After today’s mini-Budget, we can expect to hear a lot more from the Tories’ critics about how they are motived by ‘trickle down economics’. Indeed, when Shadow Chancellor Rachel Reeves invoked the buzz-phrase du jour at the despatch box this morning, claiming that the Truss government ‘have decided to replace levelling up with trickle down’. It’s also been seized on by commentators like Emily Maitlis, Lewis Goodall and the perma-wrong James O’Brien – none of whom seem to have a particularly firm grasp of what supply-side economics is actually about.
It’s worth unpacking just where this idea springs from, and why it’s clung on so doggedly in what you might call ‘the discourse’.
It may have been used relatively sparingly on this side of the pond until now, but the term has a long, ignominious vintage in the US. The idea that supposedly underpins it was first elucidated way back in 1896 by the populist Democratic politician, William Jennings Bryan.
He’s best remembered for the ‘Cross of Gold speech’, delivered at the 1896 Democratic convention, which made an impassioned argument for ‘bimetallism’ – introducing a ‘silver standard’ alongside the gold standard to (theoretically) shift wealth from the rich to the poor by inflating the money supply. While the silver standard may have sunk with Bryan’s own political fortunes, one of Bryan’s other claims in the same speech has lingered:
‘There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.’
You don’t have to look too hard to see the ghost of Bryan in this tweet from Joe Biden earlier this week.
I am sick and tired of trickle-down economics. It has never worked.
We're building an economy from the bottom up and middle out.
— President Biden (@POTUS) September 20, 2022
Characterising supply-side economics in this way is a dishonest, but clever trick. The argument, made by presidents from Johnson to Obama and now Biden, is that tax cuts for the rich will somehow ‘leak’ or ‘trickle’ down to the less wealthy down the economy food chain. The only problem is, there is no economic school of thought that actually advocates this logic.
As the US intellectual Thomas Sowell notes:
‘It is not just in politics that the non-existent ‘trickle-down’ theory is found. It has been attacked in the New York Times, in the Washington Post and by professors at prestigious American Universities – and even as far away as India. Yet none of those who denounce a “trickle-down” theory can quote anybody who actually advocated it.’
One of the ironies here is that the same politicians and commentators who complain endlessly about ‘populism’ are happy to parrot economic non-theories that owe far more to William Jennings Bryan than to mainstream ‘elite’ economists. (Modern Monetary theory is perhaps the closest equivalent intellectually to Bryan’s ‘silver standard’ idea about the money supply – MMT may have been repeatedly debunked, but it has significant sway within the Democratic Party in particular.)
Here in the UK, the decisions announced today to cut the top rate of income tax, uncap bankers bonuses, lift the moratorium on fracking and even liberalise the planning system are framed as policy decisions designed only to enrich ‘the Tories mates’, as opposed to measures aimed at incentivising investment and improving the overall growth rate of the economy.
Lifting the cap on banker’s bonuses is one policy worth dwelling on, because it’s a rare thing in politics – a decision that government can make without any significant trade-offs. You don’t need to create ‘eyesores’ as with fracking or planning reform. As Gerard Lyons has argued on CapX, lifting the cap will increase taxable income while making the City more competitive internationally.
Such is the simplicity, and strength of the case for lifting the bonus cap, that opponents of the chancellor could only criticise the change on the basis of ‘optics’ – the ‘not a good look’ school of policymaking. This is essentially a suggestion that the Government should factor in the public’s misconceptions about how the economy works when creating policy. That pro-growth strategies should not be pursued because of a sense of unfairness. But, as John Ashmore argued recently, voters don’t necessarily see politics in those terms, especially if they can detect an overarching project and motivation driving the Government’s agenda.
The Government has been very clear about its rationale: getting growth up to create wealth that will ultimately raise living standards, fund public services and, in the long term, put our public finances on a better footing. The ‘not a good look’ brigade do have a point when they point out the enormity of the political challenge Liz Truss and her team are taking on, but she appears up for the fight and encouragingly unapologetic.
It’s vital that ministers get on the front foot when it comes to rebutting the inevitable opposition attack lines. If Conservatives fail to shape the narrative on the economy, Labour will shape the narrative for them. When the idea to scrap the bonus cap was first floated in June, for instance, the Labour line was ‘pay rises for bankers, pay cuts for nurses’. This kind of lazy false dichotomy has to be challenged in earnest, making the big arguments about growth and enterprise that Kwarteng set out today.
Defending the City of London will also be part of that. Here there is a credible and important argument to made. Recent research from PWN found that the financial sector contributed £75.6bn in tax receipts to the treasury in the year ending March 2020 – equivalent to 10% of total revenue that year. They may be easy targets for leftwing demagoguery, but our accounting, finance and legal firms are some of the country’s greatest assets – making them as competitive as possible is in all of our interests.
Labour, on the other hand, remain wedded to the idea that wealth is primarily something to be distributed, rather than created. The banker and the nurse, therefore, are in a zero-sum game. If the banker gets more money, the nurse loses. The Conservatives need to make the opposite argument, that higher growth benefits all of us – and be clear that it has nothing to do with ‘trickle down’.
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