Trickle-down economics: A strawman or a plausible argument?


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A strawman is a fallacy that distorts an opposing stance to make it easier to attack. What does this have to do with economic theories in democratic political circles?


The "Trickle-Down economics" model was brought forward by former U.S President Ronald Reagan's regime as a way to expand the economy. The model proposes that profits are supposed to "trickle-down" after - and only after - the wealthy get wealthier. Is this based on sound economics or is it meant to work only in a fictional world? Is this the holy grail of economic theory, or is it another political strawman? Is this the best way to distribute wealth or is it an oxymoron?


In "Reaganomics", it is assumed that savers, investors, owners of companies, and bourgeoisie are the actual drivers of growth. Reaganomics promises that they will use the extra money saved from tax cuts to expand businesses and hire workers. It further argues that this benefit will trickle down to the workers. The Laffer curve supports this effect to the extent where the tax cuts are reasonable; whereas, at prohibitive ranges, Reaganomics proves infeasible. While the economy may have grown under President Reagan's regime, it's impossible to link this success to the "Trickle-down economic model" because it was coupled with heavy government spending and a significant reduction in fed fund rates. More sound economic analyses link the Ronald Reagan recovery to monetary policy and blame the negative effects on the heavy tax cuts extended to the wealthy.


South Africa - like most African nations - is a political-economic entity that is a caricature of a European project of colonial imperial-capitalist conquest and subjugation. It can be argued that the country still struggles to forget its colonial past and a legacy of uneven development, coming out of an acute imbalance of power blocks aligned with a perpetuation of a colonial system whose existence had only strategically retreated from a misplaced belief that the post-colonial administration symbolised a deep gradual transformation of systemic colonial societies.


South Africa’s poverty is largely related to extreme income inequality; 16.3 million (28%) people live under the international poverty threshold defined by World Bank (Galal, 2021). The economic exclusion is characterised by an income distribution with a Gini score of 63% - one of the highest in the world (Szmigiera, 2022). More than half of the country lives on less than $70 a month; 30-40% of working-age South Africans are unemployed (Chutel, 2017). This economic exclusion observed in the South African economy is rooted in a past of colonial and apartheid oppression (Munyeka, 2014).


While the apartheid regime's darkest legacy was the unwillingness of the government to provide equitable opportunities for the country’s majority population, the recent post-independence government regimes haven’t been focusing enough resources on creating a broad path to bridge this gap (Immelt, 2015). While Immelt (McKinsey et al., 2022) argues that South Africa's political leaders and the citizenry will yet again rise to the challenge (of overcoming the past of economic exclusion), it is evident that years of poor governance and corruption have stifled the economy’s ability to overcome that past (Democratic Alliance, 2020). The power structures have been accused of focusing on the people close to power - the tenderpreneurs and the wealthy; an embodiment of trickle-down "economics”. The notion has been that transfer of wealth and power between elites would result in "better" prosperity for all. Has this system worked?


Several studies have been carried out to ascertain whether economic growth in Africa trickles down to the poor through job creation. Analytical studies of the subject - using two proxies to measure the incidence of poverty, namely household consumption per capita and infant mortality - fail to support the trickle-down effect between economic growth and poverty reduction in South Africa, and reveal no cause-effect relationship between poverty reduction and a nation's economic growth in whichever direction (Nicholas M., 2011). Similarly, a 2015 report by the IMF argued that a mere 1% increase in wealth for 20% of low-income earners leads to a 0.4% increase in GDP in developing economies, while the same phenomenon in the top 20% high-income earners leads to a 0.1% drop in GDP (Dabla-Noris et al., 2015).


In the short-and-medium term, there seem to be no significant positive effects of huge tax cuts for the wealthy and ultra-wealthy. Unemployment rates and real GDP per capita trajectories remain unaffected by such tax cuts for the rich. On the contrary, such tax cuts extended to the wealthy seem to increase pre-tax income inequality, as measured by the top 1% share of pre-tax national income (Sherman, 2007). This effect is large: on average, every significant tax cut leads to a rise of 0.8% in the top 1% of pre-tax national income (Amadeo and Rasure, 2021). The case holds for African regional powerhouses - Ethiopia, Kenya, South Africa, Nigeria, Ghana, Algeria, Libya, and Egypt (Nyasha, Gwenhure and M. Odhiambo, 2017).


