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From Wikipedia, the free encyclopedia

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.
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Trickle-down economics, also known as the horse-and-sparrow theory,[1][2] 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.[3] 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.[4]

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.[5] 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.[6]

Major examples of what critics have called “trickle-down economics” in the US include the Reagan tax cuts,[7] the Bush tax cuts,[8] and the Trump tax cuts.[9] Major UK examples include Margaret Thatcher‘s economic policies in the 1980s and Liz Truss‘s mini-budget tax cuts of 2022,[10] which was an attempt to revive such Thatcherite policies.[11] 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.[4][12]

History

Background

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

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

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.[15][16] William Safire traced the origin of the term to this speech.[17] 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.[18] 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.[19]

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:

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.”[20]

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.”[21] Presidential speechwriter Samuel Rosenman wrote that “trickle down policies” had been prevalent in American government since 1921.[22]

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”.[23][24] 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.[25] 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.”[25][26][27] 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.[28]

Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy.[29] 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.[30]

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,[31] and separately William Baumol,[32] 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.[33] The Laffer curve is often cited by proponents of trickle-down policy.[34][10]

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.[35] 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,[36] 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.[37] 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.[38][39][40]

In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as “political voodoo”.[41] 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.”.[42]

The political campaign group, Tax Justice Network has used the term referring broadly to wealth inequality in its criticisms of tax havens.[43] In 2013, Pope Francis condemned “trickle-down theories” in his apostolic exhortation Evangelii Gaudium, 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.”[44]

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.[45] 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.[46] 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”.[47] Biden has continued to be critical of trickle-down.[48][49]

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.[50] 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.[51] 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.[52] Kansas governor and politician Sam Brownback‘s 2018 tax cut package was widely labelled as an attempt at trickle-down economics.[53] Friedrich Hayek‘s economic theories have also been described as trickle-down.[54][55]

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.”[56]

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 “[t]he ‘trickle-down’ theory cannot be found in even the most voluminous scholarly studies of economic theories.”[57] 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.”[58][59]

In 2022, the Liz Truss administration objected to characterizing its policies as “trickle-down economics”.[60]

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.[61] 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%.[62][63][64][65]

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.[66][67] 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.[68] 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”.[69]

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”.[70] According to these two authors the trickledown theory has temporary effects on investment and productivity growth.[70] 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.[70] To quote the book “Investments will accelerate to reach optimal proportions.”[70] 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

