“An economic recovery, like a rising tide, will lift all boats. For many, maybe even most, it will lift by painful inches. Some boats, however, may be lifted faster and higher.” 

So spoke President Ronald Reagan during his 1982 State of the Union address.  He promised growth for all, stimulated by tax cuts for the top earning bracket, allowing for money to “trickle” down socio-economic levels from the top earners to those at the bottom of the financial pyramid. With the benefit of hindsight, many disagree with Reagan’s policy and the logic and assumptions underpinning it. The concept took centre stage as Liz Truss and Kwazi Kwarteng made it a centrepiece of their economic platform in their Conservative administration that lasted a record (short) 44 days in 2022. The overwhelmingly negative reaction to this theory globally has sparked an interest in the topic, and led me to argue that we must go back in time and consider classical 18^th and 19^th century economic theory to fully appreciate the perceived appeal of this economic approach. 

From the 1700s to the late 1890s , classical economists were beginning to contemplate and theorise how to stimulate economic growth and how it worked. One idea was that of Laissez-Faire capitalism, a French phrase meaning “let it be” which refers to the belief that the government should not intervene in economic affairs, allowing the free market to operate and regulate itself. Similar to trickle-down economics, Laissez-Faire capitalism emphasised setting minimal tax rates, given the belief that tax and regulation would stifle innovation and hinder growth. However critics of laissez-faire capitalism argued that it would in fact have a negative impact on the relative wealth of the poorest socio-economic groups in society. This approach would widen inequality, as those at the top would benefit from increased resources and power. 

If we fast-forward to the 1920s, this economic belief system reached its most prominent position in the Western economies. Now billed as “Horse and sparrow” economics, a phrase used by US President Calvin Coolidge, who, like all who implemented the policy, held a firm conviction that reducing tax and regulation would encourage business activity and create more jobs. His policies fuelled the economic booms of the 1920s, with policies such as the 1924 Revenue Act, reducing the top marginal rate from 58% to 46%, also cutting the gift, excise and inheritance tax. These policies were classic trickle-down economic measures and were looked upon favourably at the time.   

However, policies such as these partially contributed to the stock market crash of 1929 and the subsequent Great Depression, immediately causing the popularity of tax cuts for the top bands to plummet. This crash led to a shift in economic theory, as President Roosevelt came in and implemented the New Deal, a significant change from the regressive tax policies of his predecessor. The New Deal economic plan helped to create a more equitable society and reduce poverty with increased government spending in areas affected by the recession.   

Laissez-faire sat on the side-lines until Ronald Reagan came to power on the 20th of January 1981. He was appointed with a promise of tax cuts and economic growth, and under his presidency, the term ‘trickle-down’ was born. He believed, as his opening quote suggests, that when people at the top of the economic ladder are given more money to work with, their increased spending will lead to more jobs being created for those at the bottom of the economy, resulting in significant incremental economic growth, benefitting all of society. To do this, he lowered the top marginal personal income rate from 70% to 28% and reduced taxes on both personal capital gains and corporate profits.   

For small-state Republicans, Reagan was following through on his campaign pledge to jump-start the economy and scale back limiters to entrepreneurship and economic activity, generating much-needed growth in a faltering America.  In fact the US economy grew at an average annual rate of 3.4% (compared to the 2.3% in the previous decade), and unemployment fell from 7.5% in 1980 to 5.5% in 1988. Furthermore, he was able to tackle high inflation, as this fell from 13.5% in 1980 to 4.1% in 1988, while during the 1970s, it had been much higher (an average inflation rate over the decade at 7.07%). Markets responded positively as well; between 1982 and 1987, the Dow Jones Industrial Average increased by over 200%, whereas in the 5 years previously it had grown by 39%, and the S&P 500 increased by over 120 %, whereas in the 5 years previously it had grown by 75%. 

