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Trickle down thinking breeds inequality

By Ad astra

In a piece published on 13 April, I predicted that inequality would be a hot button issue in the upcoming election. Now that we have had both Scott Morrison’s budget speech and Bill Shorten’s speech in reply, we can see how this issue will play out in the election. Although the word ‘inequality’ has not assumed the repetitive status of the ‘jobs and growth’ mantra, it is subtly pervading the political discourse.

Every time the term ‘fairness’ is used, notions of equality are being canvassed. In his reply speech, Shorten made a point of emphasising equality for women: “championing the march of women to equality, closing the gender pay gap and properly funding childcare”. He spoke of fairness and integrity in superannuation, and asserted that “Australia should never accept the false choice between growth and fairness – each is essential to each other.”

By now most readers of political blogs will be familiar with the term: ‘trickle down economics’, but for those who are not, let me give a short history of this concept. It is not a formal economic theory so much as a catchphrase that captures a concept that permeates the thinking of many politicians, namely that benefits given to those at the top will trickle down to those at the bottom.

The concept goes back a long way. Economist John Kenneth Galbraith noted that ‘trickle-down economics’ had been tried in the United States in the 1890s under the name ‘horse and sparrow theory’: “If you feed the horse enough oats, some will pass through to the road for the sparrows.” Reaganomics was an example, and likewise Margaret Thatcher’s approach to economics.

In his book: Zombie Economics: How dead ideas still walk among us (Princeton University Press, 2010), John Quiggin, Australian Laureate Fellow in Economics at the University of Queensland, described several discredited economic theories that refuse to die, living on as zombies that politicians still use to suit their political purposes. Among the zombies he listed was ‘trickle-down economics’. Although discredited, Quiggin warned that as a zombie that will not die, the concept would still be used: “As long as there have been rich and poor people, or powerful and powerless people, there have been advocates to explain that it’s better for everyone if things stay that way.” This was elaborated upon in an April 2011 piece on The Political Sword: Joe Hockey should read John Quiggin’s Zombie Economics.

While great economists such as Adam Smith, John Stuart Mills and John Maynard Keynes have supported income re-distribution through progressive taxation, and most economists still do today, there are still some who argue that we should let the rich get richer and wait for the benefits to trickle down to the poor. One could be forgiven for thinking that is what Joe Hockey, Scott Morrison, Malcolm Turnbull, and today’s Coalition members believe, as they insist on giving tax relief to the wealthy, but not to the less well off. This trend was starkly portrayed in the 2014 budget, and continues in 2016.

Quiggin gives example after example to demonstrate that the trickle down hypothesis is false, and caps this with a telling graph of household income distribution in the US from 1965 to 2005 that shows that those on the 95th percentile for income steadily improved their position by over fifty percent, while those on the 20th percentile and below were static.

He pointed out that the biggest challenge of the failure of the ‘trickle-down hypothesis’ is to understand why and how inequality increased so much under market liberalism, and how it can be reversed. To Quiggin, restoring progressivity to the tax system is seen as an obvious move.

For the academically inclined, several varieties of inequality are recognized: Wikipedia says:

”Economic inequality is the difference found in various measures of economic well being among individuals in a group, among groups in a population, or among countries. Economic inequality is sometimes called income inequality, wealth inequality, or the wealth gap. Economists generally focus on economic disparity in three metrics: wealth, income, and consumption. The issue of economic inequality is relevant to notions of equity, equality of outcome, and equality of opportunity…There are various numerical indices for measuring economic inequality. A widely used index is the Gini coefficient, but there are also many other methods.

“Some studies show that economic inequality is a social problem; too much inequality can be destructive because it might hinder long-term growth. Others argue that too much income equality is also destructive since it decreases the incentive for productivity and the desire to take-on risks and create wealth”.

The latter is what conservatives believe.

A more familiar way of talking about inequality is to talk about ‘fairness’, a concept every Australian understands. The ‘fair go’ is valued by most of us. Who would argue against the idea that everyone should have a ‘fair go’?

