You are on page 1of 14

Lexi Schroeder

POL 494
4/29/2015
Literature Review
Does Money Trickle Down?: A Literature Review of Supply Side
Economics in the United States
Trickle down economics is not a new concept. In fact it is a term
that has been widely in use since the 1980s during the Reagan era,
although the principles of it date back to the early 20th century. The
study of this principle over the past 35 years has led to much
discussion on whether trickle down economics actually works. Does
giving tax breaks and passing legislation that helps businesses and the
wealthy eventually help the common man as well? If corporations are
making more money will that wealth eventually trickle down to the
workers that make the success of the corporation possible? To answer
questions like these, one must look at the research that has been done
on the topic and the definition of trickle down economics. Economic
principles are change over time, so when examining the past four
decades one must look at the policies actually implemented under
supply side economics to see if the principles have evolved. Does what
is considered supply side economics morph as our country develops
and elects new leaders? Answers to these questions will determine the
key aspects of trickle down economics and whether or not they work.

Trickle down economics is not an economic policy unique to the


United States. In 1983 H.W. Arndt discusses the origins of the idea of
trickle down economics. The term was actually first used when
discussing imperialism and third world countries. Scholars of the time
showed that mother countries of third world colonies made so much
money off of the colonies that the money trickled down and improved
the lives of even the poor classes in the mother country (Arndt, 1983).
This shows that trickle down economics has existed for almost 100
years, but in the United States the concept really took off in 1981 when
Ronald Reagan took office. His economic policy coined the term
Reaganomics, which has morphed into trickle down economics over
the years. Ronald Reagan touted himself as someone who would cut
government interference in business and decrease government
spending. This has been popular rhetoric in the Republican Party for
many years and many harken back to Reagan as an ideal Republican
president. Though he did not trim government spending as much as he
had hoped or promised when running for the presidency, Reagan did
cut taxes across the board and lowered taxes on corporations by 14
percent (Niskanen).
The Reagan Administration
A common criticism of supply side economics is that they
actually end up making the poor classes worse off because they
benefit big business. Reaganomics argues against this theory by

asserting that more opportunities will open up because of supply side


economics. Therefore, the poorer classes will have a better chance of
getting higher paying jobs because more will be available (Lowe,
1984). The authors argue that the people that are most hurt by supply
side economics are actually the middle class. They do not stand to gain
from getting higher paying jobs because many of them already have
good jobs, but they also are not reaping the benefits that the upper
class does from tax cuts and deregulation (Lowe, 1984).
Mink Coats Dont Trickle Down: The Economic Attack on Women
& People of Color, a book published in 1988 that examines the Reagan
economic policy, presents a damning portrayal of supply side
economics. The authors argue that supply side economics are a way
for corporations and big business to grow wealthier at the expense of
the American people (Alberda, 1988). This book argues that tax breaks
for the wealthy and increasing globalization are being heralded in
Washington, while badly needed social programs like welfare are being
cut down. Perhaps one of the most damning sentences in this book
occurs in the introduction when the authors state that while America
spends more and more money on the military spending and defense
instead of on domestic policies. According to Mink Coats Dont Trickle
Down, roads go unbuilt; hospital beds lie empty waiting for the rich
while the poor and uninsured wait in the lobbies below; teachers teach
without books in run-down schools; and across the nation more and

more people live on the streets (Alberda, 1988). This description of


America in the 1980s is a bit over the top and in hindsight it could be
argued that Americans in the 80s were more prosperous than we are
today. However, this book highlights the viewpoint of a good number of
Americans that were not benefiting from the Reagan Administration.
The authors give evidence that though supply side economics might
boost the American economy, it by no means benefits all Americans.
This is especially true when considering populations that historically
are part of the poorer classes like women and minorities.
The 1990s
In 1997 A Theory of Trickle-Down Growth and Development was
published in the Review of Economic Studies published by the Oxford
University Press that discusses how to improve supply side economics.
The authors Phillipe Aghion and Patrick Bolton argue that while limited
government intervention on the economy can increase it, sometimes
the government is still needed to step in. One reason for this is that
supply side economics generally benefit big business. Though some of
the extra money they make may eventually trickle down to their low
and middle class workers, it may be necessary for the government to
intervene to redistribute wealth and avoid large income gaps between
classes (Aghion, 1997). This can be seen as one reason that trickle
down economics continues to be a popular theory even in recent years.
Less government regulation does lead to an increase in the economy,

but can lead to an uneven income distribution between classes. In the


initial years, corporations and businesses will be making the money
and it takes a lot longer for that money to be seen by the lower and
middle classes, if it is even seen at all. Government intervention to
help redistribute the wealth makes policies like open trade barriers and
lower tax rates beneficial to a country as a whole and not just the
upper class (Aghion, 1997). Aghion and Bolton also note that the
increased production that is inherent in supply side economics
increases the wealth of the already wealthy, but eventually the
distribution of wealth will equal out given enough time.
The 1990s and the election of democrat Bill Clinton brought with
it a change in economic policy. President Clintons new economic
policies were dubbed Clintonomics by the masses, but the
March/April issue of International Economy questioned whether Clinton
was still using trickle down economics. Experts in the field of
economics assert that Clinton was still using principles of supply side
or trickle down economics, but expanded them to a global scale (Frank,
1999). One of the main principles of supply side economics is that
there is a large investment in capital (the supply) and Clinton
structured his economic policy around making the capital go wherever
it would get the most return. This led to fewer restrictions on trade and
more globalization. While it may seem as though President Clinton
made supply side or trickle down economics work, one of the large

