Death of trickle-down economics?

While the policy side of the IMF continues (with the other members of the troika) to push for austerity measures in Greece, its research side (against the grain of much of contemporary mainstream economics) is sounding the death knell of trickle-down economics.

I am referring to the recent report, Causes and Consequences of Income Inequality: A Global Perspective, prepared by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta [pdf]. Their main finding (based on an analysis of data for 159 advanced and emerging markets and developing economies) is that there’s an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.

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.

To my mind, cross-country studies of this sort should always be taken with at least a few grains of salt (precisely because the causes and consequences of inequality vary across countries, and correlation is not causation). And the specific coefficients (such as the idea that “if the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years”) even more so (because, as I’ve argued before, the underlying data, such as Gini coefficients, mean very different things depending on the countries studied).

Still, this IMF study does give lie to the idea that the grotesque levels of inequality we’ve been witnessing in recent decades—the dramatic rise in both top-1-percent incomes shares and corporate profits—are a necessary condition for economic growth.

Most important, the IMF study challenges the idea that everyone eventually shares in whatever economic growth has taken place (which is dramatically illustrated by the growing gap between productivity and wages).

In my view, these should be considered the last nails in the coffin of trickle-down economics.

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On trickledown economics

I haven’t run across a lot of negative reaction to Pope Francis’s scathing critique of capitalism but it’s beginning to trickle down (sorry!)—and from the usual sources.

Almost immediately, Tim Worstall (for Forbes) attempted to teach the pope a lesson about how capitalism is the “third great invention of humans (after agriculture and the scientific method).” And, of course, there’s Stuart Varney (for Fox Business), who criticizes the pope for mixing religion and politics and proclaims capitalism a “liberator.”

Finally, Greg Mankiw accuses the pope’s rhetoric of—of all things—closing off debate:

“trickle-down” is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the “soak-the-rich” theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

To paraphrase Shakespeare’s Juliet, “What’s in a name? that which we call a failed theory/By any other name would smell as bad.”

What about trickle-up?

Mainstream economists will do almost anything to avoid a serious discussion of the issue of inequality, even while discussing the issue of inequality.

Right now, we have two groups of mainstream economists: those who argue we need to stick with trickle-down economics (which is basically a neoclassical argument that the existing distribution of income represents “just deserts” and that, at some point in the future, everyone will benefit from the continued funneling of income to those at the very top) and those who argue we need to shift gears and grow from the middle-out (which is a more Keynesian argument that the expenditures of the middle-class can and should serve as the effective demand for consumer goods, which in turn will spur private investment and lead to more jobs). Mark Thoma argues it’s a false dichotomy, because the supply side and the demand side are dependent on one another, that there needs to be the appropriate balance between supply and demand.

That’s a nice way of seeming to resolve the problem on the terms of mainstream economics. But what mainstream economists simply don’t want to talk about is a third option: trickle-up economics. That’s the idea that those at the bottom, who produce all the goods and services consumed by themselves and everyone else, would have a say in deciding what and how much gets produced, where it gets produced, and once it’s produced how the proceeds will be distributed.

If that happened, the fundamental cause of inequality would finally be eliminated and we’d actually have a pattern of growth that trickled up—taking care of those at the bottom before everyone else.

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