Jul 8, 2014

Trickle-Down Economics

The trickle-down theory, also known as supply-side theory, is the idea - largely hated but still beloved by policy makers - that wealth 'trickles down' from the top to other levels of society.

The theory goes that if you provide tax cuts and investment incentives to business and the wealthy, business and investment increase and thereby provide economic benefit to everyone else.

There has always been opposition to this theory, and it has always been up for parody. Since the GFC, dissent has grown with the Occupy Wall Street movement and its powerful theme: "We are the 99%" . Current bestseller 'Capital in the Twenty-First Century' posits that instead of trickling down, wealth tends to accumulate at the top and stay there, forcing an ever-growing gap between rich and poor that threatens political and social stability.

Policy makers have a hard job these days. The world is more difficult to run because we all know now how complex it is. The digital world (24-hour news, social media, democratised commentary) doesn't give politicians a break. The Great Recession continues and shows no real sign of ending. And following the ambiguous results of stimulus programs since 2008, stimulus is out and economic tough love is back in.

We know we can't go back to high levels of taxation and over-regulated economies. Having lived in a stagnant, isolated economy (New Zealand pre-deregulation) I remember it doesn't work. But I also lived in an economy going through the throes of deregulation (New Zealand under 'Rogernomics') and it was painful to see the impacts: people suffering the blows of sudden, wrenching change and the government seemingly heartless in response.

So the market can't be left to run unfettered. Some level of 'tax-and-spend' is necessary to regulate, ensure a modicum of fairness, and pay for necessary infrastructure and services.

The trickle-down effect may work a little, but it's not very effective and it's not a solution in itself for managing an economy.

Here's my view of the trickle-down effect:


  1. I saw a story this morning which said that the wealth of the seven richest people in Australia is greater than the nation's bottom 1.73 million households combined. I would like to see a little more equity, and resent the taxation and industry concessions which feed these disparities. Which probably makes me a tree-hugging lefty.

  2. Jackie, the trickle-down picture is great but I can't see difference. It is tricky just economy.

  3. I think you've got the picture.

  4. I don't understand economic policies. I can see that thing will have to change if we want infrastructure to be built/repaired/maintained etc, but when we get taxed more and see nothing happening, it gets a bit worrying. More taxes yet schools and hospitals are closing? More taxes yet roads are still in poor condition? More taxes yet people are still on long waiting lists for housing.
    I understand these things take time, but it's been several years now of more taxes/levies etc and all we've seen is a big new sporting ground.....

    1. This makes me mad too. I totally believe in taxes, and in tiered taxation levels (rich pay more, poor less, even though I know it leaves the middle squeezed). There is definitely a conundrum in that the more taxes we pay the less efficient the government gets with them. But then these days too we probably expect much more from government, and services, than we used to, so more tax money probably goes to things that don't stand out well, and it seems a given that schools and hospitals will always starve even though they need the money most. No one ever gets it right.



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