  1.  Duerringer, C. M. (2019). Class Structure and the Movement of Capital: The Rhetoric of Supply Side Economics https://rwsgradexam.pbworks.com/w/file/fetch/138387093/DuerringerRhet_TrickleDown%20Econ.pdf
  2.  Lavrynenko, A. How Trickle-Down Economics Works https://essuir.sumdu.edu.ua/bitstream-download/123456789/26035/1/Lavrynenko.pdf
  3.  Springer, Simon; Birch, Kean; MacLeavy, Julie (July 7, 2016). Handbook of Neoliberalism. Routledge. ISBN 978-1-317-54966-6.
  4.  Lockwood, Benjamin; Gomes, Joao; Smetters, Kent; Inman, Robert. “Does Trickle-down Economics Add Up – or Is It a Drop in the Bucket?”. Knowledge at Wharton. A business journal from the Wharton School of the University of Pennsylvania. Archived from the original on February 1, 2023. Retrieved February 1, 2023.
  5.  Arndt, H. W. (1983). “The “Trickle-down” Myth”. Economic Development and Cultural Change. 32 (1): 1–10. doi:10.1086/451369. ISSN 0013-0079. JSTOR 1153421. S2CID 153842242.
  6.  Noah, Timothy (September 21, 2011). “New Republic: How Did Trickle-Down Get Acceptable?”. NPR. Retrieved January 15, 2024.
  7.  Redenius, Charles (April 1983). “Thatcherism and Reagonomics: Supply-Side Economic Policy in Great Britain and the United States”. Journal of Political Science. 10 (2, Article 4). The Athenaeum Press. ISSN 0098-4612. Archived from the original on December 2, 2022. Retrieved February 9, 2023.
  8.  “The Bush Tax Cuts Disproportionately Benefitted the Wealthy”. Economic Policy Institute. Archived from the original on February 1, 2023. Retrieved February 1, 2023. The Bush-era tax cuts were designed to reduce taxes for the wealthy, and the benefits of faster growth were then supposed to trickle down to the middle class.
  9.  “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.
  10.  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.
  11.  Schomberg, William (September 7, 2022). “UK heads for return to ‘trickle-down’ economics under low-tax Truss”. Reuters. Retrieved January 15, 2025.
  12.  Harwood, John (November 9, 2017). “Gary Cohn: Trickle-down is good for the economy”. CNBC. Retrieved January 1, 2024.
  13.  “trickle-down”. Merriam-Webster (online edition). Archived April 10, 2010, at the Wayback Machine. Accessed September 17, 2010.
  14.  “trickle-down theory”. Merriam-Webster (online edition). Archived April 10, 2010, at the Wayback Machine. Accessed September 17, 2010.
  15.  Wilson, Thomas Frederick. 1992. The Power “to Coin” Money: The Exercise of Monetary Powers by the Congress Archived March 11, 2023, at the Wayback Machine. Armonk, New York: M. E. Sharpe. p. 172. ISBN 0873327942
  16.  Baker, Andrew, David Hudson, and Richard Woodward. 2005. Governing Financial Globalization: International Political Economy and Multi-Level Governance Archived March 11, 2023, at the Wayback Machine. London; New York: Routledge. p. 26. ISBN 9780203479278.
  17.  Safire, William (2008). Safire’s Political Dictionary (Revised ed.). New York: Oxford University Press. pp. 752–753. ISBN 978-0-19-534334-2. Retrieved December 27, 2011.
  18.  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.
  19.  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.
  20.  The “Trickle-Down” Myth, H.W. Arndt, Economic Development and Cultural Change, Oct., 1983, Vol. 32, No. 1 (Oct., 1983), pp. 1-10, UCP, https://www.jstor.org/stable/1153421 Archived October 10, 2022, at the Wayback Machine
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  23.  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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  27.  White, Michael (1983). “Creative statistics: the Laffer Curve and taxation incentives”. Journal of Australian Political Economy, the (14): 63–76.
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  30.  Galbraith, John Kenneth (February 4, 1982) “Recession Economics”. Archived December 27, 2020, at the Wayback Machine. New York Review of Books Volume 29, Number 1.
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  32.  Baumol, William J. (July 1, 2010). The Microtheory of Innovative Entrepreneurship. Princeton University Press. p. 80. ISBN 9781400835225. Archived from the original on December 27, 2020. Retrieved September 17, 2020.
  33.  Romer, Paul (February 1, 1994). “New goods, old theory, and the welfare costs of trade restrictions” (PDF). Journal of Development Economics. 43 (1): 5–38. doi:10.1016/0304-3878(94)90021-3. ISSN 0304-3878. S2CID 28772407.
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  53.  “After tax cuts many saw as a failure, Kansas may cut again”. AP NEWS. April 27, 2018. Archived from the original on February 1, 2023. Retrieved February 1, 2023.
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  56.  Hank Brown. Congressional Record, March 24, 1992.
  57.  Sowell, Thomas (2012). “Trickle Down” Theory and “Tax Cuts for the Rich” (PDF). Hoover Institution Press. pp. 1–2. ISBN 9780817916152. Archived (PDF) from the original on October 6, 2022. Retrieved September 6, 2022.
  58.  Sowell, Thomas (January 7, 2014). “The ‘Trickle-Down’ Lie”. Archived from the original on December 27, 2020. Retrieved December 1, 2020.
  59.  “‘Trickle Down’ Theory and ‘Tax Cuts for the Rich'”. Archived September 24, 2012, at the Wayback Machine.
  60.  Mason, Rowena (September 21, 2022). “‘No way’ Truss’s policies are trickle-down economics, says minister”. the Guardian. Retrieved January 2, 2024.
  61.  Stiglitz, Joseph E. (December 2015). “8. Inequality and Economic Growth”. The Political Quarterly. 86: 134–155. doi:10.1111/1467-923X.12237. Archived from the original on February 1, 2023. Retrieved February 1, 2023.
  62.  Hope, David; Limberg, Julian (January 7, 2022). “The economic consequences of major tax cuts for the rich”. Socio-Economic Review. 20 (2): 539–559. doi:10.1093/ser/mwab061. ISSN 1475-1461. We find that major tax cuts for the rich push up income inequality, as measured by the top 1% share of pre-tax national income. The size of the effect is substantial: on average, each major tax cut results in a rise of over 0.7 percentage points in top 1% share of pre-tax national income. The effect holds in both the short and medium term. Turning our attention to economic performance, we find no significant effects of major tax cuts for the rich. More specifically, the trajectories of real GDP per capita and the unemployment rate are unaffected by significant reductions in taxes on the rich in both the short- and medium-term.
  63.  “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.
  64.  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.
  65.  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.
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