Trickle-down economics

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This article is about the political term. For the marketing phenomenon, see trickle-down effect.

"Trickle-down economics" and the "trickle-down theory" are terms in United States politics to refer to the idea that tax breaks or other economic benefits provided to businesses and upper income levels will benefit poorer members of society by improving the economy as a whole.[1] The term has been attributed to humorist Will Rogers, who said of the New Deal that "money was all appropriated for the top in hopes that it would trickle down to the needy."[2]

Today, "trickle-down economics" is most closely identified with the economic policies known as "Reaganomics" or laissez-faire. David Stockman, who as Reagan's budget director championed these cuts at first but then became skeptical of them, told journalist William Greider that the "supply-side economics" is the trickle-down idea: "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."[3][4]

Context[edit]

Economist Thomas Sowell has written that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. He noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners—but in the absence of a profit motive, which is reduced in the aggregate by a raise in marginal tax rates in the upper tiers, this activity does not occur. Sowell further has made the case[5] that no economist has ever advocated a "trickle-down" theory of economics, which is rather a misnomer attributed to certain economic ideas by political critics who either willfully distort or misunderstand the actual stated goals of their political opponents.[6]

Although the term "trickle down" is mainly political and does not denote a specific economic theory, some economic theories reflect the meaning of this pejorative. Some macro-economic models assume that a certain proportion of each dollar of income will be saved. This is called the marginal propensity to save. Many studies have found that the marginal propensity to save is considerably higher among wealthier people.[citation needed] Policies, including tax cuts, that seek to increase saving are often aimed at the wealthy for this reason.[7] Saving usually means some form of investment, as even money placed in savings accounts is ultimately invested by the banks.

In the early 1990s Congressional Records, non-pejorative uses of the term are rare but do appear.[8][9][10][11]

Criticisms[edit]

Critics often point to declining real wages (excluding health insurance) as a response to trickle-down economics.

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." He wrote, "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.[12]

Proponents of Keynesian economics and related theories often criticize tax rate cuts for the wealthy as being "trickle down," arguing tax cuts directly targeting those with less income would be more economically stimulative. Keynesians generally argue for broad fiscal policies that are directed across the entire economy, not toward one specific group.[citation needed] In his 1919 address to Congress, Woodrow Wilson warned that, at some point, “high rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation with consequent unemployment and other attendant evils.”

In a 1962 address to Congress, John F. Kennedy said, “it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”

This was not a new idea. John Maynard Keynes said, back in 1933, that “taxation may be so high as to defeat its object,” that in the long run, a reduction of the tax rate “will run a better chance, than an increase, of balancing the budget.”


In the 1992 presidential election, Independent candidate Ross Perot called trickle-down economics "political voodoo."[13]

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

A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.[14]

Professor Ha-Joon Chang at the University of Cambridge has criticised the policies of trickle down advocates in several publications, citing examples of slowing growth in the last few decades, rising income inequality in most rich nations, and the effectiveness of welfare provision in raising living standards across all income brackets rather than at the top only.[15]

Theory explaining wealth condensation in the hands of rich is called Matthew Effect.

History and usage of the term[edit]

In 1896, Democratic Presidential candidate William Jennings Bryan made reference to trickle-down theory in his famous "Cross of Gold" speech:

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.[16]

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,[17] while the first known use of trickle-down theory was in 1954.[18]

After leaving the Presidency, Lyndon B. Johnson, a Democrat, 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." [19]

Speaking on the Senate floor in 1992, Sen. 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."[20]

Thomas Sowell claimed that, despite its political prominence, no trickle-down theory has ever existed among economists.[21] In response, many critics referred him to Stockman's remarks to Greider. Sowell replied in his newspaper columns.[22] Stockman himself had not proposed or advocated the alleged theory, so Sowell rejected him as an example of someone who had done so. Additionally, Stockman had not specifically named anyone who, or quoted a source that, advocated the theory although he did claim that the theory was being adhered to by the Reagan administration. Sowell replied that Stockman "was not even among the first thousand people to make that claim" but that "not one of those who made the claim could provide a single quote from anybody who had advocated a 'trickle-down theory.'"[21]

See also[edit]

References[edit]

  1. ^ Oxford English Dictionary: "Trickle-down, adj., of or based on the theory that economic benefits to particular groups will inevitably be passed on to those less well off...; orig. and chiefly U.S."
  2. ^ Giangreco, D. M.; Kathryn Moore (1999). Dear Harry: Truman's Mailroom, 1945-1953. ISBN 0-8117-0482-3. 
  3. ^ "The Education of David Stockman" by William Greider
  4. ^ William Greider. The Education of David Stockman. ISBN 0-525-48010-2
  5. ^ Sowell, Thomas (Sep 20, 2012). ""Trickle Down" Theory and "Tax Cuts for the Rich"". Hoover Institution Press. Archived from the original on Sep 24, 2012. "[footnote two says:] Some years ago, in my syndicated column, I challenged anyone to name any economist, of any school of thought, who had actually advocated a “trickle down” theory. No one quoted any economist, politician or person in any other walk of life who had ever advocated such a theory, even though many readers named someone who claimed that someone else had advocated it, without being able to quote anything actually said by that someone else." 
  6. ^ Thomas Sowell. Basic Economics: A Citizen's Guide to the Economy. ISBN 0-465-08138-X
  7. ^ Felix Paukert "Income Distributions at Different Levels of Development: a Survey of Evidence "http://scholar.google.com/scholar?hl=en&lr=&q=info:GQn1vpKFndUJ:scholar.google.com/&output=viewport&pg=1[dead link]
  8. ^ Lane Evans. Congressional Record, March 13, 1990.
  9. ^ Helen Delich Bentley. Congressional Record, July 24, 1989.
  10. ^ Jay Rockefeller. Congressional Record, July 26, 1991.
  11. ^ Sam Farr. Congressional Record, July 21, 1994.
  12. ^ Galbraith, John Kenneth (February 4, 1982) "Recession Economics." New York Review of Books Volume 29, Number 1.
  13. ^ "Trickle Down", Perot campaign ad
  14. ^ Heather Stewart (July 21, 2012). "Wealth doesn't trickle down – it just floods offshore, research reveals". The Guardian. Retrieved August 6, 2012. 
  15. ^ http://www.truth-out.org/news/item/1505:there-is-no-such-thing-as-a-free-market
  16. ^ Bryan’s “Cross of Gold” Speech: Mesmerizing the Masses, historymatters.com
  17. ^ Merriam-Webster Dictionary (online edition) entry for "trickle-down." Accessed September 17, 2010.
  18. ^ Merriam-Webster Dictionary (online edition) entry for "trickle-down theory." Accessed September 17, 2010.
  19. ^ The Atlantic | July 1973 | The Last Days of the President | Janos
  20. ^ Hank Brown. Congressional Record, March 24, 1992.
  21. ^ a b Thomas Sowell. The "Trickle Down" Left: Preserving a Vision. June 2, 2006.
  22. ^ Thomas Sowell. "[1]." April 2, 2005.

Further reading[edit]

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