Trickle-down Economics

Trickle-down economics, also known as the horse-and-sparrow theory, is a pejorative term for government economic policies that disproportionately favor the upper tier of the economic spectrum (wealthy individuals and large corporations). 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.
These critics reject the notion that spending by this elite group would "trickle down" to those who are less fortunate and lead to economic growth that will eventually benefit the economy as a whole.

It has been criticized by economists on the grounds that no mainstream economist or major political party advocates theories or policies using the term trickle-down economics. While criticisms have existed since at least the 19th century, the term "trickle-down economics" was popularized in the US in reference to supply-side economics and the economic policies of Ronald Reagan.

Major examples of what critics have called "trickle-down economics" in the US include the Reagan tax cuts, the Bush tax cuts, and the Trump tax cuts. Major UK examples include Margaret Thatcher's economic policies in the 1980s and Liz Truss's mini-budget tax cuts of 2022, which was an attempt to revive such Thatcherite policies. 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 used by proponents of such policies.

History

Background

The concept that economic prosperity in the upper classes flows down into the lower classes is at least 100 years old. 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, while the first known use of "trickle-down theory" was in 1954.

In 1896, United States Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" in his William Safire traced the origin of the term to this speech. William J. Bennett credits humorist and social commentator Will Rogers for coining the term and observed in 2007 its persistent use throughout the decades since. In a 1932 column criticizing Herbert Hoover's policies and approach to The Great Depression, Rogers wrote:

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 wealth in England:

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

Reagan years

Ronald Reagan launched his 1980 campaign for the presidency on a platform advocating for supply-side economics. During the 1980 Republican Party presidential primaries, George H. W. Bush had derided Reagan's economic approach as "voodoo economics". Following Reagan's election, the "trickle-down" reached wide circulation with the publication of "The Education of David Stockman" a December 1981 interview of Reagan's incoming Office of Management and Budget director David Stockman, in the magazine Atlantic Monthly. In the interview, Stockman expressed doubts about 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. Stockman said that "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.""The Education of David Stockman"
by William Greider 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.

Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy. In 1982, John Kenneth Galbraith wrote the "trickle-down economics" 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 results in some of the feed passing through for lucky sparrows to eat.Galbraith, John Kenneth (February 4, 1982
"Recession Economics"
. ''New York Review of Books'' Volume 29, Number 1.

Usage

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, and separately William Baumol, 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. The Laffer curve is often cited by proponents of trickle-down policy.

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. 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, 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. In contrast, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy roughly 67x more than the middle class.

In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as "political voodoo". In the same election, during a presidential town hall debate, Bill Clinton blamed trickle-down economics for the declining economic conditions in America, saying that "...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.".

The political campaign group, Tax Justice Network has used the term referring broadly to wealth inequality in its criticisms of tax havens. In 2013, Pope Francis condemned "trickle-down theories" in his apostolic exhortation , saying that "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."

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. In a 2016 US presidential election 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. 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". Biden has continued to be critical of trickle-down.

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. 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. 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. Kansas governor and politician Sam Brownback's 2018 tax cut package was widely labelled as an attempt at trickle-down economics. Friedrich Hayek's economic theories have also been described as trickle-down.

Objections to the term

Speaking on the US 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."

Thomas Sowell, a proponent of supply-side economics, says that trickle-down economics have never been advocated by any economist, writing in his 2012 book ''"Trickle Down" Theory and "Tax Cuts for the Rich"'' that " e 'trickle-down' theory cannot be found in even the most voluminous scholarly studies of economic theories." Sowell disagrees with the characterization of supply-side economics as trickle-down, saying that 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."

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

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. 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 increased inequality in the short and medium term, and had no significant effect on real GDP per capita or employment in the short and medium term. According to the study, this shows that the tax cuts for the upper class did not trickle down to the broader economy. From 1980 to 2016, a divergence in the distribution of wealth was noted, with the top .01% of earners seeing a 600% change in real income, vs a 0% change in the bottom 99%, leading to the top 1% accruing 15% more of the total wealth pool, from a share of 15 to 30%.

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. 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. 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".

To see if an economic theory works it must be tested and, if reasonably possible, implemented. Since supply-side economics (the trickledown theory) was implemented previously; Bruce Bartlett, and Timothy P. Roth analyzed the results of its implementation in 1983 by publishing the book “The Supply-Side Solution”. According to these two authors the trickledown theory has temporary effects on investment and productivity growth. Where the growth in capital stocks was observed to accelerate mildly but then depreciate; just as in 1968 to 1969 the investment in capital stocks had risen to 10.1% but in 1969 to 1970 the investment slowed to a 3.7% growth. Another analysis given by these authors was that the dollar net stock from 1962 to 1974 for private nonresidential fixed capital rose at a 4.8% rate, and from 1974 to 1980 it rose at a 3.0% rate. To quote the book “Investments will accelerate to reach optimal proportions.” So, these accelerations in growth were foreseen by the authors Bruce Bartlett, and Timothy P. Roth, to continue and then diminish their size of acceleration (slow down) until the “optimal proportions” are met.

See also

*
*
*
*
*
*
*
*
*
*
*

References

Further reading

*
* Gerald Marvin Meier, Joseph E. Stiglitz (2001)
Frontiers of Development Economics: The Future in Perspective
' p. 422.
* Karla Hoff and Joseph E. Stiglitz (1998) ''Adverse Selection and Institutional Adaptation'' – Department of Economics Working Paper Series/University of Maryland, College Park, Dept. of Economics; no. 98–102.
*
* Randy P. Albelda, June Lapidus, Elaine McCrate and Edwin Melendez (1988)
''Mink Coats Don't Trickle Down: The Economic Attack on Women and People of Color''
.
* “Reaganomics: A Watershed Momen
Reaganomics A Watershed Moment on the Road to Trumpism.pdf
" The Economists’ Voice, 2019, 16: 1.
*

External links

* John Miller


* {{cite news , url=https://www.nytimes.com/2007/04/12/business/12scene.html, work=The New York Times , title=In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up , first=Robert , last=Frank, date=April 12, 2007, access-date=March 5, 2008

"Trickle-down economics is the greatest broken promise of our lifetime"
(January 20, 2014). ''The Guardian''.

"The 'trickle down theory' is dead wrong"
(June 15, 2015). CNNMoney.

1930s neologisms
Economic ideologies
Neoliberalism
Political terminology of the United States
Satire
Reagan Era
Pejorative terms