Trickle-down Economics Revisited

 

Macroeconomics
Faculty Researcher Christopher Jencks, Malcolm Wiener Professor of Social Policy, Harvard Kennedy SchoolPaper Title Do Rising Top Incomes Lift All Boats? CoauthorsDan Andrews, Royal Bank of Australia; Andrew Leigh, Australian National University

Trickle-down economics — the idea that tax cuts and other financial incentives for companies and individuals in the upper tiers of society fuel growth that indirectly benefits everyone — has been a cornerstone of Republican domestic policy since the Reagan era. This general notion is quite pervasive, however, and didn’t start in the 1980s. The writer and comedian Will Rogers noted that the Hoover Administration was handing out money to the rich in hopes that it would eventually “trickle down to the needy.” The proverb, “a rising tide lifts all boats,” which John F. Kennedy used in a 1963 speech, is sometimes invoked to get across a similar idea — namely, that economic growth will help everyone, regardless of whether he has a 100-foot yacht or a dinghy.

“Those old clichés have recently been called into question, because little money seems to be trickling down and most growth has been at the top,” says Harvard Kennedy School Professor Christopher Jencks. “The question is whether people at the bottom get any lift at all. Even if the rich get most of the money, you still might want to consider a policy if everybody is going to get more than they would have gotten otherwise.” And that, indeed, is the subject of a paper Jencks wrote with Dan Andrews and Andrew Leigh.

The paper’s central question can be put another way: Is it better to grow slowly and equally or rapidly and unequally? “The conservative argument holds that rapidly and unequally is better over the long run because of compound interest,” explains Jencks. “Even growth as little as 0.1 percent per year can add up over the course of many decades.”

Andrews, Leigh, and Jencks looked at one parameter in particular —“income inequality,” expressed in terms of the share of total income held by the population’s richest 10 percent (“Top10Share”). One reason for framing the problem that way “is because the political debate has been focused on shares,” says Jencks. “The complaint is that the rich are getting more than their fair share of the pie, not that they’re eating too much pie in general.”

The researchers looked at income data derived from tax reports for 12 countries (including the United States, the United Kingdom, France, and Germany) from 1905 to 2000, trying to find any discernible link between top income shares and economic growth. They found no signs of such a relationship prior to 1960, perhaps because the upheavals caused by the Great Depression, two world wars, and the postwar reconstruction periods were of sufficient magnitude to conceal any pattern that might otherwise have been apparent.

After 1960, however, Jencks and colleagues did detect a subtle pattern: A 1 percent rise in the Top10Share, if sustained, led to a 0.12 percent rise in gross domestic product in the next year. The effect was quite small, because it would take 13 years for people in the lower 90 percent to be fully compensated by the proceeds from economic growth for the loss in income shares. At that rate it would take 40 years to see a 5 percent rise in their income.

Thirteen years is a long time to wait to reach the break-even point, Jencks says. “And if that 13-year period ran through a major depression or recession, all bets would be off.” He’s doubtful that many folks in the lower 90 percent bracket would consider that a good deal. “If you told a 20-year-old that he could let the rich get a lot richer and he’d have 5 percent more when he was 60, most people would ask: ‘What else can you offer?’”

As a result, Jencks regards the “rising tide” approach as rather dubious. “It’s like giving people aspirin when they have cancer,” he says. “It might make them feel a little better, but it’s not going to cure them.” Which brings us to that question once again: “What else can you offer?”- by Steve Nadis

It’s like giving people aspirin when they have cancer. It might make them feel a little better, but it’s not going to cure them.


John F. Kennedy School of Government 79 John F. Kennedy Street
Cambridge, MA 02138
617-495-1100 Get Directions Visit Contact Page