The ‘trickle-down’ effect

Next time a conservative politician or acquaintance tells you that tax cuts for the better off will help the state or nation’s economy, you might want to have ‘the discussion’.

Tax cuts for the better off is part of a theory of economics known as ‘trickle-down’ that seeks to prove that if the tax cuts are given to the better off, they will spend more, increasing the demand for goods and services to the direct benefit of the economy as well as the government’s tax revenue. So we’re all on the same page — here is a ‘trickle-down theory’ definition:

An economic idea which states that decreasing marginal and capital gains tax rates — especially for corporations, investors and entrepreneurs — can stimulate production in the overall economy. According to trickle-down theory proponents, this stimulus leads to economic growth and wealth creation that benefits everyone, not just those who pay the lower tax rates.

Probably the best known example of this theory around the world has been the Reagan Presidency in the United States. In the early 1980’s, he cut the top tax rate by 20%! Most conservative governments have also implemented similar cuts in the past although, to be fair, not of the same magnitude. Conservatives will also tell you that government spending should be reduced to an absolute minimum and the government’s budget should balance. Forbes (an American business publication) as recently as 2013 has been arguing that while it finds the term ‘trickle-down theory’ objectionable, it is a valid theory that has worked in the past. According to the article, the term was coined —

… by Democrats in the 1980s as a way to attack President Reagan’s economic policy combination of tax rate cuts and some relaxation of federal regulations. They needed a catchy, easy-to-remember zinger to fire at Reagan; a line that would keep their voting base angry.

The article goes through all the usual conservative talking points: small government is less of a drag on the economy; people need work rather than infrastructure such as schools and transportation; the better off are the ones that create wealth; that Obama is to blame and so on. It finishes with this:

What poor people should want is more freedom and more growth, so they will have better opportunities. The deceptive “trickle-down economics” notion was crafted to take advantage of their ignorance about the way the world works. Perhaps one day the pitiable Americans who now cheer when politicians who masquerade as their friends denounce “trickle-down economics” will realize that the massive federal Leviathan is their enemy.

While I take the point that the term ‘trickle-down theory’ may have been coined by a member of the Democratic Party in the US and it does have more ‘zing’ than ‘supply-side economics’, the fact is that the theory is all about those who are better off supporting the economy and the government reducing its influence. The conservatives have their own ‘zinger’ name for the theory as well — ‘Reaganomics’. Regardless of the name you want to give it, the theory suggests that benefits of tax cuts to the better off are supposed to flow to those that are less well off. If that isn’t trickling down, what is?

The other argument is that the reduction in regulation assisted Americans to find jobs — and contribute to the economy. While to an extend it did, the majority of the Reagan era was during a time in the world’s economic history when the economy was chugging along nicely thank you very much. It could also be argued that the seeds for the current social and economic woes in the USA were sown in that era where personal wealth was a far greater concern than the common good.

Seems it’s all cut and dried then, doesn’t it? US and Australian conservatives still call for a return to ‘supply-side’ or ‘trickle-down’ economics (depending on your point of view), citing amongst other justifications, Reagan’s success in 1981 in reversing the US recession.

Reagan’s tax cuts are claimed to be the event that ended the recession of the late 1970’s and early 1980’s in the USA. But what is (conveniently) forgotten is that he increased government spending by 2.5% at the same time. Government spending also stimulates the economy. Therefore the most cited example of the benefits of this economic theory doesn’t stack up, as there were other influences at the time. Despite later increasing taxes for the better off, Regan also tripled the US Federal deficit from 1981 to 1989 — hardly the action of a government reducing influence in the economy. George Bush (the elder) also increased taxes despite a ‘no tax increases’ promise.

Recently the Huffington Post reported on the success on the Governor of the US state of Minnesota (Mark Dayton) and his remarkable turnaround of the state’s economy. The full article is here and the highlights are that when he took office in 2011, he inherited a deficit of US$6.2 billion and 7% unemployment. In 2015, Governor Dayton handed down a budget surplus of $1 billion that he has pledged to spend on transportation and education. Unlike nations, US (and Australian) states do not issue their own currency, so balanced budgets are considerably more important than at the federal level.

