Trickle-up Economics: How to create wealth
By Tim Thorlby
10 min read
In this blog, Tim reflects on two news stories of the week - the Mini-Budget and new Living Wage rates - and how they relate to a biblical vision of wealth creation.
Within the last week, two closely related economic news stories aired; one hit the world’s headlines and one disappeared without a trace. This is a pity, because if we paid more attention to the news which vanished, we might all be better off.
The major economic news story of the week was, of course, the historic ‘Mini-Budget’ set out by the new Chancellor, Kwasi Kwarteng. In just 25 minutes, he demolished generations of ‘Treasury orthodoxy’ by announcing the biggest package of tax cuts for 50 years, funded entirely by public borrowing it seems. His proposals also included an eye-catching emphasis on giving the biggest tax cuts to the highest earners – the biggest winners by far are those earning over £155,000 per year. The purpose of all this? Economic growth.
The other news story was the announcement by the Living Wage Foundation of the new Living Wage rates for the UK. The ‘real Living Wage’ is calculated by the independent Resolution Foundation each year, on behalf of the Living Wage Foundation, and is based on the cost of living. The real Living Wage is calculated to be high enough for someone to actually live on and is substantially higher than the Government’s statutory Minimum Wage. The new rates are:
£11.95 per hour in London, a rise of 8% from 2021’s rate
£10.90 per hour outside of the London, a rise of 10% from 2021’s rate
This is not a trivial news story, as there are now some 11,000 accredited Living Wage Employers in the UK, employing nearly 400,000 people between them[1].
How are these two news stories related? Both stories are about how we secure economic growth by paying different groups of people more – but each story offers a radically different approach.
Trickle down
Kwasi Kwarteng’s core assumption is that by offering huge tax cuts, disproportionately targeted on those earning higher incomes, this will unleash the forces of entrepreneurialism and usher in a decade of economic dynamism, ‘growing the economic pie’ and, eventually, benefiting everyone. The latter point sees the revival of an old idea – the ‘trickle down’ theory of wealth. If he’s right, then the costs of all those tax cuts will be paid for in the future from growth, and everyone will be happy.
Sadly, most of the evidence suggests he is not right.
Many commentators seem fairly sure that this is a huge gamble which is unlikely to pay off. Paul Johnson at the IFS was highly sceptical that tax cuts alone would deliver sustained economic growth, describing it as a ‘sugar rush’ at best[2]. He also pointed out that with inflation already over 10%, a short burst of extra demand may push it even higher. The FT was sceptical too. The international money markets also gave a pretty negative verdict to the Growth Plan, pushing the pound down to historic lows against the dollar (another inflationary pressure).
The evidence on ‘trickle down’ theories of wealth is even clearer; it really is a fantasy. It has been tried in both the USA and the UK in the last 40 years, within living memory, and did not work. Research from the LSE shows that:
“economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero.” (LSE, 2020)[3]
Even the IMF, not famously lefty in its opinions, finds that the international evidence does not support the idea that making the rich even richer somehow benefits those on lower incomes; in fact the truth is quite the reverse:
“We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth—that is, when the rich get richer, benefits do not trickle down.” (IMF, 2015)[4]
And so here’s the point. If you want economic growth, its far more important to increase the pay and prospects for those at the bottom of the income scale than of those at the top.
Trickle up
So, if we want our economy to grow sustainably, we need to pay attention to the nature and quality of jobs at the bottom and in the middle. As President Biden has said:
“Trickle-down economics has never worked. It’s time to grow the economy from the bottom up and the middle out.”
Nearly a decade ago, the OECD published a review of evidence from across 30 wealthy countries showing that income inequality undermines economic growth[5]. This echoes the IMF finding.
The UK’s income inequality has been growing for 40 years and is now amongst the highest of any developed country[6]. That inequality manifests itself geographically too, with regions, cities and towns ‘left behind’. The weak and sporadic economic growth we’ve experienced over much of that period is not a coincidence. The prevalence of low wages and low growth go together.
So, if we care about growth and wealth in the UK, the news about the Living Wage, and how many employers are paying it, is a much more important and hopeful sign for the future.
A biblical perspective
The biblical view of markets and enterprise is that they are important and have their place, but they also have their limits (as I have discussed elsewhere). Entirely free markets rarely deliver happy and healthy outcomes. The Bible is clear that land, people, and money are too important to be traded freely as though they were just commodities. Markets operate within a broader social reality: our relationships with each other are covenantal, not just contractual; in God’s view, we have mutual obligations to each other.
It is difficult to see how a redistribution of wealth from middle-income households to high-income households, with little help for those on low-incomes, is compatible with a biblical vision of the common good and mutual obligation. Indeed, in the midst of an unfolding cost-of-living crisis it looks heartless. It also looks unfair.
A key element of any biblically inspired vision of society and economy is a commitment to fair pay; recognising the contribution of every worker with a living wage, or more, whilst also not allowing those with power to abuse it to overcompensate themselves.
This country desperately needs a bold, radical vision for how its economy can work fairly and in ways that support healthier families, stronger communities and more prosperous regions. We need to work together to put such a vision together and make it a reality.
In the meantime, one thing we can do is celebrate the Living Wage movement and encourage more employers to sign up – as a down payment on a fairer, more prosperous country.
This blog was written by Tim Thorlby. If you’d like to receive email alerts to new blogs, subscribe for free.
Footnotes
[1] Access news story here: https://www.livingwage.org.uk/news/real-living-wage-increases-%C2%A31090-uk-and-%C2%A31195-london-cost-living-rises
[2] Access news story here: https://ifs.org.uk/articles/paul-johnson-responds-kwasi-kwartengs-mini-budget
[3] Hope, D. & Limberg, J. (2020) The Economic Consequences of Major Tax Cuts for the Rich, LSE International Inequalities Institute| Access here: http://eprints.lse.ac.uk/107919/1/Hope_economic_consequences_of_major_tax_cuts_published.pdf
[4] Dabla-Norris, E. et al (2015) Causes and Consequences of Income Inequality: A Global Perspective, IMF | Access here: https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Causes-and-Consequences-of-Income-Inequality-A-Global-Perspective-42986
[5] Cingano, F (2014) Trends in Income Inequality and its Impact on Economic Growth, OECD | Access here: https://www.oecd-ilibrary.org/social-issues-migration-health/trends-in-income-inequality-and-its-impact-on-economic-growth_5jxrjncwxv6j-en
[6] Giupponi, G. & Machin, S. (2022) Labour Market Inequality, IFS | Access here: https://ifs.org.uk/sites/default/files/2022-08/Labour-market-inequality-IFS-Deaton-Review-of-Inequalities-2.pdf