Joseph Stiglitz is another who has been writing for years about the damaging effect of inequality. His book: The Price of Inequality is a classic. More recently, Thomas Piketty entered the arena with his Capital in the Twenty-First Century and hypothesized about the genesis of inequality. He asserted that the main driver of inequality, namely the tendency of returns on capital to exceed the rate of economic growth, today threatens to generate extreme inequalities that stir discontent and undermine democratic values. He reminded us that political action has curbed dangerous inequalities in the past and could do so again. But is the Coalition listening?

No matter who writes about inequality, the conclusion is the same: the gap between those at the top and those languishing at the bottom of the pile is widening in many countries, ours among them.

If you need any more evidence to convince you of the fallacy of the ‘trickle down’ concept, read: The embarrassing truth about trickle-down on the New Economics website, NEF, the outlet of a UK think tank promoting social, economic and environmental justice.

The 2014 article by Faiza Shaheen concludes:

”The trickle-down approach has been bad economics. Not only has it failed to deliver on its own terms but also it has actively damaged the health of our economy, society and political system. It has supported growing inequality which, rather than boosting economic performance, has deflated it. The UK grew more when we were a more equal country during the post-war, pre-Thatcher era than after. Its damaging social effects are also mounting. High levels of inequality are increasingly seen as harmful to individual well-being and health, social cohesion and social mobility.

“Obama’s attack on trickle-down economics, echoed by Labour Leader Ed Miliband offered hope that our leaders are finally engaging in the possibility of dethroning this damaging philosophy, but the recent response to a potential increase in income tax shows that the theory still festers. We must continue to counter an approach that has created a tide of inequality that lifts up the yachts while leaving the rest of us paddling harder. By pulling the rug out from under trickle-down economics other damaging myths can be exposed, such as the argument for high executive pay.”

Read too Elizabeth Warren demolishes the myth of “trickle-down”. “That is going to destroy our country, unless we take our country back” in Salon. She is an academic and Democrat senator.

For Liberal skeptics here is the coup de grace in United Fair Economics in an article Trickle-down economics: Four reasons why it just doesn’t work, written in 2003 during the Bush era:

  • Cutting the top tax rate does not lead to economic growth
  • Cutting the top tax rate does not lead to income growth
  • Cutting the top tax rate does not lead to wage growth
  • Cutting the top tax rate does not lead to job creation.

The article supports these assertions with graphic evidence, and concludes:

”Overall, data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans will improve the economic standing of the lower and middle classes or the nation as a whole. To be sure, the economic indicators examined in this report are dependent on a variety of factors, not just tax policy.

“However, what this study does show is that any attempt to stimulate economic growth by cutting taxes for the rich will do nothing – it hasn’t worked over the past 50 years, so why would it work in the future? To put it simply and bluntly, Bush’s top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth – unless, of course, if you’re talking about the size of the deficit.

If we now look at the Coalition’s 2016 budget, much of it is based on the trickle down concept that tax breaks or other economic benefits provided to businesses and upper income levels will inevitably benefit poorer members of society by improving the economy as a whole.

That is what is behind the monotonously repeated ‘jobs and growth’ mantra. Superficially appealing, the Coalition posits that to increase jobs those who employ people must be given tax breaks and other incentives. This is most flagrantly demonstrated by the Coalition’s plan, beginning on 1 July, to reduce company tax progressively from 28.5% now to 25% over the next decade, not just for small and medium businesses with a turnover of less than $2 million, but to extend eligibility to businesses with turnovers of up to $10m, and the lower rate will be gradually phased in for larger businesses until it covers all companies in 2023.

PutLibsLast!!@johndory49 via Twitter

PutLibsLast!!@johndory49 via Twitter

The Liberal manifesto Lowering company tax, boldly asserts:…if you are against cutting company tax, you are against economic growth. If you are against economic growth, then you are against jobs.” In other words, the benefits of cutting company tax will trickle down to the workers at the bottom. Arthur Sinodinos was the first confidently to expound this a few weeks back.

