Trickle-down economics

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"Trickle-down economics" and "trickle-down theory," in United States political rhetoric, are characterizations by opponents (principally Democrats) of the policy of lowering taxes on high incomes and business activity. Proponents of these policies claim that they will promote new investment and economic growth, thereby indirectly benefitting people who do not directly pay the taxes. Opponents characterize this as a claim that the people who would otherwise pay the tax will distribute their benefit to less wealthy individuals, so that a fraction will reach the general population and stimulate the economy.[1] Proponents of the policies generally do not use the terms "trickle-down economics" themselves.

Today "trickle-down economics" is most closely identified with the economic policies of the Ronald Reagan administration, known as Reaganomics or supply-side economics. 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.[2]

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

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[edit] Proponents' views

Adam Smith, in The Wealth of Nations, says that taxation "may obstruct the industry 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."[3]

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.[citation needed] 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.[citation needed]

Economist Thomas Sowell wrote 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 owners.[4]

In the 1990s Congressional Record, non-pejorative uses of the term are rare but do appear.[5][6][7][8]

[edit] 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."[citation needed] In this form they have been ridiculed by Franklin Delano Roosevelt as "toryism."[citation needed] One economist critical of the policies, John Kenneth Galbraith, called them "horse and sparrow" economics: "if you feed enough oats to the horse, some will pass through to feed the sparrows."[9]

Many economists dispute that Reagan's tax cuts produced the economic boom of the 1980s; instead, they apply an eclectic version of Keynesian economics.[citation needed] Paul Volcker, the Fed chief appointed by Jimmy Carter, had already begun implementing contractionary monetary policies to solve the problem of severe inflation by raising unemployment (see Phillips Curve).

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 first Bush administrations was enjoyed exclusively by the few individuals whose taxes fell.

[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. 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."[10]

Thomas Sowell claimed that, despite its political prominence, no trickle-down theory has ever existed among economists.[11] People referred him to Stockman's remarks to Greider, but he dismissed them as merely an affirmation that other people had used the term, and said that Stockman was not the last word on economic thought.[12]

[edit] References

  1. ^ Hoyer, Steny H. (2003-09-04). Hoyer: We Need a Real Economic Plan, Not More Presidential Platitudes. Office of the Majority Leader. Retrieved on 2007-01-16.
  2. ^ William Greider. The Education of David Stockman. ISBN 0-525-48010-2
  3. ^ Adam Smith, The Wealth of Nations Book V, Chapter II, Part II.
  4. ^ Thomas Sowell. Basic Economics: A Citizen's Guide to the Economy. ISBN 0-465-08138-X
  5. ^ Lane Evans. Congressional Record, March 13, 1990.
  6. ^ Helen Delich Bentley. Congressional Record, July 24, 1989.
  7. ^ Jay Rockefeller. Congressional Record, July 26, 1991.
  8. ^ Sam Farr. Congressional Record, July 21, 1994
  9. ^ John Kenneth Galbraith. The Good Society: The Humane Agenda. ISBN 0-395-85998-0
  10. ^ Hank Brown. Congressional Record, March 24, 1992.
  11. ^ Sowell, ibid.
  12. ^ Thomas Sowell. "Trickle-Down Ignorance." April 2, 2005.

[edit] See also

[edit] External links

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