Trickle-down economics

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Ronald Reagan's economic policies, dubbed "Reaganomics" by opponents, included large tax cuts and were characterized as trickle-down economics. In this picture, he is outlining his plan for the Economic Recovery Tax Act of 1981 from the Oval Office in a televised address, July 1981. President Ronald Reagan addresses the nation from the Oval Office on tax reduction legislation.jpg
Ronald Reagan's economic policies, dubbed "Reaganomics" by opponents, included large tax cuts and were characterized as trickle-down economics. In this picture, he is outlining his plan for the Economic Recovery Tax Act of 1981 from the Oval Office in a televised address, July 1981.

Trickle-down economics refers to economic policies that disproportionately favor the upper tier of the economic spectrum, comprising wealthy individuals and large corporations. The policies are based on the idea that spending by this group will "trickle down" to those less fortunate in the form of stronger economic growth. [1] The term has been used broadly by critics of supply-side economics to refer to taxing and spending policies by governments that, intentionally or not, result in widening income inequality; it has also been used in critical references to neoliberalism. [2] However, the term does not represent any cohesive economic theory. [3]

Contents

Similar criticisms have existed since at least the 19th century, though the term "trickle-down economics" was popularized in the U.S. in reference to supply-side economics and the economic policies of Ronald Reagan. [4] Major examples of what critics have called "trickle-down economics" in the U.S. include the Reagan tax cuts, [5] the Bush tax cuts, [6] and the Tax Cuts and Jobs Act of 2017. [7] Major UK examples include Liz Truss's mini-budget tax cuts of 2022. [8] While economists who favor supply-side economics generally avoid applying the "trickle down" analogy to it and dispute the focus on tax cuts to the rich, the phrase "trickle down" has also been occasionally used by proponents of such policies. [1] [9] As of 2023, studies have not shown that there is a demonstrable link between reducing tax burdens on the upper end and economic growth. [10] [11] [12]

History

Background

William Jennings Bryan, who criticized trickle-down theory in his Cross of Gold speech in 1896 WilliamJBryan1902.png
William Jennings Bryan, who criticized trickle-down theory in his Cross of Gold speech in 1896

The Google Ngram Viewer shows [13] that the term "trickle down economics" was rarely seen in published works until the 1980s. However, the concept that economic prosperity in the upper classes flows down into the lower classes is at least 100 years old. The term itself is used mostly by critics of the concept. The Merriam-Webster Dictionary notes that the first known use of "trickle-down" as an adjective meaning "relating to or working on the principle of trickle-down theory" was in 1944 [14] while the first known use of "trickle-down theory" was in 1954. [15]

In 1896, United States Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" in his Cross of Gold speech: [16] [17]

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it. [18]

William J. Bennett credits humorist and social commentator Will Rogers for coining the term and noted in 2007 its persistent use throughout the decades since. [19] In a 1932 column criticizing Herbert Hoover's policies and approach to The Great Depression Rogers wrote:

This election was lost four and six years ago, not this year. They [Republicans] didn't start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands. They saved the big banks, but the little ones went up the flue. [20]

In 1933, Indian nationalist and statesman Jawaharlal Nehru wrote positively of the term (in the sense that wealth entered upper classes then "trickled down") in critical reference to the colonial seizing of wealth in India and other territories being a cause of increased the wealth in England:

The exploitation of India and other countries brought so much wealth to England that some of it trickled down to the working class and their standard of living rose." [21]

After leaving the presidency, Democrat Lyndon B. Johnson alleged "Republicans ... simply don't know how to manage the economy. They're so busy operating the trickle-down theory, giving the richest corporations the biggest break, that the whole thing goes to hell in a handbasket." [22]

Presidential speechwriter Samuel Rosenman wrote in 2008 that "trickle down policies" had been prevalent in American government since 1921. [23]

Reagan years

Ronald Reagan launched his 1980 campaign for the presidency on a platform advocating for supply-side economics. During the Presidential nomination in 1980, George H. W. Bush had derided Reagan's economic approach as "voodoo economics". [24] [25] Following Reagan's election, the "trickle-down" reached wide circulation with the publication of "The Education of David Stockman" a December 1981 interview of Office of Management and Budget director David Stockman, in the magazine Atlantic Monthly. In the interview, Stockman was sharply critical of supply side economics, telling journalist William Greider that the Kemp–Roth Tax Cut was a way to rebrand a tax cut for the top income bracket to make it easier to pass into law: [26] [27]

It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.

