The idea was that the rich would benefit first, but the poor would eventually benefit as well. This is the famous trickle-down theory, which was never better described than by Harvard professor John Kenneth Galbraith, who claimed that this was what was called the “horse and sparrow” theory in the 1890s: “If you feed the horse enough oats, some of it will make its way to the sparrows.”
Trickle-down effect: the zombie of economic policy
by Andreas von Westphalen
[This article posted on 1/30/2025 is translated from the German on the Internet, https://www.telepolis.de/features/Trickle-Down-Effekt-Zombie-der-Wirtschaftspolitik-10261485.html.]
For decades, the idea has been haunting politics: tax gifts for the rich should benefit everyone. But the facts do not prove that. Why does this dead belief persist so stubbornly?
Germany is in the midst of an election campaign. The Centre for European Economic Research (ZEW), in cooperation with the Süddeutsche Zeitung, has examined the election manifestos of the major parties. The results of this analysis (see also here) were commented on here on Telepolis a few days ago.
The AfD, FDP and CDU programs will lead to greater inequality by providing tax breaks for the wealthy in particular. The unspoken economic policy conviction behind this is the trickle-down effect.
“Growth is a flood that lifts all boats.”
The money that would be saved by the agreed tax breaks would find its way into the economic cycle through additional investments and these investments would lead to economic growth, create new jobs, and thus benefit the community and, not least, the unemployed.
“Growth is a flood that lifts all boats,” said economist Robert Solow in 1956. It’s a poetic image. But does it have anything to do with reality or is it just dry theory?
No flood. Anywhere.
Paul Krugman, winner of the Nobel Memorial Prize in Economic Sciences, took a clear position on this question:
We have been waiting for this trickle-down effect for 30 years now – in vain.
In 2012, he doubted that “there is at least a grain of truth in the so-called trickle-down theory (…)”. His colleague Joseph Stiglitz agreed with him in his book “The Price of Inequality”:
“What America has experienced in recent years is exactly the opposite of what the trickle-down theory claims: that the wealth gains of the rich are at the expense of the poor.”
And what do the numbers say?
U.S. President Ronald Reagan, who was the first to put the trickle-down theory into practice and designed his tax policy accordingly, was convinced that the incentive effects of his tax cuts would even lead to an increase in tax revenues.
But the only thing that increased was the budget deficit. With regard to the effects of tax breaks for the wealthy in Germany, business journalist Ulrike Herrmann wrote:
“Between 2000 and 2010, real wages fell by an average of 4.2 percent, although the German economy grew by 14 percent during the same period.”
Equally unsuccessful was the tax-saving gift of $1.5 trillion that US President Donald Trump gave the wealthiest people in 2017.
The tax reform did not lead to an increase in investment and job creation. Or, currently, in Greece. The economy is booming again, but many people are becoming even poorer. No, it is not trickling down.
Studies
As early as 2012, an independent report by the US Congressional Research Service, which was withdrawn under pressure from Republicans, questioned the trickle-down effect.
Another piece of evidence: a study by David Hope of the London School of Economics and Julian Limberg of King’s College London examined 18 countries – from Australia to the United States – over the period from 1965 to 2015.
The result: tax cuts for the wealthy, implemented in line with the trickle-down theory, had no impact on gross domestic product or unemployment.
Co-author Julian Limberg:
Based on our research, we would argue that the economic case for low taxes on wealth is weak. If we look back in history, the period with the highest taxes on the rich in the post-war period was actually a time of high economic growth and low unemployment.
The discussion about the sense and nonsense of tax breaks for the richest in society should finally be over with “Capital in the 21st Century”, the opus magnum of French economist Thomas Piketty.
For 15 years, he analyzed data from 27 countries over a period of up to three centuries. His conclusion: there is no trickle-down effect.
Nor is there any evidence of a structural process of capitalism that leads to a reduction in inequality. Piketty’s work was published more than ten years ago.
Also read
“Survival of the Richest”: extreme wealth and extreme poverty are increasing at the same time
Telepolis
Abijit V. Banerjee and Esther Duflo, winners of the Nobel Memorial Prize in Economic Sciences, comment in their book “Good Economics for Hard Times”:
“Reaganomics, as the prevailing economic doctrine of the time was called, openly dealt with the fact that the benefits of growth would come at the expense of some inequality.
The idea was that the rich would benefit first, but the poor would eventually benefit as well. This is the famous trickle-down theory, which was never better described than by Harvard professor John Kenneth Galbraith, who claimed that this was what was called the “horse and sparrow” theory in the 1890s:
“If you feed the horse enough oats, some of it will make its way to the road to the sparrows.”
The belief in a trickle-down effect is also anything but the majority belief among economists. In a 2017 survey on whether Donald Trump’s planned tax reform would lead to economic growth, only a single economist said it would.
More than half of all experts disagreed with this statement.
These statements are also supported by research conducted by the International Monetary Fund, which can hardly be accused of Marxist tendencies. An IMF study showed that unequal income leads to lower growth.
This corresponds to a report by the OECD. The result: a fairer social policy in Germany that reduces inequality would have enabled up to 6 percent higher growth.
Nice theory, but no connection to reality
The French economist Gabriel Zucman summarized the state of research by slightly modifying Robert Solow’s saying that the tide lifts all yachts.
Or, to put it in the words of Elizabeth Warren, a Democratic presidential candidate in 2020: “Wealth doesn’t trickle down. It drips up.”
Elizabeth Warren: ‘Wealth trickles up’
Tami Luhby
Senator Elizabeth Warren says wealth does not trickle down from the rich.
Apparently, however, this realization has not yet spread to the CDU/CSU, FDP and AfD.
Literature:
Ha-Joon, Chang: 23 Lies They Tell Us About Capitalism
Herrmann, Ulrike: The Victory of Capital
Stiglitz, Joseph: The Price of Inequality
Ther, Philipp: The Other End of History
Zucman, Gabriel: The Triumph of Injustice