What is "trickle-down economics"?

Question

The term trickle-down economics often come up in debates, even on this very site there are questions about situations where it did or did not work, but what does that term actually mean?

I tried to search for it, but all I got was heated debates about it with proponents and critics insulting each other, and lots of memes, but not any understandable definition. Even the more encyclopedic sites were vague, or just linked to Ronald Reagan without any explanation how such a system is supposed to work.

So, my question is, how is a system based on "trickle-down economics" supposed to work?

Please note, that the question is about how it is supposed to work. Not whether it will work or not, or whether it's a good idea or not, or whether people proposing it are good or evil. For example, we can easily find descriptions about how communism is supposed to work, even though in real life it newer works out like that (the dictatorship of the proletariat is supposed do redistribute the wealth they confiscated from the owners of capital, for everyone's benefit, and then wither away, but it somehow never happens. But we get at least told what is supposed to happen if everything works out).

So, how would a system based on trickle-down economics work in the ideal case?

In my naive understanding of the words themselves, it seems about the idea that it is not a bad thing if there are rich people, because their wealth trickles down. If rich people buy luxury yachts, then it provides jobs for those who build them, maintain them, and crew them, jobs they wouldn't have had if the rich weren't buying those luxury yachts. Or if a corporation gets stronger, it will hire more people. Or if rich people get richer, it's not a problem because they will then use that money to build things which then benefits the population, or they build factories which create jobs, etc. But that is only my naive interpretation, and surely people have thought of this before Ronald Reagan, even thousands of years before him.

So if it's not how I understood it, then what is it?

Answer 1

What is "trickle-down economics"?

The term trickle-down economics was coined by Will Rogers (see here) who was a humorist, journalist and radio personality with no economic background. It was not a term that would be used in economic discipline to describe some concrete economic theory or economic idea.

Trickle-down economics is a pejorative, or at best political slogan. There is no economic theory called "trickle-down economics." It is similar to political slogans, like “wokenomics” or “soak the rich”, which do not originate in economics and are used primarily by politicians/pundits and do not refer to a formal, existing economic theory/system/idea¹.

Usually, the trickle-down economics pejorative is used as an insult to the economic policies of Ronald Reagan involving reduction of taxes (but they are not used for tax reductions by other politicians such as Kennedy)². It is also occasionally used as a pejorative for supply-side policies in general (see encyclopedia). However, its usage is not consistent.

So, how would a system based on trickle-down economics work in the ideal case?

This is not easy to answer because of the above. However, maybe some context can clear it up.

First, it’s agreed by virtually all serious economists that the economy is an endogenous system. In every economics textbook, you will find a diagram of circular flow which illustrates how all money circulates in the economy. For example, spending of a rich person on a luxury yacht does improve welfare of workers employed by yacht industry. Virtually every economist would agree with this premise (however, some may still argue that it would be better for the workers to be unemployed with generous welfare payments or working other jobs).

Moreover, virtually all economists agree that when aggregate supply (aggregate production of goods and services in an economy) expands, incomes of masses increase. This is something that is non-controversial and can be found in any textbook (e.g. you can read Mankiw Principles of Economics, or Krugman’s Economics, or any other author).

However, the real question is whether pursuing these supply-side policies is better for society overall than pursuing other policies; for instance, generous welfare policies (which require high taxes, which in turn may lead to slower growth of aggregate supply, etc.). Furthermore, giving a dollar to the poor also leads to circulation of that dollar in the economy. The difference between these approaches is that poor people have higher marginal propensity to consume, so more of it will go to consumption spending, while the rich have higher marginal propensity to invest. Discussing relative benefits of each would be too broad for this answer, but the point is that it’s not universally agreed which is better for an economy at a particular time.

This is not just an economic, but also a political and moral question. Ultimately, the correct answer depends not just on positive (i.e. objective) characteristics of the economic system, but also on political and moral considerations.

Unfortunately, people, politicians and (regrettably) even scientists are not always able to discuss these matters in a civil manner. Hence, this is where the terms like trickle-down economics or soak the rich come from. Since these terms are insults, it’s impossible to define them in a rigorous scientific manner or say how they are supposed to work.