Dayton is an interesting person. He has been in politics for some time but considered to be a terrible ‘retail’ politician. According to Mother Jones:

An heir to the Target retail fortune, Dayton, 68, has ploughed tens of millions of his own money into his campaigns, but it still hasn't come easy. He swallows his words in a rush, speaking in almost-unintelligible mumbles and frequently losing track of his point as he rambles on unrelated tangents. "He's not a terribly articulate guy," says Larry Jacobs, chair of the University of Minnesota's public policy school. "He's not a smooth talker; he struggles to give a smooth public speech." At public events, Dayton hunches his shoulders, which makes him appear shorter than his 5-foot-10 frame, and often appears to be trying to disappear into the crowd. No one wonders whether he'll seek national office someday. He's not the leader of the free world — he's your dad, struggling to make small talk with you and your friends after you get home from school.

So how did Dayton do it? Well you could say he threw the ‘supply-side theory’ out the window. Not only did he raise taxes on the highest earners in Minnesota; he increased the basic wage in the state to $9.50 an hour. Mother Jones reports:

Republicans went berserk, warning that businesses would flee the state and take jobs with them.

The disaster Dayton's GOP rivals predicted never happened. Two years after the tax hike, Minnesota's economy is booming. The state added 172,000 jobs during Dayton's first four years in office. Its 3.6 percent unemployment rate is among the lowest in the country (Wisconsin's is 5.2 percent), and the Twin Cities have the lowest unemployment rate of any major metropolitan area. Under Dayton, Minnesota has consistently been in the top tier of states for GDP growth. Median incomes are $8,000 higher than the national average. In 2014, Minnesota led the nation in economic confidence, according to Gallup.

Scott Walker is the Republican Governor of Wisconsin — the neighbouring state to Minnesota — and a potential Republican Presidential Nominee in 2016. For decades, the two states have been comparable in a number of social and economic criteria. In the past few years, it seems that the ‘unlikely politician’ in Minnesota is outperforming his counterpart in Wisconsin according to a number of sources including Minnesota Public Radio and Econbrowser. Walker was also the subject of a ‘recall election’ in 2012, when in excess of 500,000 Wisconsin voters petitioned for Walker’s removal from office. He won the subsequent re-election — only after allegedly receiving considerable financial support from outside the state. CBS News in the US is reporting there are some potential problems with the morals and ethics of how Scott Walker manages his fundraising. Never the less, Walker is seen as a conservative hero by legislating to remove considerable negotiating power from the public service unions in Wisconsin and other US states as detailed in this article from The New York Times . Walker is now claiming that his ‘success’ with unions gives him the experience to deal with Islamic State (when he becomes a Republican President in 2016 you would have to assume). Fighting with unions and reducing public services are not unknown in Australia under the current federal government or its predecessors. Dayton has announced that his current term will be his last — and yes, he did have to wait until the ‘stars aligned’ to actually perform what is considered to be a remarkable recovery.

Australia’s newly appointed (in January 2015) Treasury Secretary, John Fraser, has gone ‘on the record’ claiming that ‘Reaganomics’ had some positive effects. Gareth Hutchens, writing for Fairfax media (link above) suggests that the view of Fraser is somewhat different to Martin Parkinson and Ken Henry — the previous two Treasury Secretaries. Given that Parkinson and Henry demonstrated their credentials during the Global Financial Crisis and its aftermath, Fraser has some large shoes to fill.

It is fair to suggest that there will be economists discussing the benefits of ‘trickle-down economics’ for years to come. However, Governor Dayton has clearly demonstrated that trying to make society more equitable by increasing the basic wage and taxing those that can afford to fund the services will not only improve the state’s bottom line, it will improve the quality of life enjoyed by all its citizens, then when the ‘payoff’ comes, services such as education and transportation can be improved using government funding. It seems there is a better way than the frequent calls for ‘tax cuts for the well-off’.

Minnesota and Wisconsin have seemingly been joined at the hip economically and socially for a considerable period of time. Governor Dayton has improved the living conditions of those in his state, reduced unemployment and is now funding improvements to transportation and education using methods that are certainly not supported by Australia’s Treasury Secretary Fraser or Treasurer Hockey. Governor Walker cannot replicate the success of Dayton (or Reagan for that matter) using ‘traditional’ conservative economic measures in neighbouring Wisconsin; accordingly the citizens of that state are falling behind their ‘long time equals’ who live over the border in Minnesota.

