The failure of trickle-down economics

The chart below shows that while inequality in the UK rose under Thatcher, the poorest families saw virtually no increase in their disposable income over the same period. So much for the theory that making the rich richer will make everyone else richer too.

Under Tony Blair, inequality stabilised, but the incomes of the poorest rose significantly. Both these trends were due to redistribution through the tax system. Had the government not intervened, inequality would have risen further and the poorest would have seen far less improvement in their incomes.

The current government is about to cut tax credits significantly, which will hit the poorest the hardest once again. So much for compassionate conservatism.

Utopia - you are standing in it!

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2 thoughts on “The failure of trickle-down economics

    • Thank you for your reply. I have read your article, and while it is clear that some degree of inequality, and individual incentives (though for everyone, not just the richest) are important, it ignores macroeconomic and structural effects, as well as incidences of market failure. Sure, some people are poor and others rich through the effects of individual effort, but in eg poor countries with insufficient education and infrastructure and undeveloped financial provision, there are far fewer opportunities for the individual to flourish, no matter what they do. Such effects can occur in rich countries too, even if to a lesser extent. Inequality of outcome can also produce inequality of opportunity, so simple arguments for meritocracy may be subject to nuances that make the issue more complex than just making the state get out of the way.

      As far as growth goes, excessive inequality can mean reduced consumption growth, as more income flows to those who spend a smaller proportion of it (the wealthy). Whether through the state or the market, falling inequality and rising incomes lower down the scale can boost consumption through the multiplier that you cite, raising aggregate demand/spending, and encouraging higher investment and growth. If there is insufficient aggregate saving to fund the investment due to some degree of equality, then trickle down could work, less for the incentive reasons and more for macroeconomic ones. In this case, allowing more income to flow to those at the top might boost average saving to fund investment through the financial system.

      Technological change in recent decades has helped to raise inequality in rich countries, such that there has been a large increase in low-paid and highly-paid work, mainly in service sectors. This is clearly not all down to the individual and incentives, so those concerned with stagnating incomes at the bottom should support intelligently designed tax credits and the minimum wage, which should encourage people into employment, and mean that they are better off working. The state can therefore intervene to change incentives in a big way. Also the enormous rise in the pay of those in finance have, since the recession, been shown to be dysfunctional, driving excessive risk-taking and the eventual collapse of the whole system. Banks that are safer may take fewer risks, and make lower profits in the short term (leading to falling bonuses and pay), but would contribute to a more stable economy over the long run. Thus falling inequality would be a result of markets working better given the appropriate regulation on eg capital requirements. The banks would also be less likely to need bailing out, which implies less state intervention overall.

      I would appreciate your comments on the chart I posted, given that it shows that while the economy grew under Thatcher, the bottom 10% gained little or nothing, and it required state intervention under Blair/Brown to stabilise inequality through the tax system.

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