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What is Trickle Down Theory?
Trickle down theory is an economic concept steeped in the belief that the economy will become stronger as a whole if the conditions improve for the wealthiest members within it. According to the theory, those wealthy individuals will then be stimulated to produce more as a whole, a situation that would then benefit the poorer individuals as well. This theory became popular in the United States in the 1980s as the driving force behind the economic policies of President Ronald Reagan. Critics of the theory believe that it only increases the disparity in wealth between the rich and poor.
When a nation's economy is suffering, there are many contrasting theories on how to rally that economy from the doldrums. The trickle down theory is a somewhat controversial one because of its counterintuitive nature. Instead of attempting to directly boost the fortunes of the poor, the theory instead posits that any direct economic stimulation should benefit the wealthy. Their good fortune, according to the theory, would then filter throughout the rest of the economy, or, to put it another way, trickle down to help the poor.
The proponents of trickle down theory believe that, by boosting the fortunes of the richer members of the economy, those people will then be inspired to pour that extra wealth into the economy. This stimulation is achieved by tax breaks for the wealthy or by providing incentives to encourage entrepreneurship. When this occurs, according to trickle down theory, these wealthy individuals may then pass that wealth indirectly on to the lower rungs of society. For example, a business might increase its operations and need to hire more, or it might produce more, allowing it to lower prices.
Much of trickle down theory is based on the laws of supply and demand. It follows the work of certain economists who believe that a stagnant economy can be boosted by increasing the supply side. The theory goes that people are still willing to work in a recession, which means that they are trying to earn money and, thus, still have a demand. Hence, increasing the supply would give these struggling workers a chance to meet these demands.
This theory flies in the face of the one that says that a lack of demand is actually the problem for an economy. Critics of trickle down theory don't believe that helping the rich is a way to help the poor. They believe that it just makes the rich get richer because they can simply keep the extra wealth instead of pumping it back into the economy. Worse yet, according to trickle down critics, the wealth then stays within rich families through inheritance, thus perpetuating the disparity of wealth throughout future generations.
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![U.S. President Ronald Reagan promoted the "trickle down" economic theory.]()
U.S. President Ronald Reagan promoted the "trickle down" economic theory.
Discussion Comments
When given financial assistance, the wealthy actually spend more than the poor. The poor are more likely to save the money since they predict that they may have financial problems in the future. But the wealthy do not have this fear, so the money is more likely to end up in the economy. This theory is not as flawed as some think.
@RocketLanch8-- That's true, another way that the trickle down theory works is that when people spend more money, the economy grows. And when the economy grows, everyone benefits, not just the wealthy.
When the economy is expanding, employment increases and prices also drop, encouraging people to buy more. This is also a boost for manufacturers who then produce more to increase demand.
I think that the trickle down theory is flawed. Policies making the wealthy wealthier may not result in wealthier middle and lower classes. It's completely based on what the wealthy do with the money.
If the wealthy use the money as investment to start business and hire people, then it can be said that the wealth is "trickling down." But what is the guarantee that this will happen? What if that money just goes to a personal bank account and sits there?
If the goal is to improve the economic conditions of lower and middle classes, then they need to be provided that wealth directly. It's a ridiculous idea to make the rich richer hoping that they will spend it in ways benefiting other economic classes of a society.
I think many people were expecting a "rain down" theory, not a "trickle down". I remember when the term "voodoo economics" became popular, once Reaganomics failed to take hold. Econometrics is a tricky thing, since it can take decades before a new approach to the economy can truly be measured.
I grew up during the time of Reaganomics, and I remember all the talk about the trickle down effect. My social studies teacher called it Keynesian economics. I couldn't see how this plan would work, since I always assumed wealthy people stayed wealthy because they didn't spend a lot of money. They just earned it.
Now that I'm older, I can see where trickle down economics might have worked in the long run. If the wealthier citizens started spending money on creature comforts and luxury items, then the middle class people who manufactured those items would have more work to do. The lowest economic class would then have entry-level jobs available and they would become less dependent on government assistance programs. However, this all would have hinged on our country having more generous wealthy people like Bill Gates and fewer greedy tycoons.
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