Trickle-down economics

Last updated

Ronald Reagan's economic policies, dubbed "Reaganomics", 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 Ronald Reagan televised address from the Oval Office, outlining plan for Tax Reduction Legislation July 1981.jpg
Ronald Reagan's economic policies, dubbed "Reaganomics", 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, also called trickle-down theory, refers to the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term. In recent history, the term has been used by critics of supply-side economic policies, such as "Reaganomics." Whereas general supply-side theory favors lowering taxes overall, trickle-down theory more specifically targets taxes on the upper end of the economic spectrum. [1] [2]

Supply-side economics Macroeconomic theory

Supply-side economics is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation, by which it is directly opposed to demand-side economics. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices and employment will increase.

Reaganomics economic policies promoted by U.S. President Ronald Reagan

Reaganomics refers to the economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics or voodoo economics by political opponents, and free-market economics by political advocates.

Social class Hierarchical social stratification

A social class is a set of subjectively defined concepts in the social sciences and political theory centered on models of social stratification in which people are grouped into a set of hierarchical social categories, the most common being the upper, middle and lower classes.

Contents

The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies which favor the wealthy or privileged while being framed as good for the average citizen. David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea: [3] [4]

Will Rogers American humorist and entertainer

William Penn Adair Rogers was an American stage and motion picture actor, vaudeville performer, cowboy, humorist, newspaper columnist, and social commentator from Oklahoma. He was a Cherokee citizen born in the Cherokee Nation, Indian Territory.

David Stockman American politician

David Alan Stockman is an American politician and former businessman who served as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.

Ronald Reagan 40th president of the United States

Ronald Wilson Reagan was an American politician and film actor who served as the 40th president of the United States from 1981 to 1989. Prior to his presidency, he was a Hollywood actor and union leader before serving as the 33rd governor of California from 1967 to 1975.

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.[ citation needed ] Some studies suggest a link between trickle-down economics and reduced growth. [5] [6] Trickle-down economics has been widely criticized particularly by left-wing (socialist and social liberal) and moderate politicians and economists, but also some right-wing (conservative) politicians.

Presidency of Ronald Reagan Period of the United States government

The presidency of Ronald Reagan began at noon EST on January 20, 1981, when Ronald Reagan was inaugurated as the 40th President of the United States, and ended on January 20, 1989. Reagan, a Republican, took office following a landslide victory over Democratic incumbent President Jimmy Carter in the 1980 presidential election. Reagan was succeeded by his Vice President, George H. W. Bush, who won the 1988 presidential election with Reagan's support. Reagan's 1980 election resulted from a dramatic conservative shift to the right in American politics, including a loss of confidence in liberal, New Deal, and Great Society programs and priorities that had dominated the national agenda since the 1930s.

Left-wing politics supports social equality and egalitarianism, often in opposition to social hierarchy. It typically involves a concern for those in society whom its adherents perceive as disadvantaged relative to others as well as a belief that there are unjustified inequalities that need to be reduced or abolished. The term left-wing can also refer to "the radical, reforming, or socialist section of a political party or system".

A 2019 study in the Journal of Political Economy found, contrary to trickle-down theory, that "the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small." [7]

The Journal of Political Economy is a bimonthly peer-reviewed academic journal published by the University of Chicago Press. It covers both theoretical and empirical economics. It was established in 1892 by James Laurence Laughlin. In January 2020, the journal will move to a monthly publication schedule.

History and usage

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

In 1896, Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" in his Cross of Gold speech: [8] [9]

Democratic Party (United States) Major political party in the United States

The Democratic Party is one of the two major contemporary political parties in the United States, along with its rival, the Republican Party. Tracing its heritage back to Thomas Jefferson and James Madison's Democratic-Republican Party, the modern-day Democratic Party was founded around 1828 by supporters of Andrew Jackson, making it the world's oldest active political party.

William Jennings Bryan United States Secretary of State

William Jennings Bryan was an American orator and politician from Nebraska. Beginning in 1896, he emerged as a dominant force in the Democratic Party, standing three times as the party's nominee for President of the United States. He also served in the United States House of Representatives and as the United States Secretary of State under Woodrow Wilson. Just before his death, he gained national attention for attacking the teaching of evolution in the Scopes Trial. Because of his faith in the wisdom of the common people, he was often called "The Great Commoner".

Cross of Gold speech

The Cross of Gold speech was delivered by William Jennings Bryan, a former United States Representative from Nebraska, at the Democratic National Convention in Chicago on July 9, 1896. In the address, Bryan supported bimetallism or "free silver", which he believed would bring the nation prosperity. He decried the gold standard, concluding the speech, "you shall not crucify mankind upon a cross of gold". Bryan's address helped catapult him to the Democratic Party's presidential nomination; it is considered one of the greatest political speeches in American history.

"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." [10]

Humorist Will Rogers jokingly advised in a column in 1932: [11]

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 fellows hands. They saved the big banks, but the little ones went up the flue.