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_{1. This should not be confused with real economic terms like free markets or socialism that are sometimes used as pejoratives but have actual pre-existing economic definitions, theories and literature behind them and originated in academia.}

_{2. Similarly the slogan “soak the rich” is in US applied to tax hikes made by Democrat politicians but not to Republican politicians like Bush. These are in essence empty labels that mean “bad policy of the other guy”.}

Answer 2

The basic idea behind 'trickle-down economics' is that if an action, like a policy change, will increase overall wealth then it should be seen as a net positive regardless of how this will affect the wealth distribution among the population. That is because, in the long run, it will 'trickle down' - which is to say increase everyone's (or at least most people's) wealth.

This is essentially the idea of supply-side economics which is a serious economic concept, whereas trickle-down economics is a derogatory name for it used by its critics. (Note the Wikipedia argument about the terms: SSE starts with 'not to be confused with TDE'; TDE starts with 'it is a critical term for SSE')

This greatly simplifies judging various proposed policy changes because it gives you a direct quantifiable score and it is also something that is directly computable in lots of theoretical models of the economy.

Increasing wealth is seen as a positive thing by essentially everyone; the question is more about increasing wealth at any cost.

The main counter-arguments are that the long run could be very long indeed and, more importantly, that the overall most wealthy society is not the most desirable one. This can be easily seen by considering extreme examples but in practice this leads to complicated value judgements about how many poorer people you are willing to accept if the overall wealth increases.

Answer 3

I think the top answer is good but unnecessarily long and harder to absorb. A better answer was given in the comments below:

Trickle down economics is basically any system that people on the left don’t like...

I would just modify it a little a bit, since more correct definition would be;

Trickle-down-economics is any system that people on the left don’t like, and which they perceive to disproportionately benefit the rich.

I have seen the term trickle-down-economics used widely inconsistently, even for environmental economic policies which some people on left perceive as benefiting the rich more (e.g. cap and trade). For example, this article calls the US pandemic policy, which was clearly demand-side policy trickle-down-economics.

Notice, the policy does not need to even actually disproportionally benefit the rich, it is just important that it is perceived as such. As was correctly mentioned in the comments under the top answer, people call Regan's tax cuts trickle-down-economics, but not the tax cuts that Kennedy did. What is trickle-down-economics is in the eye of beholder. The same tax cut can be trickle-down-economics if it is done by republicans, but not if done by democrats. Consequently, there isn't a way how to describe how such "system" works.

Answer 4

I think this Wharton School of Business article answers your question. Here is a summary of what the article says since link only answers are not allowed.

You first ask: What is "trickle-down economics"?

1. The term ‘trickle-down economics’ doesn’t really represent a cohesive economic theory

2. It’s a term used, often negatively, to characterize the view that reducing taxes on the rich will benefit the non-rich.

This is the point of the answer by muflon and Leeh. I think if you want to be very pedantic you can make claim that since it is not coherent theory it can't be described in economic terms because there is nothing to describe. However, we can pick one particular usage, just for the sake of giving you some answer. We can for example pick the policy of "lowering taxes" as being trickle down economics (because the article does so) and then we could describe it. You should still keep in mind that this is merely one of various different usages of the term trickle down economics, the term is like the sheep inside the box from the Little Prince.

Next you ask: how is a system based on "trickle-down economics" supposed to work?

If we use trickle down economics as label for reducing taxes, then we are not talking about economic system but a particular policy inside wider economic system. The article explains how this works:

There are a number of reasons why tax cuts for high earners could theoretically make others better off, he says. “Economists have long emphasized that taxes don’t necessarily ‘stick’ where you levy them — for example, a tax cut on corporate profits could raise workers’ wages. And if taxes are very high, reducing them can theoretically spur economic activity enough that tax revenues actually increase, which may have been the case in the 1950s, when top income tax rates exceeded 90%.”

Lower taxes will probably add to growth. “Almost all economists accept that,” ... “How much and for how long is another question, and that’s where we disagree. There are several reasons for that. Some of us will say it is because lower taxes encourage people to work more and maybe corporations to invest more. If the tax cuts are long lived, this will raise national income for a long time.