1/8
Stefan, I don't think it makes sense to support or reject an economic model, including "trickle down" theory, on ideological grounds as either always right or always wrong. It is much more useful to consider the condition under which it benefits the economy.
Stefan, I don't think it makes sense to support or reject an economic model, including "trickle down" theory, on ideological grounds as either always right or always wrong. It is much more useful to consider the condition under which it benefits the economy.
2/8
I'd argue that a severely underinvested economy with low domestic savings could benefit from trickle-down policies that force up income inequality if the associated increase in ex-ante savings can be channelled, perhaps through official entities, into productive investment.
I'd argue that a severely underinvested economy with low domestic savings could benefit from trickle-down policies that force up income inequality if the associated increase in ex-ante savings can be channelled, perhaps through official entities, into productive investment.
3/8
In that case, the reducing of the savings constraint on investment would allow the economy to grow more quickly, and everyone would be better off, just as the supplysiders claim, although of course the rich disproportionately so.
In that case, the reducing of the savings constraint on investment would allow the economy to grow more quickly, and everyone would be better off, just as the supplysiders claim, although of course the rich disproportionately so.
4/8
But in economies in which additional productive investment is sensitive mainly to changes in domestic demand, which is usually the case in advanced economies and many developing ones, rising income inequality is likely to lead to less, not more productive investment.
But in economies in which additional productive investment is sensitive mainly to changes in domestic demand, which is usually the case in advanced economies and many developing ones, rising income inequality is likely to lead to less, not more productive investment.
5/8
That's because if rising income inequality reduces consumer demand, businesses won't convert the higher ex ante savings of the rich into higher investment, in which case either debt must rise or workers would lose jobs. Everyone would be worse off, especially the poor.
That's because if rising income inequality reduces consumer demand, businesses won't convert the higher ex ante savings of the rich into higher investment, in which case either debt must rise or workers would lose jobs. Everyone would be worse off, especially the poor.
6/8
China is a great example of both conditions. In the 1980s and 1990s the economy was so terribly underinvested that Chinese supply-side policies that favored the rich and local government elites ("to get rich is glorious") were able to fund a massive surge in savings.
China is a great example of both conditions. In the 1980s and 1990s the economy was so terribly underinvested that Chinese supply-side policies that favored the rich and local government elites ("to get rich is glorious") were able to fund a massive surge in savings.
7/8
That in turn set off China's astonishing investment boom which generated nearly three decades of healthy 10% growth, and while ordinary households received a disproportionately low share of this growth, they still benefitted enormously (household income grew by 7%).
That in turn set off China's astonishing investment boom which generated nearly three decades of healthy 10% growth, and while ordinary households received a disproportionately low share of this growth, they still benefitted enormously (household income grew by 7%).
8/8
In the past decade, however, the same set of supply-side polices in China have continued to force up ex ante savings, but because it is now demand, and not savings, that is the main constraint to productive investment, these policies no longer benefit the economy.
In the past decade, however, the same set of supply-side polices in China have continued to force up ex ante savings, but because it is now demand, and not savings, that is the main constraint to productive investment, these policies no longer benefit the economy.
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