However, despite positive headline improvements to growth, inflation and markets, for many, this missed the point of supporting the less well off in society.  Indeed, the impact of Reagan’s policies was that the overall rising tide did not lift all boats. This is due to inequality widening dramatically; the top 1% of income earners saw their share of national income increase from 10% to 15%, while the bottom 20% saw their share decline from 5.7% to 4.1%. This highlights how the Reagan Administration entirely disregarded equality, a critical macroeconomic aim for governments. Not only this, but the federal deficit nearly tripled during his presidency, from $79 billion in 1980 to $221 billion in 1986, showing the degree to which his tax cuts were unfunded .   

On its own, “Reaganomics” could’ve been a one off, an anomaly, and trickle down wasn’t as detrimental to inequality as people think. However, on the other side of the Atlantic, Margaret Thatcher was implementing similar policies with the same aim: economic growth. She believed that by deregulating industries, privatising state-owned enterprise, and reducing trade union power, the economy would become more efficient and prosperous, ultimately benefitting everyone. Such policies included the ‘Big Bang’ in 1986, where she abolished fixed commission charges and opened up the London Stock Exchange to electronic trading, boosting London’s status as a global financial centre. 

The growth came, following a short recession in 1981, where the economy contracted by 2.2%, and it was decently sized. Between 1982 and 1989, the UK consistently experienced positive economic growth ranging from 2.4% and 4.9%. She was also able to combat inflation, with it lying at 15% in 1979, using tight monetary policy, decreasing it to around 9% in 1990. Thatcher’s reign also increased UK GDP by around 23%. Furthermore, unemployment, although initially rising to 11% in 1984, fell towards the end of her reign, with it settling at around 6% in 1990. 

However, just like for Reagan, the growth came at a cost, and again, just like in the US, inequality boomed. The UK’s gini coefficient was 0.25 in 1979. By 1990 it had risen to 0.34 (the higher the number the greater the income inequality). Furthermore, the top 10% of income earners in the UK saw their share of total national income increase from 21.1% in 1979 to 25.1% in 1990, whilst the bottom 10% saw a decline in their total share during the same period. The most telling statistic though, was that the wealthiest 1% of households held around 21% or total household wealth by the end of the 1980s. This made Thatcher a highly controversial figure in UK politics, especially around those with lower incomes who suffered as a result of her policies. 

Jump to September of 2022, and in comes Liz Truss as the UK’s prime minister. She advocated for Trickle Down economics as her policies were coined ‘Trussonomics’. When she was elected, Truss spent no time (with the help of her chancellor of the exchequer, Kwasi Kwarteng) revealing her ‘mini-budget.’ This ‘mini budget’ aimed to boost economic growth through significant tax cuts, abolishing the 45% additional income tax rate, freezing the primary corporation tax rate at 19%, and removing the cap on banker bonuses. However, these unexpected tax cuts, combined with the significant supply-side inflation caused by Russia’s invasion, massively spooked markets. Her £45 billion unfunded tax cuts caused the pound to fall to a record low 1.03$ the day after the cuts were announced in the House of Commons. She was even chided by the  IMF that warned that these “large and untargeted fiscal packages were likely to deepen inequality” (Out of the Blue, 2022).   

Forty-nine days later, Truss (and her Chancellor) had resigned. Their successors, Rishi Sunak and Jeremy Hunt, reversed all their proposed economic policies before they could do further, lasting damage.  Her economic policy was ridiculed worldwide, with trickle-down economics dominating every front page and financial magazine for the weeks to follow. Sterling recovered and markets stabilised.

Trickle-Down has now been tried and tested over many centuries and in a variety of economic conditions and political systems.  Reagan’s quote “a rising tide lifts all boats” has been disproven. In fact, a rising tide sunk those at the bottom while sending those at the top even further sky-high. Handing out tax cuts to the already well-off can now be a discredited economic approach to broaden economic welfare for those in the lower socioeconomic classes who may never see the benefits.