So next time you hear the call for tax cuts, austerity and ‘small government’; why don’t you think about Minnesota’s Mark Dayton and have ‘the discussion’ about a better way instead?

What do you think?

About 2353

Welcome to ‘the discussion’ we have to have. 2353 provides plenty to discuss in this piece on ‘trickle-down’ economics and the alternative approach — that seems to be more successful. The piece is particularly timely as Hockey released the government’s taxation discussion paper last Monday.

Next week, on a similar theme, Ken discusses ‘How the economic rationalists tried to steal our hearts and minds’, which looks at how the economic rationalist approach was trying to change not just our economy but our basic Australian values.

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5/04/20152353 What a timely piece you have written. “Trickle down economics’ has been discussed here on many occasions, and it has been suggested that this is the government’s working model of economics, although they have never revealed what their model is. They may not know; they may be simply following IPA dictates. You have effectively debunked ‘trickle down’ and have shown that the opposite; namely that increasing the basic wage improves the quality of life of citizens, increases employment and decreases inequality. Joseph Stiglitz has written about the downside of inequality in [i]The Price if Inequality:[/i], and more recently Thomas Piketty has explored its origins in [i]Capital in the Twenty-First Century[/i]: The book's central thesis is that when the rate of return on capital is greater than the rate of economic growth over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability. Piketty proposes a global system of progressive wealth taxes to help reduce inequality and avoid the vast majority of wealth coming under the control of a tiny minority. The economist John Kenneth Galbraith noted that ‘trickle-down economics’ had been tried in the United States in the 1890s under the apt descriptor ‘horse and sparrow theory.’ [i]“If you feed the horse enough oats, some will pass through to the road for the sparrows.’[/i] Anyone wanting a little amusement should type ‘Images for trickle down economics’ into Google. There’s a surprisingly large collection of telling images there! Thank you for spelling out what ‘trickle down economics’ really is.

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6/04/2015Folks [b]Are you among the growing throng who despair of the Abbott government, who wonder if this ‘grown up, adult’ outfit will ever get its act together? If so, you might enjoy reading the pieces on the [i]TPS[/i] sister site: [i]TPS Extra[/i], which has been designed specifically to accommodate the ever-unfolding extraordinary events in Canberra.[/b] Here are two recent offerings: [i]Does this nation deserve to be led by a buffoon?[/i] [i]When ideology, dishonesty, and incompetence collide[/i] If you wonder how Bill Shorten ought to be approaching his role in opposition, you might find the piece: [i]If I were Bill Shorten – on a vision for the nation[/i] of interest. [b]Whenever you visit [i]The Political Sword[/i], if you make a habit of clicking the [i]TPS Extra[/i] icon in the left panel, you will be taken to that site, where you will find a collection of acerbic pieces, waiting for your comments.[/b] The current piece is: [i]A time to hate[/i]. Check out what it says!