— David Stockman, The Atlantic

Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy. [28] In 1982, John Kenneth Galbraith wrote the "trickle-down economics" that that David Stockman was referring to was previously known under the name "horse-and-sparrow theory", the idea that feeding a horse a huge amount of oats will result in some of the feed passing through for lucky sparrows to eat. [29] Reagan administration officials including Michael Deaver wanted Stockman to be fired in response to his comments, but he was ultimately kept on in exchange for a private apology. [30]

Usage

Economic analyses of the effects of lowering taxes on the wealthy

Nobel laureate Joseph Stiglitz wrote in 2015 that the post-World War II evidence does not support trickle-down economics, but rather "trickle-up economics" whereby more money in the pockets of the poor or the middle benefits everyone. [31]

In a 2020 research paper, economists David Hope and Julian Limberg analyzed data spanning 50 years from 18 countries, and found that tax cuts for the rich only succeeded at increasing inequality and making the rich wealthier, with no beneficial effect on real GDP per capita or employment. According to the study, this shows that the tax cuts for the upper class did not trickle down to the broader economy. [32] [33] [11] [34]

A 2015 IMF staff discussion note by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka and Evridiki Tsounta suggests that lowering taxes on the top 20% could actually reduce growth. [35] [36]

Political scientists Brainard Guy Peters and Maximilian Lennart Nagel in 2020 described the 'trickle down' description of tax cuts for the wealthy and corporations stimulating economic growth that helps the less affluent as a "zombie idea", and stated that it has been the most enduring failed policy idea in American politics. [37]

Some studies suggest a link between trickle-down economics and reduced growth, and some newspapers concluded that trickle-down economics does not promote jobs or growth, and that "policy makers shouldn't worry that raising taxes on the rich ... will harm their economies". [38] [39]

Broader use

While the term "trickle-down" is commonly used to refer to income benefits, it is sometimes used to refer to the idea of positive externalities arising from technological innovation or increased trade. Arthur Okun, [40] and separately William Baumol, [41] for example, have used the term to refer to the flow of the benefits of innovation, which do not accrue entirely to the "great entrepreneurs and inventors", but trickle down to the masses. And Nobel laureate economist Paul Romer used the term in reference to the impact on wealth from tariff changes. [42]

Despite a lack of practical-use evidence for the Laffer curve, it is often cited by proponents of trickle-down policy. [43] [8]

In the US, Republican tax plans and policies are often labeled "trickle-down economics", including the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017. [44] In each of the aforementioned tax reforms, taxes were cut across all income brackets, but the biggest reductions were given to the highest income earners, [45] although the Reagan Era tax reforms also introduced the earned income tax credit which has received bipartisan praise for poverty reduction and is largely why the bottom half of workers pay no federal income tax. [46] Similarly, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy. [47] [48]

In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as "political voodoo". [49] In the same election during a presidential town hall debate, Bill Clinton said:

What I want you to understand is the national debt is not the only cause of [declining economic conditions in America]. It is because America has not invested in its people. It is because we have not grown. It is because we've had 12 years of trickle-down economics. We've gone from first to twelfth in the world in wages. We've had four years where we’ve produced no private-sector jobs. Most people are working harder for less money than they were making 10 years ago. [50]

The political campaign group, Tax Justice Network has used the term referring broadly to wealth inequality in its criticisms of tax havens. [51]

