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trickle down theory

“Trickle down theory” is a derisive term for the idea that giving benefits to large, powerful people and companies can yield benefits for society as a whole.

Trickle down theory is also known as “trickle down economics.”

The theory got its name from the comedian Will Rogers, who was critiquing President Herbert Hoover’s economic stimulus proposals:

The money was all appropriated for the top in the hope that it would trickle down to the needy. Mr. Hoover didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow’s hands.

A few years later, when Hoover had been voted out of office, President Franklin Roosevelt’s speechwriter kept on talking about trickle down theory:

The philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.

Today, trickle down theory is closely associated with President Ronald Reagan. Reagan’s economic advisor, Arthur Laffer, called for strategic tax cuts to boost the federal government’s revenue. The federal government did, in fact, increase its tax revenue after it cut tax rates for the highest income brackets. However, there was no proof that this benefited lower-income Americans, as the trickle down theory suggests.

A 2015 report commissioned by the International Monetary Fund argued that in fact, the trickle down theory does not work the way its supporters hope:

Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

However, some pundits argue that today’s economy relies on a different kind of trickle down theory. The stock market is central to the global economy, but its ups and downs are controlled by a relatively small group of people. When the federal government creates conditions favorable to investing, they are carrying out their own kind of stimulus project.

That’s the argument that Jeff Cox made, in a 2014 piece titled “Barack Obama: the new trickle-down president?” Cox noted that

Most of the market—about 90 percent by a recent count—is controlled by 20 percent of the people.

That top-tier group has been helped immensely by a president who has given at least tacit approval to monetary policy in which the Federal Reserve has kept interest rates anchored near zero for nearly six years and has inflated its balance sheet past $4 trillion in an effort to pump money into risk assets, and by extension the broader economy.

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