Trickle-down economics

US Congressional Budget Office Graph of Outlays versus Revenues.

"Trickle-down economics" and "the trickle-down theory" are terms used in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole. The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy." The term is considered pejorative by some proponents of tax cuts.

Proponents of these policies claim that if the top income earners are taxed less that they will invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals. Proponents argue that economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work, and that the trickle-down effect may be very slim, if indeed it even exists at all.

Today, "trickle-down economics" is most closely identified with the economic policies known as Reaganomics or supply-side economics. Originally, there was a great deal of support for tax reform; there was a dual problem that loopholes and tax shelters create a bureaucracy (private sector and public sector) and that relevant taxes are thus evaded. During Ronald Reagan's presidency, the Democratic Party-controlled House, at the urging of President Reagan, cut the marginal tax rate on the highest-income tax bracket from 70% to 28%.

A major feature of these policies was the reduction of tax rates on capital gains, corporate income, and higher individual incomes, along with the reduction or elimination of various excise taxes. 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 term "supply-side economics" was used to promote a 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."

— David Stockman, Ronald Reagan's budget director

Proponents' views

Ronald Reagan in 1982

Stockman placed supply-side economics in a long tradition in economics and claimed that laissez-faire, or trickle-down economics, will benefit not just "those well placed in the market" -- the wealthiest people—but also "those poorly placed in the market" -- the poorest people. A more general version argues that increases in real gross domestic product are beneficial for poor people—indirectly, marginally and eventually beneficial, of course—as a consequence, or side effect, of their being directly, significantly and immediately beneficial for the rich people.

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 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.

Although economists do not use the term "trickle down," 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. Policies, including tax cuts, that seek to increase saving are often aimed at the wealthy for this reason. Saving, of course, also ultimately 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.

Criticisms

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. During this period, in his Cross of Gold speech, Democrat William Jennings Bryan said:

"There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests up on them."

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 direct across the entire economy, not toward one specific group.

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

History and usage of the term

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.

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.

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." [1]

Speaking on the Senate floor in 1992, Sen. Hank Brown 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 claimed that, despite its political prominence, no trickle-down theory has ever existed among economists. In response, many critics referred him to Stockman's remarks to Greider. Sowell replied in his newspaper columns. 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.'"

See also

• A rising tide lifts all boats
• Economic inequality
• Keynesian economics
• Laffer curve
• Neoliberalism
• Progressive tax
• Supply-side economics
• Trickle up effect
• S corporation

Further reading

• Aghion, Philippe (1997). "A Theory of Trickle-Down Growth and Development". Review of Economic Studies. 64 (2). The Review of Economic Studies Ltd.: 151–172. doi:10.2307/2971707. JSTOR 2971707. {{cite journal}}: Cite has empty unknown parameter: |month= (help); Unknown parameter |coauthors= ignored (|author= suggested) (help)
• 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. 98-02
• Randy P. Albelda, June Lapidus, Elaine McCrate, Edwin Melendez (1988) Mink Coats Don't Trickle Down: The Economic Attack on Women and People of Color ISBN 0-89608-328-4

External links

• Ronald Reagan's Legacy (A Dollars and Sense article by John Miller)
• Frank, Robert (2007-04-12). "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". New York Times. Retrieved 2008-03-05.