Last week I wrote about some clear messages that Pope Francis gave about the economy. I also referred to the fact that he made comments about the so-called ‘trickle-down economy’, which is the subject of this week’s contribution.
It is an aspect that is not mentioned much in economics textbooks. However, it is an economic policy that has been and is promoted by a number of political leaders. Promoters of the trickle-down economic theory believe that governments should reduce taxes for businesses, dividends and capital gains and high incomes, as this would stimulate investment, which in turn would create jobs, which in turn would generate economic growth.
The assumption is that investors and business owners are the real drivers of economic growth and that they will use tax cuts to fund further growth of their business. This would generate more employment and the benefits start to trickle down to everyone else.
Some have likened it to supply side economics, which in truth is different. In Malta, successive governments over the last 30+ years have implemented supply side economic policies aimed at increasing the potential of the Maltese economy, such as through investment in education and the infrastructure and reducing the tax burden generally.
On the other hand, trickle-down economic policy aims at targeting the benefits of tax cuts to the more wealthy segment of society, in the hope that they spend more and invest more, and eventually any economic expansion will trickle down to the workers.
What appears to happen after each crisis is that the wealthy get wealthier and amass further wealth, and the poor get poorer
Pope Francis has stated that the COVID-19 pandemic was the latest crisis to prove that market forces alone and trickle- down economic policies had failed to produce the social benefits their promoters claim. As proof of this, he made reference to the widening of the gap between the wealthier people of this world and the poorer people; to the hardline position taken by a number of governments on the issue of immigration; to economic and social injustices created by the concentration of assets in the hands of a few global organisations; and to the imbalances in healthcare and education, where significant segments of the world’s population still do not enjoy adequate access to these two fundamental merit goods.
The financial and economic crisis of 2008 and the subsequent years and the current crisis caused by the coronavirus have shown that market forces alone are not enough to keep the economy going and ensure economic growth for the benefit of all. What appears to happen after each crisis is that the wealthy get wealthier and amass further wealth, and the poor get poorer. There is not a fairer distribution of wealth and resources are not used for the common good.
In Malta we also need to be careful about the concept of trickle-down economy. Although we do not have the issue of giving tax cuts to the more wealthy, we do face the issue of encouraging certain sectors of the economy at the expense of others in the belief that there would be a trickle multiplier effect on the economy.
We have done this and continue to do this with the construction sector. In spite of what has been claimed, the construction sector leaves very little long-lasting economic benefit in the country and its contribution to economic growth is minimal.
Taking a broader perspective, as a country we need to appreciate that although wealth generation activities need to continue to be incentivised, this cannot be done for the benefit of the few. Our country’s economic policies need to keep in focus the human person and the common good. The trickle-down economy does not work.