The trouble with trickle-down economics

George Town, in Grand Cayman, Cayman Islands

George Town, in Grand Cayman, Cayman Islands - Credit: Getty Images

It is an attractive idea, but flawed, says MITCH BENN.

You may remember that a couple of weeks ago I suggested that when one is considering whether a given project has 'worked', one should bear in mind that its ostensible objective (ie. what the public are told it’s supposed to achieve) and its actual objective (ie. what its instigators really hoped to achieve) are by no means always one and the same.

The particular project under discussion was, inevitably, Brexit... I suggested that those wondering aloud when or if Brexit is going to 'work' seemed to have missed the fact that it’s already 'worked' in that it has shored up the electoral fortunes of the Conservative Party for the foreseeable future.

This was, I’m relatively certain, the only purpose David Cameron had in mind when he proposed the referendum back in 2015. It’s worked perfectly, even if its creator was among its first victims (although as victims of Brexit go, he’s doing okay so far).

I was reminded of this a couple of days ago when I read that a paper published by economists David Hope (of the LSE) and Julian Limberg (of King’s College London) on the subject of 'trickle-down' economics has come to the conclusion that cutting taxes for the wealthy produces little or no broader benefits for society as a whole.

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They studied 50 years’ worth of statistics comparing the financial fortunes of countries which pursued such a policy compared with those that didn’t, and found that lavish tax cuts and breaks for wealthy companies and individuals (if you’re standing up you may want to hold onto something before you read on) did not, in fact, give rise to any noticeable rise in GDP or fall in unemployment rates. Says Limberg: “Based on our research, we would argue that the economic rationale for keeping taxes on the rich low is weak”.

This news is being seized upon by progressive commentators as final clinching proof that – altogether now – “trickle-down does not work”.

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I beg to differ; trickle-down has worked like a charm.

Not according to its stated objective, of course, but according to its actual objective. Its stated objective – reducing the tax burden on the wealthiest in society so that they might flex their entrepreneurial muscles unimpeded and “create wealth” which then, yes, “trickles down” all over everyone else – was never going to work.

Moreover, it was never meant to work. The very idea is utterly ludicrous and falls apart under just a moment’s serious examination. It falls apart under a moment’s comedic examination.

I’m nobody’s idea of an economist but to me it seems fairly evident that if you give things to people who need things, they will use those things. If you give things to people who don't need those things, those people will probably not use those things.

Similarly, if you direct money 'down' towards those members of society who actually need that money to buy the stuff they require to carry on living, those people will use that money to buy that stuff. The money stays in circulation, generating tax revenue, creating modest wealth where it’s needed.

Conversely, if you funnel money 'upwards', into the overflowing coffers of those who already have more money than they have any idea what to do with, those people will not spend it, on 'creating wealth' or anything else. They’ll hide it in the Cayman Islands where it will never be seen again, not even by its 'owners'.

No, when I say trickle-down has worked, I mean it has worked according to its actual objective; that is, convincing large swathes of low-income voters that making the richest individuals and companies in society richer and richer still was ever going to benefit anyone other than those wealthy companies and individuals. We’ve got fifty years of election results to prove this.

We shouldn’t credit the creators of trickle-down economics with too much Machiavellian genius. They were largely cashing in on 19th century notions of 'the undeserving poor' and the wealthy elites’ propagation (especially in the USA) of the idea of an inherent meritocracy; that the rich got that way by being better and harder working than you, and as such deserve everything they’ve got (and quite a bit of what you’ve got).

Not that it’s easy to pinpoint exactly who it was that came up with trickle-down in the first place; these days we associate it primarily with Ronald Reagan’s Reaganomics revolution in the 1980s but the theory seems to date back to around the early 20th century.

Intriguingly, the term trickle-down itself appears to have first been coined, in a mocking rather than laudatory context, by a humorist and newspaper columnist named Will Rogers in 1932.

So there you go folks; we smarty-pants 'humorous' newspaper columnists might not be able to fix the woes and travails of the modern world (even if some of us do become prime minister), but we can usually be relied upon to come up with catchy names for them.

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