A more plausible economic empowerment argument would focus on a "bottom-up" approach which would focus on targeting the drivers of inequality and opportunity that affects the majority of citizens. Additionally, it would emphasize heavy privatisation of massive national projects to spur efficiency, minimise looting, justify employment numbers and improve the skill sets of the working population. There has been a recent wave of politics based on sound economic revival methodologies; South Africa's Democratic Alliance and Kenya's United Democratic Alliance have been at the forefront of this. Hopefully, other regional powerhouses follow suit.




References

Amadeo, K. and Rasure, E., 2021. The Shortcomings of Supply-Side Economics. [online] The Balance. Available at: <https://www.thebalance.com/trickle-down-economics-theory-effect-does-it-work-3305572> [Accessed 11 February 2022].

Chutel, L., 2017. Post-apartheid South Africa is failing the very people it liberated. [online] Quartz Africa. Available at: <https://qz.com/africa/1061461/post-apartheid-south-africa-is-failing-the-very-people-it-liberated/> [Accessed 4 February 2022].

Dabla-Noris, E., Kochhar, K., Suphaphiphat, N., Ricka, F. and Tsounta, E., 2015. Causes and Consequences of Income Inequality: A Global Perspective. [online] INTERNATIONAL MONETARY FUND. Available at: <https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Causes-and-Consequences-of-Income-Inequality-A-Global-Perspective-42986> [Accessed 11 February 2022].

Galal, S., 2021. South Africa: national poverty line 2021 | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/1127838/national-poverty-line-in-south-africa/> [Accessed 4 February 2022].

Immelt, J., 2015. Accelerating South Africa’s economic transformation. [online] McKinsey. Available at: <https://www.mckinsey.com/featured-insights/middle-east-and-africa/accelerating-south-africas-economic-transformation> [Accessed 11 February 2022].

Nicholas M., O., 2011. Growth, employment and poverty in South Africa: In search of a trickle-down effect. [online] Uir.unisa.ac.za. Available at: <https://uir.unisa.ac.za/handle/10500/7617> [Accessed 11 February 2022].

Nyasha, S., Gwenhure, Y. and M. Odhiambo, N., 2017. POVERTY AND ECONOMIC GROWTH: A MULTIVARIATE CAUSAL LINKAGE. [online] JSTOR. Available at: <https://www.jstor.org/stable/26415711> [Accessed 11 February 2022].

McKinsey, Immelt, J., Mohale, B., Serobe, G., Katz, M., Nxasana, S., Manuel, T., Dlamini-Zuma, N. and Chaka Chaka, Y., 2022. Reimagining South Africa: 20 reflections by leaders from South Africa and beyond. [online] McKinsey Insights. Available at: <https://www.mckinsey.com/za/our-insights/reimagining-south-africa> [Accessed 11 February 2022].

Munyeka, W., 2014. An In-Depth Look at Economic Growth and Employment in Post-Apartheid South Africa: Analysis and Policy Implications. Journal of Educational and Social Research, [online] Available at: <https://www.semanticscholar.org/paper/An-In-Depth-Look-at-Economic-Growth-and-Employment-Munyeka/1be5a87061bd1636b78c3106481ce3e0ffa5616f>.

Sherman, A., 2007. Income Inequality Hits Record Levels, New CBO Data Show. [online] Center on Budget and Policy Priorities (CBPP). Available at: <https://www.cbpp.org/research/income-inequality-hits-record-levels-new-cbo-data-show> [Accessed 11 February 2022].

Szmigiera, M., 2022. Gini Index: income distribution inequality worldwide | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/264627/ranking-of-the-20-countries-with-the-biggest-inequality-in-income-distribution/#statisticContainer> [Accessed 4 February 2022].


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