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6/04/2015Folks It Tony Abbott was looking for some respite over the Easter break from the pressure on his leadership, the January-March quarterly [i]Newspoll[/i] will give him no joy. This is what Phillip Hudson wrote in an article: [i]Newspoll: Heartland support for Fortress Abbott goes west, fast[/i] in[i]The Australian[/i] today: “[i]Western Australia has been a fortress for the Coalition for the entire 5½ years Tony Abbott has been Liberal leader, yet between Christmas and Easter the west has been lost. “It surprised many when the uprising against the Prime Minister in February was led by West Australian backbenchers Luke Simpkins and Don Randall. At the last election, the Coalition won 12 of Western Australia’s 15 federal seats, repeating the dominance under Abbott in 2010. “But the slump in primary vote to a 14-year-low of 38 per cent and the flow-on collapse in the two-party-preferred vote from 53 per cent to 46 per cent revealed by today’s quarterly Newspoll shows half of those seats could be at risk. “Throughout last year, when support for Abbott and the Coalition fell in other states in the wake of a poorly received budget, Western Australia stayed strong for the Coalition and strong for Abbott. He got rid of the mining and carbon taxes and stopped the boats, all policies strongly supported in the state. Exactly a year ago, at the re-run of the West Australia Senate election, after the missing votes fiasco, the Coalition retained three of the six seats while Labor was humiliated with its worst result of one seat. “The last quarterly Newspoll, based on polls between October and December, showed Western Australia remained Coalition heartland and the only state where it was ahead in two-party terms. Abbott was easily preferred over Bill Shorten as better PM. “Rapidly, it has all changed. Western Australia lost a cabinet minister in the pre-Christmas reshuffle when David Johnston was dumped from Defence, although former treasurer Christian Porter won a minor promotion. The state is also taking the brunt of plunging iron ore prices. “It appears support for Abbott collapsed around the time of his captain’s pick to make Prince Philip a knight on Australia Day. When Simpkins sent an email to colleagues on February 6 seeking a spill motion, he said it was “the final proof of a disconnection with the people”. He wrote that he had been inundated with emails and people walking in to his electorate office “questioning the direction the government is being led”. He said many were people he knew who were firm supporters and polling-booth volunteers. “Today’s quarterly Newspoll covers that period and the spill motion Abbott survived. Many unpopular policies have since been reversed. “Abbott’s unpopularity in Western Australia, where his 42 per cent satisfaction rating at Christmas has dived to 25 per cent at Easter, now rivals his worst states of Victoria and South Australia, where his satisfaction of 19 per cent is lower than Julia Gillard’s rock-bottom 22 per cent in Queensland. As Shorten’s ratings in Western Australia also dropped, it will fuel speculation in Liberal ranks that voters might be lured back if their own Julie Bishop was leader. “It is unclear whether the collapse in the west is a protest vote or a deliberate shift to Labor, which has picked up all the lost Liberal support as well as ground from the Greens, who last year peaked at 17 per cent after strong campaigning by Scott Ludlam. “While the Coalition is bleeding in the west, its vote has climbed to a 12-month high in Queensland, a state where Abbott was last year told to stay away. “It’s too early to tell if the plunging fortunes of the Palmer United Party, the demise of Campbell Newman or second thoughts about a state Labor government are dominant reasons.”[/i] The related news item on [i]ABC News[/i] this morning adds: “[i]Nationally, Labor leads the Coalition 55-45 two-party preferred. “Opposition Leader Bill Shorten leads Mr Abbott 44-34 as preferred prime minister. “He is now ranked as better prime minister in all states for the first time.”[/i] Happy Easter Tony!


7/04/2015Whoever deleted that last spam You just beat me to the draw! :)


7/04/2015Twasn't me TT - I had to go and find my password!


7/04/20152353 I find it almost unbelievable that we are not having a debate about the alternative approaches to 'trickle-down' economics and economic rationalism. (The latter leads to the 'austerity' approach during economic troubles.) When there are good examples of alternative approaches actually working, as you show, why aren't there more politicians and economists pointing to those examples and suggesting that, at the very least, we should give them go and see if they work for us - they should! It is similar to my discussion last year of alternative approachs to GDP as a measure of a society's 'success'. As I said then, there are already a number of governments that have adopted, at least in part, measures of social well-being not just economic activity, and yet that debate is also not happening. I don't quite understand why such debates are not on the public agenda. Perhaps we have a generation of economists who were educated in the years of economic rationalism who will not change their spots and, of course, they will continue to advise governments world-wide for some years to come. Perhaps we just have 'weak' politicians who are not game to try anything new - as Dayton dared to do. But why aren't we at least having those debates???


7/04/20152353 "Trickle-down effect" always was a con. The reality is more like a [i]wick[/i] effect, with those at the top sucking up, not trickling down. Real wages for workers remain at very similar levels over time - food, bills, taxes, accommodation et al always consume most of most people's income, but the rich have hugely increased their share of a much larger product over time. Inequity in Australia has never been so great, with the wealth of Rindlard going on before. $2 million a day? (How many workers' wages is that?) Makes even Abborrtrrtt's $500K+++ sound modest! Well after all, he's working for her!


