Trickle-down economics
Encyclopedia
"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 cut
s.
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.
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 Record
s, non-pejorative uses of the term are rare but do appear.
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:
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."
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." http://www.theatlantic.com/past/docs/issues/73jul/janos.htm
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.'"
Will Rogers
William "Will" Penn Adair Rogers was an American cowboy, comedian, humorist, social commentator, vaudeville performer, film actor, and one of the world's best-known celebrities in the 1920s and 1930s....
, who said during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
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 cut
Tax cut
A tax cut is a reduction in taxes. The immediate effects of a tax cut are a decrease in the real income of the government and an increase in the real income of those whose tax rate has been lowered. Due to the perceived benefit in growing real incomes among tax payers politicians have sought to...
s.
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
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
, 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
Reaganomics
Reaganomics refers to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s, also known as supply-side economics and called trickle-down economics, particularly by critics...
or supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
. 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
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
'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
David Stockman
David Alan Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget ....
, who as Reagan's budget director championed these cuts at first but then became skeptical of them, told journalist William Greider
William Greider
William Greider is an American journalist and author who writes primarily about economics.His most recent book is . Before that he published The Soul of Capitalism: Opening Paths to a Moral Economy, which explores the basis and history of the corporation and how people can influence further...
that the term "supply-side economics" was used to promote a trickle-down idea.
Proponents' views
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
in a long tradition in economics and claimed that laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
, 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
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
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
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...
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
Marginal propensity to save
The marginal propensity to save refers to the increase in saving that results from an increase in income i.e. The marginal propensity to save might be defined as the proportion of each additional dollar of household income that is used for saving. It is also used as an alternative term for the...
. 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 Record
Congressional Record
The Congressional Record is the official record of the proceedings and debates of the United States Congress. It is published by the United States Government Printing Office, and is issued daily when the United States Congress is in session. Indexes are issued approximately every two weeks...
s, non-pejorative uses of the term are rare but do appear.
Criticisms
The economist John Kenneth GalbraithJohn Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...
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
David Stockman
David Alan Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget ....
has said that supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
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
Panic of 1896
The Panic of 1896 was an acute economic depression in the United States that was less serious than other panics of the era precipitated by a drop in silver reserves and market concerns on the effects it would have on the gold standard. Deflation of commodities prices drove the stock market to new...
. During this period, in his Cross of Gold speech
Cross of Gold speech
The Cross of Gold speech was delivered by William Jennings Bryan at the 1896 Democratic National Convention in Chicago on July 8, 1896. The speech advocated bimetallism. Following the Coinage Act , the United States abandoned its policy of bimetallism and began to operate a de facto gold...
, Democrat William Jennings Bryan
William Jennings Bryan
William Jennings Bryan was an American politician in the late-19th and early-20th centuries. He was a dominant force in the liberal wing of the Democratic Party, standing three times as its candidate for President of the United States...
said:
Proponents of Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
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
United States presidential election, 1992
The United States presidential election of 1992 had three major candidates: Incumbent Republican President George Bush; Democratic Arkansas Governor Bill Clinton, and independent Texas businessman Ross Perot....
, Independent
Independent (politician)
In politics, an independent or non-party politician is an individual not affiliated to any political party. Independents may hold a centrist viewpoint between those of major political parties, a viewpoint more extreme than any major party, or they may have a viewpoint based on issues that they do...
candidate Ross Perot
Ross Perot
Henry Ross Perot is a U.S. businessman best known for running for President of the United States in 1992 and 1996. Perot founded Electronic Data Systems in 1962, sold the company to General Motors in 1984, and founded Perot Systems in 1988...
called trickle-down economics "political voodoo."
History and usage of the term
In 1896, Democratic Presidential candidate William Jennings BryanWilliam Jennings Bryan
William Jennings Bryan was an American politician in the late-19th and early-20th centuries. He was a dominant force in the liberal wing of the Democratic Party, standing three times as its candidate for President of the United States...
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
Lyndon B. Johnson
Lyndon Baines Johnson , often referred to as LBJ, was the 36th President of the United States after his service as the 37th Vice President of the United States...
, 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." http://www.theatlantic.com/past/docs/issues/73jul/janos.htm
Speaking on the Senate floor in 1992, Sen. Hank Brown
Hank Brown
George Hanks "Hank" Brown is a former Republican politician and U.S. Senator from Colorado who served as president of the University of Colorado system from April 2005 - January 2008.-Education:...
said, "Mr. President, the trickle-down theory attributed to the Republican Party
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
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
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...
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 boatsA rising tide lifts all boatsThe aphorism "a rising tide lifts all boats" is associated with the idea that improvements in the general economy will benefit all participants in that economy, and that economic policy, particularly government economic policy, should therefore focus on the general macroeconomic environment first...
- Economic inequalityEconomic inequalityEconomic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...
- Keynesian economicsKeynesian economicsKeynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
- Laffer curveLaffer curveIn economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
- NeoliberalismNeoliberalismNeoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...
- Progressive taxProgressive taxA progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
- Supply-side economicsSupply-side economicsSupply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
- Trickle up effectTrickle up effectThe trickle up effect is an economic theory used to describe the flow of wealth from the poor to the affluent; it is opposite to the trickle down effect.-Relationship to the trickle down effect:...
- S corporationS CorporationAn S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
Further reading
- Gerald Marvin Meier, Joseph E. Stiglitz (2001) Frontiers of Development Economics: The Future in Perspective p. 422
- Karla Hoff and Joseph E. StiglitzJoseph E. StiglitzJoseph Eugene Stiglitz, ForMemRS, FBA, is an American economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences and the John Bates Clark Medal . He is also the former Senior Vice President and Chief Economist of the World Bank...
(1998) Adverse Selection and Institutional Adaptation - Department of Economics Working Paper Series / University of Maryland, College ParkUniversity of Maryland, College ParkThe University of Maryland, College Park is a top-ranked public research university located in the city of College Park in Prince George's County, Maryland, just outside Washington, D.C...
, 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)