Trickle-down economics

Trickle-down theory, also known as Trickle-down economics, was a term used by detractors and advocates alike for some of the policies of Ronald Reagan. See Reaganomics. This term has also been applied to the policies of President George W. Bush. It is the view that government policies that help the wealthy and their corporations (through tax cuts, for example), will benefit the middle classes and even the poor. The benefits trickle down. More generally, trickle-down theory argues that unfettered markets benefit all in society. It is central to Supply-Side economics, a version of laissez-faire economics, and it was a highly charged issue during the Reagan Administration.

The phrase "trickle-down economics" was coined by David Stockman, one of Ronald Reagan's economic advisors. He painted Supply-Side economics as part of a long tradition in economics, that laissez-faire will benefit not just those well-placed in the market (the rich) but also the poorest. The general principle is well said in (Bernard de Mandeville, The Grumbling Hive (1733)) "private vices are public virtues". Because the wealthy spend lavishly and employ others, benefitting the rich, they help the poor.

The other side of trickle down theory can be seen in the work of Adam Smith. For example,

It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. (An Inquiry into the Nature and Causes of the Wealth of Nations," ch. 1. Emphasis added.)

To Smith, the "well-governed society" is one in which free markets ("natural liberty") replace the state's guidance as the method of resource allocation. (In his time, the King's government was encouraging and discouraging many different types of economic activities using subsidies, monopolies, taxes, and other laws.) Smith's argument is that increased division of labor (specialization) raises labor productivity. This in turn leads to lower costs, which, all else constant, are passed on to consumers in the form of lower prices.

Many doubt that Adam Smith can be invoked in favor of trickle-down theory. The Wealth of Nations is a very eloquent in its criticism of special interests, and Supply-Side economics bears a striking resemblance to the sort of special-interest arrangements that Smith was critical of.

The concept was also discussed by Karl Marx. For example,

Capital can multiply itself only by exchanging itself for labor-power, by calling wage-labor into life. The labor-power of the wage-laborer can exchange itself for capital only by increasing capital, by strengthening that very power whose slave it is. Increase of capital, therefore, is increase of the proletariat, i.e., of the working class.
And so, the bourgeoisie and its economists maintain that the interest of the capitalist and of the laborer is the same. And in fact, so they are! The worker perishes if capital does not keep him busy. Capital perishes if it does not exploit labor-power, which, in order to exploit, it must buy. The more quickly the capital destined for production -- the productive capital -- increases, the more prosperous industry is, the more the bourgeoisie enriches itself, the better business gets, so many more workers does the capitalist need, so much the dearer does the worker sell himself. The fastest possible growth of productive capital is, therefore, the indispensable condition for a tolerable life to the laborer.

Of relevance is Kuznets' "Law"[1], which says that increases in income inequality that occur in the early stages of industrialization are followed by increases in income equality.

Trickle-down theory is a major rhetorical variant is "what's good for business is good for the country". While many believe this is generally true, in practice, trickle-down economics simply helps business. David Stockman said the rhetoric of supply side economics was used during the Reagan Administration as a trojan horse for making taxation more regressive.

In its defense, Supply-Side economics was implemented, and the economy did improve. But almost all economists would agree that Reagan's regressive tax cuts were not the cause. Paul Volcker, the then Fed chief, had already begun implementing far less controversial monetary policies to solve the problem of severe inflation. Once inflation has been beaten (by the back-to-back recessions of 1980 and 1982), the Reagan policy of deficit spending (due to tax cuts and military spending increases) can be seen as sparking the prosperity of the late 1980s. But this was an application of old-fashioned Keynesian economics rather than Supply-Side theory.

External Links

quote.bloomberg.com includes economic numbers for the Reagan Administration.
Dollar & Sense includes numbers on savings and investment during the Reagan Administration.

See Also

External Links