Does trickle down economics actually work?

I will start by stating loud and clear that my understanding of economics is at a very basic level. However the concept of trickle down economics is refreshingly simple, so even I get the gist. But does it work?

Ed Davey addressed the question in his interview on Sky News yesterday, where he says that the practice of boosting big business with tax cuts will not help the 4 million SMEs:

And neither will it help those many millions of people who are struggling now, at this very moment, with the cost of living crisis. Even if Truss’s proposals did manage to kickstart the economy again it would take months, if not years, to impact on ordinary citizens/consumers.

However the evidence appears to be that, even in the long term, trickle down (or supply side) economics doesn’t achieve its intentions.

I used my trusty source – Wikipedia – to look up the origins of the term. It seems it was invented by a comedian, Will Rogers, who wrote this in 1932:

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.

It was famously tried by Ronald Reagan, George W Bush and Margaret Thatcher, and in all cases resulted in greater inequality.

I love this comment from a most surprising pundit, Pope Francis:

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralised workings of the prevailing economic system.

We have to ask why anyone would adopt it as an ideology. Is it perhaps because it is easy to understand, sounds plausible and doesn’t require any sophisticated economic analysis? Hmmm…..

* Mary Reid is a contributing editor on Lib Dem Voice. She was a councillor in Kingston upon Thames, where she is still very active with the local party, and is the Hon President of Kingston Lib Dems.

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23 Comments

  • Cutting taxes on the top earners and reducing social welfare spend is actually deflationary because top earners have a much higher capacity to consume imports. Upgrade the BMW?

  • nigel hunter 23rd Sep '22 - 11:43am

    Water trickles downhill BUT if you put a dam (the rich putting it in the bank NOT spending it on the larger economy) in its way it will not.The release, overflow pipe (where to stop the water overflowing from the dam top) only works sporadically when in ‘good’ times (lots of rain).That spare water is not a lot and is soon used up whilst the dam is full (the rich have it) TRICKLE DOWN WORKS FOR THE RICH

  • Trickle down can work, but mainly in the form of extra donations to the Conservative party.

    The reduction of the top rate of tax from 83% to 60% in the 1980s resulted in a massive loss of revenue. However, instead of recovering lost revenue by reinstating higher levels of tax, the Tories increased VAT. What will happen this time?

  • @ James Dapre “the Tories increased VAT”…… they didn’t do it by themselves, James. They got a bit of help.

  • Katharine Pindar 23rd Sep '22 - 12:17pm

    Having listened to the new Chancellor’s statement in he Commons this morning, I am more than ever convinced of the sheer moral turpitude of this attitude taken by the Tory leadership. On the one hand, richer people will no longer pay 45% income tax, it will be reduced to 40%. On the other hand, recipients of Universal Credit will have their miserable dole reduced if they fail to increase their job searches. Tell that to the single parents already trying to juggle three jobs, all at minimum wage levels, to keep bread on the table for their households; perhaps the Tories would like them to give up the time they have to spend visiting the local food bank.

  • Steve Trevethan 23rd Sep '22 - 1:01pm

    “Trickle Down Economics”, with energetic support from most of the main stream media, uses the emotional/affective part of a folksy metaphor to delude the not-rich into believing that we shall have “jam tomorrow”.
    Might our party offer a real alternative by espousing the practical realities of Modern Monetary Theory?.

  • Joseph Bourke 23rd Sep '22 - 1:21pm

    As Larry Elliott writes in the Guardian History would suggest Kwarteng’s hefty tax giveaway is a huge gamble “Britain has been here before. Just like Reginald Maudling in the early 1960s and Tony Barber in the early 1970s”
    “…the biggest immediate threat to the chancellor comes from a crashing pound and soaring bond yields. No chancellor can avoid the scrutiny of the financial markets, which is why Kwarteng’s gamble has only two feasible outcomes: complete success or abject failure. History suggests it won’t be the former.”

  • >Does trickle down economics actually work?
    Short answer: No
    Slightly longer answer: Yes, but very slowly.

    Over two hundred years ago we witnessed the industrial revolution and the biggest accumulation of wealth among a small elite. Subsequent history shows that whilst some money did trickle down, it was wholly insufficient and that the majority of social change witnessed was the result of bottom-up positive action.

    It is clear from this “budget” that the current Conservative party not only doesn’t believe in society but is prepared to take actions that will cause massive social division; something even Margaret Thatcher held back from.

  • nvelope2003 23rd Sep '22 - 2:39pm

    Curiously most of the people interviewed by the BBC in Norwich seemed to agree with the Government’s economic plan. It seems perverse but I have heard these sentiments expressed by working people here too. Time will tell I suppose.

  • Mick Taylor 23rd Sep '22 - 2:50pm

    @Steve Trevathan. You’ll wait a long time before our party espouses MMT. Our leaders along with almost everyone in the country has been brainwashed for decades by the idea of debt and how bad it is. MMT would suggest that actually inflation is the problem, not the debt itself, which is simply a transfer from the Bank of England to the government. The problem we face in the UK is inflation and this ‘fiscal statement’ does absolutely nothing to tackle it, indeed the measures announced today will actually make inflation worse.
    The whole concept of trickle down has been used for years to justify the indefensible, namely making the rich richer and trying to con the poor that they will benefit as a result.
    @David Raw. I think you’ve got your VAT increases muddled up. James Dapre was talking about the increase from 8% to 15% which was down to the Tories alone. This isn’t to deny the later increase, just getting the timescales right.

