Joke Economics

By January 28, 2017US Politics

The term ‘trickle-down’ economics started as a joke by American comedian Will Rogers who was poking fun at President Herbert Hoover’s Depression recovery efforts, when he stated that the “money was all appropriated for the top, in the hopes it would trickle down to the needy”.

Trickle down economics is a system whereby large businesses and the wealthy are given tax breaks or other financial benefits, such as subsidies, to supposedly stimulate economic growth in the hope that everyone benefits from that economic growth. The logic stems from the assertion that taxes can be too low or too high to produce maximum tax revenue. Clearly a 0% tax rate will deliver no income to the government, while a 100% tax rate will deprive people of any incentive to generate income, thereby delivering no income to the government. It was assumed that an optimum tax regime existed which would deliver maximum revenue. This manifested itself in Ronald Reagan’s tax cuts of the 1980s when the top marginal tax rate in the USA fell from 70% to 28%. While tax income to the government rose over the same period, it simply transferred wealth from most of the populace to the wealthy few. As a consequence, it has lead to a massive increase in the disparity between rich and poor. In the USA, the current levels of disparity are now greater than they have been since at least 1910, because earlier data are unavailable.

The modern level of inequality is only marginally above that from the late 1920s and 1930s, when the top 10% had about 45% of the national income. The Second World War changed everything, and by its end, the top 10% only had about 34% of the national income. This was stable until 1981, when Ronald Reagan became president. From that time onwards it has climbed again and now the top 10% have about 47% of the national income.

Another way of looking at inequality is in the ratio between large company CEO salary and their workers’ pay. In 1980 this ratio was 42:1. By 2000 it had reached 525:1. It has now declined slightly to about 335:1. Over the same time the average weekly salary for the top 10% of income earners has increased about 33%, while the wages for the bottom 10% of income earners have decreased by about 1%.

This inequality has reached a point in the USA where the top 0.1% have about the same amount of wealth as the bottom 90%. To use an analogy: Say there are 1000 people in a nation, then 1 person would have as much as the lowest 900 people. That is the result of trickle down economics. It cannot continue.

Sources:

http://inequality.org/income-inequality/

http://www.investopedia.com/terms/t/trickledowntheory.asp

https://www.thebalance.com/trickle-down-economics-theory-effect-does-it-work-3305572

https://psmag.com/the-imf-confirms-that-trickle-down-economics-is-indeed-a-joke-207d7ca469b#.to0bisrxb

Picketty, T., 2014. Capital in the Twenty-First Century. Belknap Press, Cambridge, 685 p.

Further reading:

https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

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