reasons that the country experienced a time of economic growth


during his presidency was not because he was using supply side
economics, but because he was investing in the country. In this article,
Charles B. Rangel, a member of the House of Representatives during
the Clinton Administration, argues that the reason that the U.S.
experienced a period of economic growth was because Clinton used
government funds to invest back into the United States. Clinton put a
lot of revenue from the federal government back into the education
system. Rangel argues that this investment in the future of America
has led to an increase in the economy because more people have
higher paying jobs and are able to buy more (Frank, 1999).
Robert J. Shapiro, Under Secretary of Commerce for Economic
Affairs during the Clinton Administration, also maintained that the
economic prosperity experienced during Clintons time in office was
not due to trickle down economic principles. Shapiro notes that the
reason for this shift in the economy was due to the Clinton
Administration curbing federal spending and increasing tax rates. Jeff
Faux, President of the Economic Policy Institute in Washington D.C.
during the Clinton Administration, again contends that Clinton has
been using trickle down economics because he cut taxes for the rich
and he argues that the lower and middle classes are really responsible
for the growth of the economy, but for poor reasons. Faux argues that
the Clinton economic policy has encouraged the lower and middle

classes to borrow more money than they should and as a result will be
incurring huge debts that will eventually hurt the economy (Frank,
1999). Though many of the contributors to this article had differing
opinions on Clinton economic policy and whether or not it adhered to
trickle down or supply side economics, one can gather from these
disagreements that the few trickle down economic principles being
used during the Clinton Administration were not the sole reason for
economic growth. The discussion of Clinton economic policies also
opens up the examination of trickle down economics to something that
exists on a global scale.
Relevance to Current Policy
In the year 2000, 20 years after the dramatic push by Ronald
Reagan to adopt supply side economic principals the Joint Economic
Committee of the United States Senate met to discuss the changes
that had occurred in the U.S. economy during that period. Though this
committee meeting was meant to look back at economic policy over
the previous 20 years, the members of the committee were also
looking to the future to see what principles of supply-side economics
they wanted to utilize moving forward. Implementing principles of
supply side economics such as a smaller government, fewer barriers to
trade, lower tax rates and price stability helped to increase the U.S.
economy when it was at a low point during the recession of 1981-82
(Joint Economic Committee, 2000). However, since that time the U.S.

economy had changed and the point of this committee was to look at
what the government needed to do in the new century to keep the U.S.
economy thriving. Since these policies of supply side economics had
been instituted in the United States the economy had grown at a
steady rate of almost 4% per year, the DOW Jones was worth 10 times
what it was in the early 80s and over 30 million jobs had been created
(Joint Economic Committee, 2000).
A key component of supply side economics is an open trade
policy. This promotes globalization and increases imports and exports.
However, if a country ends up importing more goods than they export,
an open trade policy can end up hurting their economy. In 1985 the
U.S. was importing $114 billion more than it was exporting
(Karstensson, 2003). This issue was so severe that Reagan spoke on
this issue to try to explain why free trade was hurting the U.S.
economy. According to Reagan free trade is always the best economic
policy and the reason that Americans were not benefitting from it then
was because of the restrictive trade policies of other countries. Reagan
asserted that if other countries like Korea and Japan got rid of laws that
made the sale of American goods illegal, the international economy
would be better off because everyone would benefit (Karstensson,
2003). Karstensson makes it seem as though Reagan spent most of his
speech blaming other countries when really the problem may have
been with his economic policy. The speech does skew towards blaming

other countries, but Reagan did have a point in that free trade policies
are not successful unless all members participate.
Looking back on presidencies years later often gives us incite to
policies that might not have been understood at the time. Reagan was
elected president during one of the worst recessions that had hit
America since the Great Depression (Wood, 2004). His use of supply
side economics sought to increase the economy and many claim that
he achieved his goal because the U.S. economy was in much better
shape when he left office than when he began. Americans also felt they
were better off with Reagan as president as he had been re-elected by
a huge margin after his first four years. One of the reasons for this
might have been that Reagan used economic rhetoric in a way that
presidents before him had failed to. Wood argues that Reagan talks
more about the economy in speeches than his predecessors and in
those speeches he gives answers to why the U.S. economy is down
(Wood, 2004). While many of his speeches blame outside sources, the
fact that Reagan kept addressing the issue increased U.S. citizens
opinion of him. Reagans consistent use of rhetoric to increase the
publics perception of the American economy went a long way in
ensuring that the American people saw Reaganomics in a good light.
Reagan was able to sell the public on his economic policy and many
people from the Reagan era still believe it today.

