Does Trickle-Down Economics Work?

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Does trickle-down economics work to make the poor richer, or is it simply a justification for sustaining wealth inequality?

‘Trickle-Down’ economics was the prevalent view of the 1950s and 60s in which any development was seen as purely  ‘economic’ (according to H.W. Arndt). The idea was that rapid gains from the overall growth of GNP and per capita income would automatically bring benefits (i.e. ‘trickle down’) to the masses in the form of jobs and other economic opportunities. Popularised largely by Ronald Reagan and Margaret Thatcher, the theory states that measures which benefit the wealthy, will benefit everyone else too. Their wealth ‘trickles down’ to those lower in class, and so make us all richer as wealth inequality grows. A laissez-faire, self-regulating mechanism of top-down wealth redistribution, in which wealth just ‘trickled’ down, led to the term became associated with neoliberalism.

Trickle-Down economics assumes that the wealthy will either share their wealth (e.g. by increasing wages alongside profits), or that  the market will self-regulate to automatically benefit the poor. This logic is prone to significant flaws.  For instance, a common argument against measures such as increasing corporation tax or lateral agreements to abolish tax loopholes, is that for employers to be able to pay their workers more they need to have the money to do so, meaning that any measure reducing their wealth are detrimental to workers. From this alone one can see the flaws in this logic.

This theory ignores two crucial realities:

Firstly, the top 1% of employers extract enough profit to increase wages but choose not to. Oxfam’s 2018 ‘Reward Work, Not Wealth’ report reveals that 82% of the wealth generated in 2017 went to the richest 1% whilst the 3.7 billion people – the poorest half of humanity – saw no increase in their wealth. In the US, it takes slightly over one working day for a CEO to earn what an ordinary employee is given in a year. And it would take around 1/3 of the amount paid to shareholders by 2016’s top 5 garment sector companies to give all 2.5 million Vietnamese garment workers a living wage.

Reducing profits does not necessitate job losses as profit is the extra money that comes after paying wages and other costs – it is purely the employer’s decision and they are under no obligation to share their profits.

Secondly, following this theory, workers’ wages should have increased automatically as their employer’s does too, but as Oxfam’s research points out, this is simply not the case. In fact, between 2009 and 2014 real wages fell every year in the UK despite increasing inequality, the longest decline since the mid-1800s. Similar patterns of wage reduction and stagnation exist elsewhere such as A. L. Mohamed’s 2018 study on trickle-down in Egypt, where “Econometric analysis assured that high economic growth rates were accompanied with increase in poverty rates”, concluding Egypt must “change its dependence on trickle-down theory of economic development into bottom-up economic development approach”.

These claims are ideological.

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It is rarely stated that “increasing inequality gaps will make the poor richer”. Instead, coherent and ideological statements are made that perpetuate capitalism by justifying its ruling ideology. This theory is, as György Lukács puts it – a projection of the class consciousness of the rich.

So for example, in a society where social mobility and security are low, private housing becomes valuable as an investment to secure a comfortable life away from work and housing inevitably becomes more expensive as profit applies, leading to competition and monopolies over housing that exclude the poor. Thus, private property is misperceived as beneficial and ideologies like conservatism, liberalism, and social democracy create a false consciousness – continual antagonisms whilst ignoring the reality that everyone benefits from abolishing such property relations – accommodation either applies to all or only to those who can afford it. Thus, belief in this philosophy and claims like it obscure the true nature of capitalism’s tenets –  profit, competition and individualism which find material expression in private property (as opposed to shared, fairly distributed property, sustaining the need for poor wages to avoid homelessness and destitution).

What does this mean for employment? It means companies either pay their employees more (but no obligation exists) or governments legislate to redistribute wealth. Another solution which avoids these issues and ensures redistribution is a public ownership of industry as part of a wider social transformation. If workers were able to democratically decide where the profits from their labour went, no sane individual would choose such high amounts to go to one individual while everyone else remains in poverty pay and perpetual insecurity. How this is brought about is debatable, but claims like trickle-down must be relegated to the confines of history if we are ever to progress to a situation where wealth inequality no longer exists, and freedoms are not dictated by finances. Thus trickle-down and its associations are dangerous and politically regressive ideological myths, serving as socially necessary illusions – justifying coping mechanisms for a long and 50-year UK average working life that could be largely reduced and avoided if such statements were decoded and society changed. Instead, the pursuit and justification for individual over collective wealth belies us. As the Cambridge economist Ha-Joon Chang wrote: “Once you realize that trickle-down economics does not work, you will see the excessive tax cuts for the rich as what they are – a simple upward redistribution of income, rather than a way to make all of us richer, as we were told”.

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Radical journalist interested in Art, Politics, and other creative disciplines.

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