PM Turnbull and Treasurer Morrison were reluctant to admit the cost to revenue of this measure, but Treasurer Secretary John Fraser let the cat out of the bag during a Senate Estimates hearing with the figure of $48.2 billion over ten years. Clearly, the Coalition has such fervent belief in the stimulatory effects to ‘jobs and growth’ of giving a large tax break to businesses, even to multinationals, that it is prepared to forego over $48 billion in revenue!

Another manifestation of preferentially feeding the horses is the Coalition’s push for lower penalty rates on Sundays. Their belief is that if this were to occur, more businesses would open on Sundays, and employ more people. Trickle down again. That those depending on Sunday rates would suffer seems immaterial to them.

There are other instances in the 2016 budget of giving to the rich but not to the poor, such as a tax cut to those earning over $80,000 by raising the marginal tax threshold for this second top bracket from $80,000 to $87,000. But there is no tax break for those earning below this magic figure; indeed they will suffer cuts in entitlements. The horses will get the oats; the sparrows will need to fossick in the manure to get their share.

Progressives: Labor and the Greens, know the trickle down concept is a charade. They believe that to stimulate an economy that is slowing, and thereby drive jobs and growth, stimulatory measures are needed. Time and again, better wages have been shown to increase economic activity because people have more money in their pockets to buy the things other people make or do. Using government funds to support infrastructure development also has been shown to stimulate economic activity and increase jobs. This Keynesian approach has a long track record of success when applied where private economic activity is lagging, but the Coalition doesn’t want to know.

I need go on no further.

Almost every slogan, almost every utterance of the Coalition is premised on an entrenched, unshakeable belief in trickle down economics, despite this concept having been debunked for a century. Zombie-like though it is, the Coalition embraces it with fervour. Why? Because it suits their political purpose: to shore up the top end of town, to please those who fund and support it.

Don’t expect them to ever believe that trickle down thinking breeds inequality, because with all PM Turnbull’s talk of ‘fairness’, ‘equality’ is unimportant to them. They believe that inequality is simply part of the natural order of things, and should remain that way.

What do you think?

What do you think of the Turnbull/Morrison budget?

Do you see how trickle down thinking has permeated the budget, and how it will lead to more inequality?

 

Also by Ad astra:

Divining the federal budget

Inequality will be a hot button election issue

The calamitous Abbott lies in wait

The irrational voter

Where are the crooks?

This article was originally published on The Political Sword

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18 comments

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  1. @RosemaryJ36

    The greatest problem is getting people to listen or read articles such as this. Anyone who is not struggling to make ends meet does not really understand the plight of the very large number of people whose income is not only below the average – which is overstated because of the small group with excessive incomes – but also below the median, itself less than $50,000 .

  2. Michael

    We mistakenly always knew that 2,5% of nothing is nothing, primary school mathematics (x companies, (a human construct, therefore can be de/reconstructed) do not pay tax) but what we were not aware of is the University of LNP mathematical law – the gravity “trickle down” effect, a euphemism which basically says that in return for you giving away a 2.5% (of common property) tax in return for no undertaking to do anything other than words of encouragement to fools, I can keep it for our inner circle bonus scheme.

    And as fools I will stoke your ego and say I love you, answer all surveys, contribute lots to your Enterprise Fund and drop an occasional $25K for a lamb chop dinner and get my NFP industry lobby $350Kpa CEO’s to make reinforcing noises and of course lets not forget paying for expensive ads in murdokpress – 457 and abuse of student visas cremes it all off.

    All is good in the $200M club.

  3. Max Gross

    Your headline reads “Trickle down thinking breeds inequality”. Well, duh! That’s the point! Do you really imagine the self-entitled minority who control almost all the world’s assets, hold most of the world’s positions of power, privilege and influence, WANT a level social playing field any more than they do a genuinely free market? Really? Here! Have a free six-month trial subscription to Foxtel!

  4. Carol Taylor

    If a person wants to look at any trickles at all, then it should be “trickle up”, that a well paid workforce spends their money on goods and services thereby creating additional jobs thereby benefitting all. Giving a tax cut to business creates not one single solitary customer for that business.

