Trickle-down theory continues to feed the rich

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The trickle-down theory has created an economic underclass affecting the entire population (Image by Dan Jensen)

Continuing his examination of archaic economic models, Professor John Quiggin looks at problems associated with the trickle-down theory.

OVER THE LAST FEW WEEKS, I’ve been looking at zombie ideas in economics. These are ideas that should have been killed by the evidence against them that has accumulated since the beginning of the 21st century and particularly the Global Financial Crisis. Yet they have remained influential and have made the pandemic catastrophe even worse than it would inevitably have been.

In previous instalments, I’ve looked at the Great Moderation (the idea that the economy of the early 2000s had reached a new and permanent state of stability), the efficient-market hypothesis (which stated that financial markets always make the best possible estimate of the value of any investment, public or private), and the Dynamic Stochastic General Equilibrium macroeconomic model, which combines the previous two.

All of these zombie ideas arose within the last 50 years and we can hope that they may one day be killed, once and for all. But some zombies, like vampires, are effectively immortal. One of these is what has been called “trickle-down economics”, the idea that if the wealthy are treated with respect and not attacked with punitive taxation, everyone will be better off.

This idea has been propounded throughout history by the priests and scribes whose job it is to protect the wealthy from dangerous ideas. It can be found in the Bible, in Aesop’s fables and in the earliest written records of all cultures — doubtless, it long predates writing. In the modern world, the job of priests and scribes has been taken over by the purveyors of zombie economics. Some of these are academic economists, but many more are employed by financial institutions, PR companies and lobbyists. And as long as there are wealthy people, there will be a ready market for trickle-down advocates.

The low point of trickle-down economics came during the decades after World War II. During the “Great Compression”, market incomes were more equal than at any time before or since.

A typical CEO in a major company made 20 times the salary of the average worker, compared to a ratio of 361:1 today. Inequality was further reduced by steeply progressive income taxes and other redistributive policies. 

Yet contrary to the predictions of the trickle-down theorists, the supposedly disastrous effects of taxing the rich never materialised. Productivity and output grew steadily and more strongly than in recent decades. Middle-class prosperity seemed to be the way of the future.

The economic crisis of the 1970s was not the result of progressive taxation or inadequate rewards for the rich. But it empowered the financial sector to demand ever greater rewards, which then flowed to top executives and business owners while the majority of workers, particularly in the U.S., experienced wage stagnation.

Throughout the decades of market liberalism, workers were promised that they would share in the benefits that flowed so lavishly to the one per cent. That claim lost all credibility in the global financial crises and the years of austerity that followed it, particularly in Europe.

But the pandemic exposed the failure of the trickle-down theory in a more dramatic and deadly fashion. Although the first Westerners hit by the disease were international travellers, once it became established through local transmission, the pandemic has hit the poor and vulnerable hardest. This is a familiar pattern: the crowded slums of previous centuries were notorious as breeding grounds for disease. And, as in the past, it has proved impossible to stop the virus spreading beyond the apparently expendable poor. The most notable example is Singapore, which seemed to have beaten the pandemic, only to have it reappear in the barracks housing the poorly paid migrant workers who do the jobs Singaporean citizens will not.

The same pattern has played out elsewhere. Austerity-driven cuts have left European health systems overloaded to the point of near-collapse. Even in Australia, where the pandemic has been contained, the casualisation of the workforce has made the economy more vulnerable to the shocks arising from the lockdown.

But by far, the worst disaster has been in the U.S. With low wages, an inadequate system of unemployment insurance and no general entitlement to sick pay, workers cannot afford to take time off. As a result, lockdowns have been patchy and only partially effective. There now seems little chance the virus can be contained in time to prevent over a hundred thousand deaths as well as massive economic damage.

Far from allowing wealth to trickle down from the rich, market liberalism has created an economic underclass from whose suffering all manner of ills spread through the entire population.

Professor John Quiggin is an Independent Australia columnist and an economist and Laureate Fellow at the University of Queensland. You can follow him on Twitter @johnquiggin.

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