Trickle-down theory Summary

  • Last updated on November 10, 2022

Proponents of the trickle-down theory contend that economic gains by the wealthy (such as tax cuts) result in investment or purchases that ultimately result in more jobs for the middle and lower classes by creating economic growth that increases demand for goods and stimulates production. In contrast, they contend, increases in tax rates initially produce more revenue, encourage savings, and stimulate investments but ultimately hinder production and decrease revenues in business.

The phrase “trickle-down theory,” coined by Will Rogers, gained fame during the 1932 election and was used to describe President Herbert Hoover’s economic policy in failing to deal with the Great Depression. With the advent of President Franklin D. Roosevelt’s New Deal programs, the theories of the British economist John Maynard Keynes, John MaynardKeynes began to take hold during the 1940’s and 1950’s. Keynesian economic theoryEconomics;KeynesianKeynesian economics espoused that the federal government must take an active role in creating jobs and stimulating the economy through aggressive tax cuts, government regulation of business, social programs for the poor, and increases in spending. Keynes argued that low interest rates stimulated borrowing and helped increase the money supply, which in turn encouraged consumers to spend.Trickle-down theoryEconomics;trickle-down theory

The administration of President John F. Kennedy began to implement Keynesian policy, passing major tax cuts during the early 1960’s. However, with the presidency of Lyndon B. Johnson came an escalation of the Vietnam War, and the Johnsonian Great Society’s War on Poverty caused government spending on programs to skyrocket and inflation rates to rise rapidly. During the 1970’s, it became increasingly difficult for monetary and fiscal authorities to deal effectively with the problem of increasing inflation, burgeoning government, unemployment, and falling productivity levels in labor. Personal savings went down, an energy crisis ensued, and rising interest rates caused an adverse effect on business investment.

The federal budget increased dramatically, from $94 billion in 1960 to $577 billion by 1980. During the 1980 presidential election, Ronald Reagan, RonaldReagan began campaigning on a Republican platform of economic recovery that closely resembled trickle-down economic theories. Reagan’s economic policies countered Keynesian philosophy and were often called “Reaganomics” or Economics;supply-sideSupply-side economicssupply-side economics. When Reagan was elected, his administration implemented a strategy of limited government regulation and an expanded private sector to control inflation. These tactics included tax breaks for companies, reductions in social welfare programs, increases in defense spending, and decreasing government regulation in certain industries.

The 1980’s represented a good time to invest money and delve heavily into the stock market, but throughout the decade, income distribution worsened between the social classes. Lower taxes on businesses allowed for real estate opportunities and the development of new factories throughout the United States. The subsequent deregulation of savings and loans, communications, and transportation industries brought forth streamlined operations and new technologies that made business transactions more efficient. However, mergers, consolidations, and takeovers became commonplace, because smaller enterprises were not able to compete. By the end of the twentieth century, the losers of Reagan’s trickle-down legacy were middle managers, who found their positions displaced by either emerging computer systems or restructuring and downsizing that occurred in companies. The power of labor unions was also disrupted, and wages fell for unskilled and semiskilled industrial workers.

Further Reading
  • Fink, Richard H, ed. Supply-Side Economics: A Critical Approach. Frederick, Md.: Altheia Books, 1982.
  • Kimzey, Bruce W. Reaganomics. New York: West, 1983.
  • Schiller, Bradley R. The Economics of Poverty and Discrimination. 10th ed. Upper Saddle River, N.J.: Pearson/Prentice Hall, 2008.

Great Depression

New Deal programs

Supply-side economics

Taxation

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