7/04/2015TT I thought there was some 'good news' the other day when I read that the falling iron ore price has knocked over $5 billion off Gina's 'worth'. They may think they are rich but not as rich as they think when their lifestyle is leveraged off assets that can lose value. I recall reading some years ago that the Rockefellers, although dropping down the world's rich list, were still one of the richest families in terms of 'cash'. But perhaps that's just my old working-class view that the only real wealth is the cash in your pocket.:-)


8/04/2015This was posted on Twitter today: Time4Hemp ‏@Time4Hemp Research Proving Cannabis Kills Cancer Cells Safely has been Suppressed Since 1974 … #marijuana I have known of this virtue of Cannabis (in rats) since exactly that year, when I was a guinea-pig (does that sound funny?) in a series of trials at Sydney University's Pharmacology Department. (Hillbilly Skeleton was one too, though a year or two later.) Dr Greg Chesher, who designed the trial in question, published a paper particularly noting the ability of cannabis to make cancers go into remission or even recession. Cannabis use is considered the best available treatment for glaucoma, an eye disease in which the intra-ocular pressure rises to the extent that it progressively destroys the optic nerve: Cannabis reliably lowers that pressure, with no important side-effects. (You might get a bit stoned, O woe.) In fact the fight for legal medicinal Cannabis started in the USA around the same time, with Mr Robert Randell's long-running legal bid for legal joints as medication for his glaucoma. Amidst a seemingly endless range of ailments and conditions for which it is proving efficacious, Cannabis is also the [i]most[/i] effective agent for preventing the deposition of amyloid plaque on neurons in the brain. (source: Scripps Institute, California, ) It is that plaque which is the primary marker for dementia, notably Alzheimers, the single most expensive condition of all in the Western world. Yet you don't hear a word about it from the Alzheimers Association. Glaucoma. Alzheimers. Cancer. Pain abatement where opiates have failed. Appetite stimulant in cancer cases. Everything from depressive illness to bone healing rate. How is the truth about this most useful medication being suppressed at Government level? Why, and who's doing the silencing? It seems to me the most devilish conspiracy of all. To deny people relief from suffering for fabricated reasons. If you want to read up on ALL the research now being done on Cannabis around the world, Google IACM [] the International Association for Cannabis Medicine, a highly reputable and long-running organisation which publishes papers and research from scientists all over the world.


9/04/2015Ken - why aren't alternative economic theories being promoted? Follow the money, the media and politicians generally have a vested interest in the status quo. TT - interesting comment on the use of cannabis. With two of the three health issues you list in my genetics - I'll be following the research. If nothing else, there would be a pretty good chance of going out the door smiling!


9/04/20152353 'Follow the money' - unfortunately too true. But the world is still suffering the aftereffects of the GFC (or Great Recession as the Yanks call it). With problems like that, you would think that the economic models that helped create the problem would be questioned - but they don't seem to be. The world moved to economic rationalism after the economic problems of the 1970s when it was argued that the old economic models had helped create the problems. But for some reason we are not having a similar debate now. Perhaps we need a Thatcher but one, this time, who will pursue the post-economic rationalist approach. That may be the key to change - the leader of a significant economy who dares to take the Dayton approach.


9/04/2015The status quo is supporting the 'trickle-up' effect Ken. Inequality is becoming greater, but those who control the system are those currently benefiting from it staying as it is. Perhaps Nick Hanauer is correct - revolution may be the only way to break this hold vested interests have on the economy.


11/04/2015Meh the IMF released a paper last year showing that inequality of income is the biggest drag factor on economic growth. Far bigger than taxing the wealthy. Indeed a redistributive tax system can benefit the wealthy via boyant economic growth. A rising tide lifts all boats some say........


11/04/2015This paper Glorfindel?


11/04/2015Hey Bacchus, Feb 2014 sounds right. I was amazed at the time that the Federal ALP leadership weren't making more of a noise about it. Especially considering how the Hockey budget treated equality......


11/04/2015Glorfindel I like the "rising tide lifts all boats" as an alternative to the "trickle-down" theory. And it works as 2353's reference to Governor Dayton in Minnesota shows. You would think that even the rich "b's" could see that, could see that austerity measures not only make it hard for the less well-off but also means they cannt make as much money. But obviously they can't - blinded by their own riches and willing to sit there until it all comes crumbling down around them.


11/04/2015Glorfindel, Bacchus, good to see you. Gee I wish I could get enthusiastic about Labor leadership. Abborrrtt's so awful, you know that a PJKeating would be making salami of him daily, but Bill Shorten is just so matter-of-fact, so seemingly bloody agreeable with Abborrrtt, Dog Albitey, Labor, go for the jugular! That's what I think anyway.

Pappinbarra Fox

15/04/2015Yes TT could not agree morr
How many Rabbits do I have if I have 3 Oranges?