William J. Bennett wrote:

Humorist 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. [12]

Presidential speech writer Samuel Rosenman wrote:

The philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.

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 [13] while the first known use of "trickle-down theory" was in 1954. [14]

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." [15]

Speaking on the Senate floor in 1992, Senator Hank Brown (R-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." [16]

Economist Thomas Sowell has written extensively on trickle-down economics and loathes its characterization, citing that supply-side economics 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." [17]

Criticisms

The economist John Kenneth Galbraith noted that "trickle-down economics" had been tried before in the United States in the 1890s under the name "horse and sparrow theory", writing:

Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'

Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896. [18] In the 1992 presidential election, independent candidate Ross Perot called trickle-down economics "political voodoo". [19] 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. [20]

In New Zealand, Labour Party Member of Parliament Damien O'Connor has called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the 2011 general election. [21]

A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but it instead tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy. [22]

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. [23]

A 2015 paper by researchers for the International Monetary Fund argues that there is no trickle-down effect as the rich get richer:

[I]f the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. [5]

A 2015 report on policy by economist Pavlina R. Tcherneva described the failings of increasing economic gains of the rich without commensurate participation by the working and middle classes, referring to the problematic policies as "Reagan-style trickle-down economics," and "a trickle-down, financial-sector-driven policy regime." [24]

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. [25]

See also

Related Research Articles

Economic Recovery Tax Act of 1981 Act of United States Congress

The Economic Recovery Tax Act of 1981 (ERTA) was a major tax cut designed to encourage economic growth. Also known as the "Kemp–Roth Tax Cut", it was a federal law enacted by the 97th United States Congress and signed into law by President Ronald Reagan. The Accelerated Cost Recovery System (ACRS) was a major component, and was amended in 1986 to become the Modified Accelerated Cost Recovery System (MACRS).

Fiscal policy use of government revenue collection and spending to influence the economy

In economics and political science, fiscal policy is the use of government revenue collection and expenditure (spending) to monitor and influence a nation's economy. It developed out of the Great Depression, when the laissez-faire approach to economic management was ended and government intervention became the means of influencing macroeconomic variables. Fiscal and monetary policy are two sister strategies that are used by the government and the central bank in order to reach a county's economic objectives. The theories of the British economist John Maynard Keynes are the basis for fiscal policy. According to Keynesian economics, when the government changes the levels of taxation and government spending, it influences aggregate demand and the level of economic activity. This influence enables the fiscal authority to target the inflation and to increase employment. Additionally, it is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilize the economy over the course of the business cycle.

Arthur Laffer American economist

Arthur Betz Laffer is an American economist and author who first gained prominence during the Reagan administration as a member of Reagan's Economic Policy Advisory Board (1981–89). Laffer is best known for the Laffer curve, an illustration of the concept that there exists some tax rate between 0% and 100% that will result in maximum tax revenue for government.

The trickle-up effect or fountain effect is an economic theory used to describe the overall ability of middle class people to drive and support the economy. The theory was founded by John Maynard Keynes (1883–1946). It is sometimes referred as Keynesian economics in which economic growth is enhanced when the government lowers taxes on the middle class and increases government spending.

The aphorism "a rising tide lifts all boats" is associated with the idea that an improved economy will benefit all participants, and that economic policy, particularly government economic policy, should therefore focus on broad economic efforts.

1984 United States presidential election in Missouri

The 1984 United States presidential election in Missouri took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. Missouri voters chose 11 electors to the Electoral College, which selected the president and vice president of the United States.

Domestic policy of the Ronald Reagan administration

This article discusses the domestic policy of the Ronald Reagan administration from 1981 to 1989. Reagan's policies stressed conservative economic values, starting with his implementation of supply-side economic policies, dubbed as "Reaganomics" by both supporters and detractors. His policies also included the largest tax cut in American history as well as increased defense spending as part of his Soviet strategy. However, he significantly raised (non-income) taxes four times due to economic conditions and reforms, but the tax reforms instituted during presidency brought top marginal rates to their lowest levels since 1931, such that by 1988, the top US marginal tax rate was 28%.

Larry Kudlow American economist

Lawrence Alan Kudlow is an American financial analyst and former television host serving as Director of the National Economic Council under President Donald Trump since 2018.

In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue. It illustrates the concept of taxable income elasticity—i.e., taxable income changes in response to changes in the rate of taxation. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a rate between 0% and 100% that maximizes government taxation revenue. The Laffer curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. However, the shape of the curve is uncertain and disputed among economists. Under some assumptions, such as revenue being a continuous function of the rate of taxation, the maximum illustrated by the Laffer curve is a result of Rolle's theorem, which is a standard result in calculus.

1984 United States presidential election in Idaho

The 1984 United States presidential election in Idaho took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. Idaho voters chose 4 electors to the Electoral College, which selected the president and vice president of the United States.

