Trickle-down economics facts for kids
Trickle-down economics refers to economic policies that disproportionately favor the upper tier of the economic spectrum, comprising wealthy individuals and large corporations. The policies are based on the idea that spending by this group will "trickle down" to those less fortunate in the form of stronger economic growth. 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.
Similar criticisms have existed since at least the 19th century, though the term "trickle-down economics" was popularized in the U.S. in reference to supply-side economics and the economic policies of Ronald Reagan. Major examples of what critics have called "trickle-down economics" in the U.S. include the Reagan tax cuts, the Bush tax cuts, and the Trump tax cuts. Major UK examples include Liz Truss's mini-budget tax cuts of 2022. 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 occasionally used by proponents of such policies. As of 2023, studies have not shown that there is a demonstrable link between reducing tax burdens on the upper end and economic growth.
Contents
History
Background
The Google Ngram Viewer shows that the term "trickle down economics" was rarely seen in published works until the 1980s. However, the concept that economic prosperity in the upper classes flows down into the lower classes is at least 100 years old. The term itself is used mostly by critics of the concept. 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.
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. William Safire traced the origin of the term to this speech.
William J. Bennett credits humorist and social commentator Will Rogers for coining the term and noted in 2007 its persistent use throughout the decades since. 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.
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 the 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."
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."
Presidential speechwriter Samuel Rosenman wrote in 2008 that "trickle down policies" had been prevalent in American government since 1921.
Reagan years
Ronald Reagan launched his 1980 campaign for the presidency on a platform advocating for supply-side economics. During the Presidential nomination in 1980, George H. W. Bush had derided Reagan's economic approach as "voodoo economics". 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. 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."
Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy. 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 will result in some of the feed passing through for lucky sparrows to eat. 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.
Usage
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.
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 only succeeded at increasing inequality and making the rich wealthier, with no beneficial effect on real GDP per capita or employment. According to the study, this shows that the tax cuts for the upper class did not trickle down to the broader economy.
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.
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.
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".
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.
See also
In Spanish: Efecto derrame para niños
- Reaganomics
- Thatcherism
- Laffer curve
- A rising tide lifts all boats
- Trussonomics
- Austerity
- Classical economics
- Economic inequality
- Keynesian economics
- Matthew effect
- Neoclassical economics
- Neoliberalism
- Palace economy
- Progressive tax
