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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. It is the view that to benefit the wealthy is to benefit the middle classes and even the poor. These benefits then trickle down. This idea is central to Supply Side Economics and it was a highly politically charged issue during the Reagan Administration. Supply Side Economics was implemented, and the economy did improve. However, there is debate over what caused these improvements. Paul Volcker, the then Fed Chief, had already begun implementing far less controversial monetary policies to solve the problem of stagflation and many have said it was his monetary policies which caused the economic turn around. David Stockman, Reagan's Economic Advisor later characterized supply side economics and trickle down economics as rhetoric.
History of the Idea
Under various other names, it had been advocated for many decades, particularly in the 1920s, when it seemed that corporate laissez-faire economics would produce an unending boom in investment and growth. The idea that the top of the economic structure produced growth and benefits, which then moved down in the form of increased wages was promoted by, among others Henry Ford and was rooted in that era's intepretation of Say's Law.
Political opponents of this idea ridiculed it as "toryism", in Franklin Delano Roosevelt's words, or by John Kenneth Galbraith' famous remark that "if you feed enough oats to a horse some will pass through to feed the sparrows". Comedian Will Rogers quipped that if you put gold at the top of the economy, it will float there.
With the coming of the new deal, and the government as a major source of capital supply and growth in the economy, demand driven models such as Keynes' carried the policy debate for several decades. However, with the inflation of the 1970s, there began to form a political coalition to reduce the tax burden on capital gains and higher income earners. "Trickle Down" became the political phrase which was associated with supply-side economics.
Reagonomics and Trickle Down Theory
Trickle Down Economics was coined from a speech made by David Stockman, who was Ronald Reagan's chief economic advisor. 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, benefits the poor.
The idea that the "creative sector of the economy" created employment is rooted in the argument that the United States is successful because it is a free market and capitalist state, and that hatred of communism, and anything associated with the left in general, is a political virtue. Being a political, rather than an economic, term, both sides in the debate demonized the others as being heartless and in league with the forces of greed.
Trickle down was used to justify a range of changes under both British Prime Minister Margaret Thatcher and President Ronald Reagan, specifically those which attempted to break the power of unions, reduce impediments to hiring and firing, reducing environmental regulation, and in general pursue a more pro-corporate stance to legislation and economic policy.
The term fell out of favor in the late 1980s and early 1990s, even though the economic program, of lowering marginal tax rates, selling off government stakes in assets and reducing regulation, continued to be the center piece of the Republican Party in the United States.
- Trickle down effect -- an alternative view of the above.
- Supply-side economics
- Regressive taxes
- John Kenneth Galbraith - "Horse and Sparrow Economics"
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