One of the many reasons that supply side economics has been
touted over other economic policies is because Ronald Reagan
popularized it. Over the past 15 years or so conservatives have held
Reagan up as an example of one of the best presidents in our history.
While it can be debated how effective Reagan was as a president, he
definitely had a lasting impact on economic policy in the United States.
According to Matthew Dallek in Not Ready for Mt. Rushmore:
Reconciling the Myth of Ronald Reagan with the reality, Reagan has
become a conservative icon (Dallek, 2009). However this idolization
does not match up with the actual economic policies that he instituted.
Reagan did cut spending in many areas of the government such as
welfare and tax revenue, but he more than made up for it in an
increase in military spending (Dallek, 2009). In addition to actually
increasing the deficit, some of the supply side economic techniques
that Reagan used only ended up making the common man worse off
during his Administration. Tax cuts were primarily for the wealthy and
so the upper class gained the most during the Reagan Administration.
In 2013 the Joint Economic Committee of the 130th Congress of
the United States met to discuss taxes in America. In particular this
meeting was looking at the economic policy of President Reagan and
comparing it to economic policy in 2013. A portion of Congress
believed that adopting some of the tax reforms that Reagan instituted
during his Administration could help boost the U.S. economy. Kevin

Brady, the chairman of the Joint Economic Committee and a


Representative from Texas, argued that the United States has a very
convoluted tax policy. He states that Americas current tax code is too
costly, too complex, and unfairbut mostly, unfair (Joint Economic
Committee, 2013). Brady notes that when Reagan reduced tax rates
when he came into office, increased the economy and also helped to
create jobs at a time when America desperately needed them.
Reverting back to policies that have worked in the past is a common
theme in politics, but just because certain economic principles have
helped in the past does not mean they will help the situation the
United States is currently in.
The various sources that have been produced throughout the last
four decades show that while aspects of trickle down economics may
help to improve the U.S. economy as a whole, the money does not
always trickle down to the lower and middle class. A lowering of trade
restrictions and fewer taxes are primarily beneficial to large
corporations and they prosper under Reaganomics/trickle down
economics/supply side economics. However, as was stated in A Theory
of Trickle Down Growth and Development, money for businesses does
not give money to the poorer classes unless there is government
intervention. The economy may improve under trickle down policies,
but government intervention can help spread the benefit of this to
everyone and not just the very rich. Implementing supply side

economics can leave America subject to an ever-growing wealth gap.


The initial positive effects of trickle down economics can be part of the
reason that many legislators keep turning back to this solution
whenever the economy takes a turn for the worse. However, the fact
that it widens the income gap in America, a country where the income
gap is already fairly large, should lead legislators to use caution when
adopting principles of supply side economics. Given the research
available in political literature, a good marriage of supply side
economics and government intervention when needed is the best
option for a country like America.

Bibliography
Aghion, Phillipe, & Bolton, Patrick. (1997). A Theory of Trickle-Down
Growth and Development. The Review of Economic Studies, 64,
151-172. Retrieved from http://www.jstor.org/stable/2971707.
Albelda, Randy, McCrate, Elaine, Melendez, Edwin, Lapidus, June, &
Center for Popular Economics. (1988). Mink Coats Dont Trickle
Down: The Economic Attack on Women & People of Color.
Boston: South End Press.
Arndt, H.W. (1983). The Trickle-down Myth. Economic Development
and Cultural Change, 32, 1-10. Retrieved from
http://www.jstor.org/stable/1153421.
Dallek, Matthew. (2009). Not Ready for Mt. Rushmore: Reconciling the
myth of Ronald Reagan with the reality. American Scholar, 78, 1323. Retrieved from http://www.jstor.org/stable/41222054.
Frank, Barney, Greider, William, etc. (1999). Is Market Friendly
Clintonomics a More Stylized Form of Trickle Down Theory?.
International Economy, 18-23. Retrieved from EbscoHost.
Joint Economic Committee. (2000). The Supply-Side Revolution: 20
Years Later (S.HRG. 106-563). Washington, DC: U.S. Government
Printing Office.
Joint Economic Committee. (2013). Lessons From Reagan: How Tax
Reform Can Boost Economic Growth (S.HRG. 113-88).
Washington, DC: U.S. Government Printing Office.

Karstensson, Lewis. (2003). The Merchant and Mr. Reagan: The Case of
a Half-Classical Trade Policy. American Journal of Economics and
Sociology, 62, 567-582. Retrieved from
http://www.jstor.org/stable/3487811.
Lowe, Carl (Eds.). (1984). Reaganomics: The New Federalism. New
York: H.W. Wilson Company.
Reaganomics. (n.d.). In The Concise Encyclopedia of Economics online.
Retrieved from
http://www.econlib.org/library/Enc1/Reaganomics.html.
Wood, Dan. (2004). Presidential Rhetoric and Economic Leadership.
Presidential Studies Quarterly, 34, 573-606. Retrieved from
http://www.jstor.org/stable/27552614.