1984 United States presidential election in North Dakota

The 1984 United States presidential election in North Dakota took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. North Dakota voters chose 3 electors to the Electoral College, which selected the president and vice president of the United States.

1984 United States presidential election in South Dakota

The 1984 United States presidential election in South Dakota took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. South Dakota voters chose 3 electors to the Electoral College, which selected the president and vice president of the United States.

1984 United States presidential election in Michigan

The 1984 United States presidential election in Michigan took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. Michigan voters chose 20 electors to the Electoral College, which selected the president and vice president of the United States.

1984 United States presidential election in Wisconsin

The 1984 United States presidential election in Wisconsin took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. Wisconsin voters chose 11 electors to the Electoral College, which selected the president and vice president of the United States.

1984 United States presidential election in West Virginia

The 1984 United States presidential election in West Virginia took place on November 6, 1984. All 50 states and the District of Columbia, were part of the 1984 United States presidential election. West Virginia voters chose 6 electors to the Electoral College, which selected the president and vice president of the United States.

Pavlina R. Tcherneva American economist

Pavlina R. Tcherneva is an American economist, of Bulgarian descent, working as associate professor and director of the Economics program at Bard College. She is also a research associate at the Levy Economics Institute and expert at the Institute for New Economic Thinking.

Demand-side economics is a macroeconomic theory which argues that economic growth is most effectively created by high demand for products and services. According to demand-side economics, output is determined by effective demand. High consumer spending leads to business expansion, resulting in greater employment opportunities. Higher levels of employment create a multiplier effect that further stimulates aggregate demand, leading to greater economic growth.

References

  1. Amadeo, Kimberly (April 29, 2017). "Why Trickle Down Economic Works in Theory But Not in Fact". The Balance.
  2. Crouse, Eric R. (2013). The Cross and Reaganomics: Conservative Christians Defending Ronald Reagan. Rowman & Littlefield. p. 31.
  3. "The Education of David Stockman" by William Greider
  4. William Greider. The Education of David Stockman. ISBN   0-525-48010-2
  5. 1 2 Era Dabla-Norris; Kalpana Kochhar; Nujin Suphaphiphat; Frantisek Ricka; Evridiki Tsounta (June 15, 2015). Causes and Consequences of Income Inequality : A Global Perspective. International Monetary Fund. Retrieved June 25, 2015.
  6. "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". The New York Times. April 12, 2007.
  7. Zidar, Owen (October 30, 2018). "Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment". Journal of Political Economy: 000–000. doi:10.1086/701424. ISSN   0022-3808.
  8. Wilson, Thomas Frederick. 1992. The Power "to Coin" Money: The Exercise of Monetary Powers by the Congress . Armonk, N.Y.: M.E. Sharpe. p. 172. ISBN   0873327942
  9. Baker, Andrew, David Hudson, and Richard Woodward. 2005. Governing Financial Globalization: International Political Economy and Multi-Level Governance . London; New York: Routledge. p. 26. ISBN   9780203479278
  10. Bryan's "Cross of Gold" Speech: Mesmerizing the Masses, historymatters.com
  11. "Will Rogers on "trickle up" economics". WiredPen. January 30, 2015. Retrieved March 11, 2017.
  12. Bennett, William J. (2007). America: The Last Best Hope. Harper Collins. p. 78. ISBN   1595551115.
  13. Merriam-Webster Dictionary (online edition) entry for "trickle-down." Accessed September 17, 2010.
  14. Merriam-Webster Dictionary (online edition) entry for "trickle-down theory." Accessed September 17, 2010.
  15. Janos, Leo. "The Last Days of the President". theatlantic.com.
  16. Hank Brown. Congressional Record, March 24, 1992.
  17. "Tricle Down" Theory and "Tax Cuts for the Rich".
  18. Galbraith, John Kenneth (February 4, 1982) "Recession Economics." New York Review of Books Volume 29, Number 1.
  19. "The Living Room Candidate - Commercials - 1992 - Trickle Down". www.livingroomcandidate.org. Retrieved March 13, 2017.
  20. "Bill Clinton Won 1992 Town Hall Debate By Engaging With One Voter". Huffington Post. Retrieved March 16, 2017.
  21. Chapman, Kate (October 28, 2011). "Labour campaign video harks back to history". Stuff.co.nz. Retrieved October 5, 2016.
  22. Heather Stewart (July 21, 2012). "Wealth doesn't trickle down – it just floods offshore, research reveals". The Guardian . London. Retrieved August 6, 2012.
  23. "Evangelii Gaudium : Apostolic Exhortation on the Proclamation of the Gospel in Today's World". vatican.va.
  24. Tcherneva, Pavlina (March 2015). "When a Rising Tide Sinks Most Boats: Trends in US Income Inequality" (PDF). Levy Economics Institute. Bard College. Retrieved November 25, 2016.
  25. Jacob Pramuk (September 26, 2016). "Clinton: Trump would cut taxes for the rich in 'trumped up' trickle down economics". CNBC .

Further reading