    Indeed the Libs consider that inequality is the natural order of things, the theory being that those who are successful and wealthy became that way due to skill, expertise, strength of will and all the other estimable qualities the Libs like to endow themselves with. They are Abbott’s ‘women of calibre’ and other shining lights they hold up as symbols of worthiness. As such, these folk deserve to be rewarded as these people will make use of their money in ways to benefit the country (but mostly themselves). Pity that it doesn’t quite work that way. I see instead a massive sense of entitlement where wealth and power seeks to retain this, via fair means or foul.

  5. astra5

    Folks
    Thank you for your comments.

    Carol, you are right. It should be ‘trickle up’. Give those at the bottom a decent wage and they will spend it, thereby increasing economic activity. Everyone benefits. Where the minimum wage has been increased, as it has in some states of America, the economy has lifted and prospers. Which begs the question: “why do conservatives persist with trickle down, which does not work, when it’s trickle up that does?”

  6. Carol Taylor

    Ad Astra, I would think that the idea of “trickle down” reinforces the sense of superiority. with the elite (naturally) being in control of all of the trickling.

  7. Andreas Bimba

    A well argued article with many powerful references. You have won the argument. I don’t agree however that the ALP is a progressive party, they are almost as neoliberal as the Liberals/Nats and have been since Hawke and they have always increased the scope of neoliberalism, not reduced it. The ALP do however offer moderately better social, health, education and environmental policy.

  8. Terry2

    Discussing this article with my wife she said – as she frequently does on matters of economics :

    ” they should have asked me, I could have told them that trickle down economics doesn’t work ”

    On all matters of economic policy, the government would be well advised to run it by the wives of Australia before implementation.

  9. Michael

    If it is OK for company donations in all their sophisticated monetary (declared and winked $$$) and non-monetary (verbal and printed neo-con organs) forms = giving away a sum certain for a certain common property benefit or rule bending both of which is usually at our expense.

    Then it should be OK for any company, for taking up every, say, $100K, of tax cut can only do so if the company hires an additional fulltime employee, less than say the $100K proportional number of part-time hours = giving away a certain amount of public property (tax) for a certain return.

  10. Adrianne Haddow

    I watched a TED talk by ex-Finance minister for Greece, Yanis Varoufakis entitled Capitalism will eat democracy……… unless we speak up.
    Excellent explanation, as is yours, Ad astra.

    “Trickle down economics’ has always seemed to me an insult to those people whose labour creates the wealth, along the lines of “we will take want we want, on our terms, using your taxes to subsidise our business ventures, and you can have what we don’t want”.

    The rich, in buying our political parties, have concreted their position,and will continue to do so, and the rest of us appear happy (or too demoralised) to allow that.

    It seems the only way to change it is to bring on the revolution.

  11. Gangey1959

    I agree with Adrianne above, Bring on the revolution.
    Trickle down Economics? Just add Gravity.
    Take 1 x CEO on $10million.
    250 x Workers on $40,000.
    Put them all on the roof of their city high rise, and tell them that costs have to be cut by %50.
    They have to sort it out among themselves, and no-one goes home until they have decided.
    Then lock the door to the stairs.
    Who is going to be first off the roof ?

  12. astra5

    Thank you all for your informative comments.

    Terry2
    I agree with your wife. Today my wife and I attended the first Women’s Leadership Forum to be held in Melbourne. It was organised by the Layne Beachley Foundation, which funds scholarships for ambitious and dedicated females to enable them to achieve their goals. Many inspirational stories of accomplishment against the odds were told. Julia Gillard, who is the Foundation’s Patron, was a guest speaker, as well as a number of other highly accomplished women in important positions.

    How much better we would be if women had a greater say in business and commerce, and of course in politics. They offer insights that many men struggle to understand. Increasingly, objective evidence shows how much their contributions matter. Why are we so slow as a society to realise and accept this?

  13. Jennifer Meyer-Smith

    Thanks Ad Astra,

    for your explanation. The more and more the fallacy of ‘trickle down economics’ is exposed, the more of us are informed and better able to explain it to our peers.

    [Who are asasa and anhem?] Looks suss.

  14. Marian Sallam

    like the article

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