In his latest Economic Scene column in the NYTimes, Cornell economist Robert Frank examines the validity of the 'trickle-down' theory:
The surface plausibility of trickle-down theory owes much to the fact that it appears to follow from the time-honored belief that people respond to incentives. Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less, as trickle-down theorists claim. As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.If economic theory is unkind to trickle-down proponents, the lessons of experience are downright brutal. [...]
And here's the conclusion:
... [T]rickle-down theory ... is supported neither by theory nor evidence ... . This theory is ripe for abandonment.
Strong words, aren't they? Do read the whole thing. Here.
2 Comments:
Don't want to bring this up but what is the reservations policy if not trickle-down? By focusing on higher education and public sector jobs, the policy, by design, focuses on those from the disadvantaged groups who are least in need of it. The policy would make sense if everyone in the disadvantaged group had reached a certain basic level. That, most assuredly, is not the case.
Presumably, trickle-down works here but not elsewhere.
what about the counter posts at gregmankiw.blogspot.com, shouldn't you link to them too.
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