  • Steve Trevethan 23rd Sep '22 - 3:13pm

    Might it be possible to persuade H. Q. to adopt “Classical Economic Theory Adjusted for Fiat Money” which was, without the fiat money dimension, advocated by the great Liberal thinkers of the19c.
    Low cost, non-extractive, quality infrastructures, banking, housing and like, results in high quality living contexts and healthy, energetic citizens who do not need money to pay for excessive profit based infrastructure needs, for debts, for extractive housing costs and the like.
    Thus our country becomes more efficient and able to live better on lower wages and so more competitive.
    What is our party’s economic policy?
    Is it “nice” Neoliberal Economics”?

  • Sorry to disappoint, Mick, but no muddle. Merely referring to the most recent rise after the abandonment of the famous “VAT bombshell campaign” by you know who. I must confess to being naive enough to think that politicians, especially Lib Dems, should mean what they say and say what they mean when they claim the moral high ground.

    You are, of course, quite right to flag up that under Thatcher Geoffrey Howe increased the standard rate of VAT from 8% to 15% (and abolished the higher rate) in June 1979. In 1991 Lamont increased VAT again from 15% to 17.5%. But I don’t think it was that becoming to encourage them by joining in with their bad habits especially after saying we wouldn’t.

    I have to confess I wasn’t that keen when our mutual friend Richard Wainwright tried to convert the Liberal Party to support the introduction of VAT way back in the mists of time. Unless my memory is failing me, I’m not sure he convinced the party when he did.

  • George Thomas 23rd Sep '22 - 8:20pm

    Life has become a competition to see which of us can become friends with neighborhood super-wealthy in order to access crumbs of healthcare, housing and access to legal services.

    Bad luck if your neighborhood doesn’t have a super-wealthy or if they don’t like you.

    The UK is becoming very much like The Hunger Games.

  • >The UK is becoming very much like The Hunger Games.
    Doesn’t bode well for Truss et al then… 🙂

  • nvelope2003 23rd Sep ’22 – 2:39pm:
    Curiously most of the people interviewed by the BBC in Norwich seemed to agree with the Government’s economic plan.

    The canaries in the coal mine?

  • The reality is that economics was invented by people. We are very reliant on the concept of limited liability when talking about economics. However this was clearly an invention in the nineteenth century.
    So when we talk about international corporations we are talking about people. The people who make the decisions, the people who at least in theory own them and the people who work for them.
    We need to stop talking about trickle down economics and talk about people.
    The idea of individuals making decisions for others has lasted a long time. Now this idea. Is threatening the environment we all share. Would the idea of people being able to make decisions jointly, and being educated in schools to do that, result in better outcomes? There is no way of finding out unless we try.

  • Peter Davies 24th Sep '22 - 9:45am

    The key to growth is productivity. Broadly speaking, National income is directly related to national output and average income is directly related to average personal output (productivity). Of course there is no guarantee that any rise in productivity produces a rise in the income of the poorest individuals. It tends to be rather the opposite which is why policies to stimulate productivity need to be accompanied by more redistribution.

    Improved productivity comes from better technology, up-skilling and investment. The government seems to think that it comes only from more ambition or desperation which can be created by financial incentives.

    The energy crisis presents many problems but it also presents opportunities. There are new technologies to be developed, new skills to be learned and a lot of capital investment to be made.

    Education is the other major area where the UK has been failing to keep up. I’m no expert in education and rather a lot of people in the party are but it seems to me that the problem is how many inadequately educated young adults it is producing rather than how few brilliant academics. I don’t think we have a big idea that we can tell the public will fix it though we do seem to have a lot of good small ones. What does seem obvious though is that Truss’s big idea (re-introducing secondary moderns) is a step in the wrong direction.

  • William Francis 25th Sep '22 - 5:28pm

    @Steve Trevethan

    “Might our party offer a real alternative by espousing the practical realities of Modern Monetary Theory?”

    What realties are those? MMT has no real macro-economic model, its just meme-theory, which stipulates; that a state can print all the money it wants without causing inflation and has no impact on the political economy, that a job guarantee (what that job is rather vague) is a good substitute for general aggregate demand management and tool to achieve full-employment, and that interest rate rises are inflationary (disproven by Turkey recently).

    MMT is just a product of a tax-averse society, during a period of low inflation.

  • Joe Biden was right “Trickle down has never worked”… Amazon, MacDonalds, Sports Direct, et al, already make ÂŁÂŁbillions and yet pay their workforce as little as possible;. On what planet would giving them even more turn them into philanthropists?

  • Nonconformistradical 25th Sep '22 - 9:00pm

    @expats
    Re Amazon etc. do you buy from them? Are they worthy of your custom given the way they treat their staff?

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