In 2013, Pope Francis referred to "trickle-down theories" in his apostolic exhortation Evangelii Gaudium with the following statement (No. 54):

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. [52]

In New Zealand, Damien O'Connor, an MP from the Labour Party, called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the 2011 general election. [53] In a 2016 presidential candidates debate, Hillary Clinton accused Donald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, calling it "trumped-up trickle-down" as a pun on his name. [54] In his speech to a joint session of Congress on April 28, 2021, US President Joe Biden stated that "trickle-down economics has never worked". [55] Biden has continued to be critical of trickle-down. [56] [57]

A Columbia journal article comparing a failed UK Enterprise Zone proposal to later US proposals references them as a form of trickle-down policy where lower regulatory and tax burdens were aimed at wealthier developers with the hope they would benefit residents. [58]

Nobel laureate Paul Krugman states that despite the narrative of trickle-down style tax cuts, the effective tax rate of the top 1% of earners has failed to change very much. [59]

Political commentator Robert Reich has implicated institutions such as The Heritage Foundation, Cato Institute, and Club for Growth for promoting what he considers to be a discredited idea. [60]

Kansas governor and politician Sam Brownback's 2018 tax cut package was widely labelled as an attempt at trickle-down economics. [61]

Friedrich Hayek's economic theories have also been described as trickle-down. [62] [63]

Objections to the term

Speaking on the Senate floor in 1992, Hank Brown (Republican senator for Colorado) said: "Mr. President, the trickle-down theory attributed to the Republican Party has never been articulated by President Reagan and has never been articulated by President Bush and has never been advocated by either one of them. One might argue whether trickle-down makes any sense or not. To attribute to people who have advocated the opposite in policies is not only inaccurate but poisons the debate on public issues." [64]

Thomas Sowell consistently argues that trickle-down economics has never been advocated by any economist, writing in his 2012 book "Trickle Down" Theory and "Tax Cuts for the Rich":

Let's do something completely unexpected: Let's stop and think. Why would anyone advocate that we "give" something to A in hopes that it would trickle down to B? Why in the world would any sane person not give it to B and cut out the middleman? But all this is moot, because there was no trickle-down theory about giving something to anybody in the first place.

The "trickle-down" theory cannot be found in even the most voluminous scholarly studies of economic theories - including J. A. Schumpeter's monumental History of Economic Analysis, more than a thousand pages long and printed in very small type. [65]

Sowell has also written extensively on supply-side economics and opposes its characterization firmly, citing that it has never claimed to work in a "trickle-down" fashion. Rather, the economic theory of reducing marginal tax rates works in precisely the opposite direction: "Workers are always paid first and then profits flow upward later – if at all." [66] [67]

In 2022, the Liz Truss administration objected to characterizing its policies as "trickle-down economics". [68]

See also

Related Research Articles

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Reaganomics, or Reaganism, were the neoliberal economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are characterized as supply-side economics, trickle-down economics, or "voodoo economics" by opponents, while Reagan and his advocates preferred to call it free-market economics.

<span class="mw-page-title-main">Economic Recovery Tax Act of 1981</span> US federal tax cut

The Economic Recovery Tax Act of 1981 (ERTA), or Kemp–Roth Tax Cut, was an Act that introduced a major tax cut, which was designed to encourage economic growth. The Act was enacted by the 97th US Congress and signed into law by US President Ronald Reagan. The Accelerated Cost Recovery System (ACRS) was a major component of the Act and was amended in 1986 to become the Modified Accelerated Cost Recovery System (MACRS).

