Trickle-down economics

"Trickle-down economics" and "trickle-down theory," is a term used in political rhetoric to classify economic policies perceived to benefit the wealthy and then "trickle-down" to the middle and lower classes. The theory states that if the top income earners 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. This sentiment is captured in John F. Kennedy's argument, "a rising tide floats all boats". Proponents argue 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 might be very slim.

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. Reagan, in 1984 cut taxes by 5%. In order to spur business, Bill Clinton lowered taxes for the wealthy another 3%. In the early years of 2001, George W. Bush, lowered taxes again for the wealthy by 4%. To this day, the tax rate is currently at an all-time low at 18%, many economists generally favor simplifications and generally reform in the tax code . 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 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

The term "trickle-down" comes from an analogy with a phenomenon in marketing, the trickle-down effect.

Proponents' views

Adam Smith, in The Wealth of Nations, says that taxation "may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so."

Stockman placed supply-side economics in a long tradition in economics, and maintained that laissez-faire will benefit not just those well-placed in the market but also the poorest. Another variant centers on Simon Kuznets's "Law", which says that increases in income inequality that occur in the early stages of industrialization are followed by increases in income equality. A more general version argues that increases in real gross domestic product are almost always good for the poor.

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.

In the 1990s Congressional Record, non-pejorative uses of the term are rare but do appear.

Criticisms

The ideas derided as "trickle-down economics" are often seen as a major rhetorical variant of "what's good for business and the rich is good for the country." In this form they have been ridiculed by Franklin Delano Roosevelt as "toryism." 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": "if you feed enough oats to the horse, some will pass through to feed the sparrows." Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896.

Proponents of Keynesian economics and related theories often criticize tax cuts for being "trickle down"; however, Keynesian theory actually holds that tax cuts can be used as an economic stimulus. Keynesians generally argue for broad fiscal policies that are direct across the entire economy, not towards one specific group. Supply-siders, on the other hand, argue that tax cuts for the rich promotes investment, which in turn promotes growth. It is this sort targeted tax cut that is derided as trickle down since many in the economy do not directly reap benefits from the cut, and many may not see any benefit at all unless the cuts "trickle down" to them. References to the trickle-down theory in the 1990s Congressional Record are overwhelmingly from Democrats saying that it has not worked, and that the benefit of tax cuts by the Reagan and second Bush administrations was enjoyed exclusively by the few individuals whose taxes fell.

Criticism of term

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. I do not think it does. 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

External links

• "Trickle-Down Economics: Four Reasons Why It Just Doesn't Work" (United for a Fair Economy)
• Economic numbers for the Reagan Administration
• "The 'Trickle Down' Economics Straw Man" (Thomas Sowell)
• "Trickle-Down Pain" (Robert Reich)
• Ronald Reagan's Legacy (A Dollars and Sense article by John Miller)
• Robert Frank (April 12, 2007). "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". The New York Times. Retrieved 03-05-2008. {{cite web}}: Check date values in: |accessdate= and |date= (help)