Trickle-down economics

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"Trickle-down economics" and "trickle-down theory" are terms of political rhetoric that refer to the policy of providing tax cuts or other benefits to businesses and rich individuals, in the belief that this will indirectly benefit the broad population.[1] 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."[2]

Proponents of these policies claim 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.[citation needed] 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,[3] and that the trickle-down effect might be very slim.[4]

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 Reagan's presidency, the Democratic controlled House, which, according to the Constitution, is responsible for introducing all bills related to taxation, cut the marginal tax rate on the highest-income tax bracket from 70% to 28%. [5][6]

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.[7]

“ 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. [8] - David Stockman, Ronald Reagan's budget director ”

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

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[edit] Proponents' views

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. 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--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. [9]

Although economists do not use the term 'trickle down', some economic theories reflect the meaning of this pejorative. Some macroeconomic 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. [10]

In the early 1990s Congressional Record, non-pejorative uses of the term are rare but do appear.[11][12][13][14]

A May 16, 2006 editorial in the Wall St. Journal stated, "The Pacific Research Institute has crunched the tax numbers in all 50 states and published the 'U.S. Economic Freedom Index' ranking all states according to how friendly or unfriendly their policies were toward free enterprise... In 2005, per capita personal income grew 31% faster in the 15 most economically free states than it did in the 15 states at the bottom of the list. And employment growth was a staggering 216% higher in the most free states." [15]

Critics of this editorial point out that it failed to mention that those states with 'friendly' policies tend to take more federal money than they pay out in federal taxes.[16]

[edit] Criticisms

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.[17] 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 toward one specific group. Supply-siders, on the other hand, argue that tax cuts for the rich promotes investment, (basically the rich choosing where their money goes, and then getting dividends in return) which in turn promotes growth.

[edit] 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. To attribute to people who have advocated the opposite in policies is not only inaccurate but poisons the debate on public issues."[18]

Thomas Sowell claimed that, despite its political prominence, no trickle-down theory has ever existed among economists.[4] In response, many critics referred him to Stockman's remarks to Greider. Sowell replied in his newspaper columns.[19] 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.'"[4]

[edit] See also

[edit] References

  1. ^ Aghion and Bolton (1997) p.151
  2. ^ Giangreco, D. M.; Kathryn Moore (1999). Dear Harry: Truman's Mailroom, 1945-1953. 
  3. ^ Hoyer, Steny H. (2003-09-04). "Hoyer: We Need a Real Economic Plan, Not More Presidential Platitudes". Office of the Majority Leader. http://www.democraticleader.house.gov/media/press.cfm?pressReleaseID=231. Retrieved on 2007-01-16. 
  4. ^ a b c Thomas Sowell. "The "Trickle Down" Left: Preserving a Vision." June 2, 2006.
  5. ^ Top US Marginal Income Tax Rates, 1913 - 2003
  6. ^ Total Income Tax Shares, 1980-2006, Summary of Latest Federal Individual Income Tax Data, Table 6, Source: Internal Revenue Service, July 18, 2008
  7. ^ William Greider. The Education of David Stockman. ISBN 0-525-48010-2
  8. ^ http://www.theatlantic.com/doc/198112/david-stockman/5 "The Education of David Stockman" by William Greider
  9. ^ Thomas Sowell. Basic Economics: A Citizen's Guide to the Economy. ISBN 0-465-08138-X
  10. ^ 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
  11. ^ Lane Evans. Congressional Record, March 13, 1990.
  12. ^ Helen Delich Bentley. Congressional Record, July 24, 1989.
  13. ^ Jay Rockefeller. Congressional Record, July 26, 1991.
  14. ^ Sam Farr. Congressional Record, July 21, 1994
  15. ^ 'Live Free or Move', Wall St. Journal, May 16, 2006
  16. ^ [1]
  17. ^ Galbraith, John Kenneth (February 4, 1982) "Recession Economics." New York Review of Books Volume 29, Number 1.
  18. ^ Hank Brown. Congressional Record, March 24, 1992.
  19. ^ Thomas Sowell. "Trickle-Down Ignorance." April 2, 2005.

[edit] Further reading

[edit] External links

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