Supply-side economics is a macroeconomic theory postulating that economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit from greater supplies of goods and services at lower prices, and employment will increase. Supply-side fiscal policies are designed to increase aggregate supply, as opposed to aggregate demand, thereby expanding output and employment while lowering prices. Such policies are of several general varieties:

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  2. Tax reduction, to provide incentives to work, invest and take risks. Lowering income tax rates and eliminating or lowering tariffs are examples of such policies.
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  4. Reduction in government regulations, to encourage business formation and expansion.
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References

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  7. ↑ "Trickle-down economics gets new life as Republicans push tax-cut plan". USA Today . Archived from the original on May 9, 2021. Retrieved May 7, 2021. Behind [Republican tax legislation of 2017] is a theory long popular among conservatives: Slash taxes for corporations and rich people, who will then hire, invest and profit — and cause money to trickle into the pockets of ordinary Americans.
  8. 1 2 Elliott, Larry (September 20, 2022). "Liz Truss favours trickle down economics but results can be trickle up". The Guardian. ISSN   0261-3077. Archived from the original on October 20, 2022. Retrieved February 3, 2023.
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  19. ↑ Bennett, William J. (2007). America: The Last Best Hope. Harper Collins. p. 78. ISBN   978-1595551115. Archived from the original on March 11, 2023. Retrieved February 18, 2023. Will Rogers referred to the theory that cutting taxes for higher earners and businesses was a "trickle-down" policy, a term that has stuck over the years.
  20. ↑ Roger, Will (November 26, 1932). "Will Rogers Explains That Money, Unlike Water, Always Trickles Up". The St. Louis Star and Times . Archived from the original on July 7, 2022. Retrieved July 7, 2022.
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  24. ↑ Wiseman, Paul. "Trickle-down economics gets another try". The Detroit News. Archived from the original on October 18, 2022. Retrieved October 18, 2022.
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  30. ↑ "David Stockman's famous trip to the woodshed was prompted..." UPI. April 12, 1986. Retrieved January 2, 2024.
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  32. ↑ "Trickle-Down Economics Fails a Sophisticated Statistical Test". Bloomberg.com. December 21, 2020. Archived from the original on February 24, 2023. Retrieved February 1, 2023.
  33. ↑ Picchi, Aimee (December 17, 2020). "50 years of tax cuts for the rich failed to trickle down, economics study says". CBS News. Archived from the original on February 1, 2023. Retrieved February 1, 2023.
  34. ↑ Christopher Ingraham (December 23, 2020). "'Trickle-down' tax cuts make the rich richer but are of no value to overall economy, study finds". The Washington Post . Washington, D.C. ISSN   0190-8286. OCLC   1330888409. Archived from the original on August 19, 2022. Retrieved October 3, 2022.
  35. ↑ "Staff Discussion Notes Volume 2015 Issue 013: Causes and Consequences of Income Inequality: A Global Perspective (2015)". imfsg. doi: 10.5089/9781513555188.006 . Archived from the original on February 3, 2023. Retrieved February 3, 2023.
  36. ↑ Goodwin, Neva R. (2020). Principles of economics in context (Second ed.). New York, NY. ISBN   978-0-429-43875-2. OCLC   1111577770.{{cite book}}: CS1 maint: location missing publisher (link)
  37. ↑ Peters, Brainard Guy; Nagel, Maximilian Lennart (2020). Zombie Ideas: Why Failed Policy Ideas Persist. Cambridge University Press. p. 8. doi:10.1017/9781108921312. ISBN   9781108921312. S2CID   229422499. Archived from the original on December 27, 2020. Retrieved November 28, 2020.{{cite book}}: |website= ignored (help)
  38. ↑ "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". The New York Times. April 12, 2007. Archived from the original on November 12, 2020. Retrieved February 23, 2017.
  39. ↑ Craig Stirling (December 16, 2020). "Fifty Years of Tax Cuts for Rich Didn't Trickle Down, Study Says". Bloomberg News. Archived from the original on December 17, 2020. Retrieved December 17, 2020.
  40. ↑ Okun, Arthur M. (1975). Equality and Efficiency, the Big Tradeoff . Brookings Institution. pp.  46–47. ISBN   9780815764762.
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