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: