Tax cuts and similar monetary incentives for multi-nationals and the wealthy form a fundamental part of today’s economic jargon. These incentives are ostensibly intended to ‘generate’ economic growth since neoliberal theory claims that it is the rich who carry out economic activity which leads to economic prosperity.
This argument is posited on the claim that economic activity by the well-off increases the pie of the economy and hence, more people get a share in the pie. This is defined as the trickle-down effect which states that wealth will find itself to the lowest echelons of society if economic activity continues to take place.
Nothing could be further from the truth. Since the 1970s, the salaries of corporate CEOs have increased a thousand fold while the average worker earns only eleven percent more. A recent Oxfam report in fact shows that the world’s richest eight people own as much wealth as the poorest half of the world’s population — 3.6 billion to precise.
This horrendous income inequality has only worsened since neoliberal reforms were first implemented under the Thatcher regime in Britain and in Ronald Reagan’s presidency in America in the 1970s and 80s.Both Thatcher and Reagan instituted sharp tax cuts for the wealthiest Americans and British, on the premise that this would serve as the panacea to the stagflation which had plagued the global economy in the 70s.
Tax cuts and the dissemination of neoliberal ideology have since then become the cornerstone of today’s economic order. Developing nations are forced to implement neoliberal policies under the aegis of ‘structural reforms’ institutions such as the IMF and the World Bank force these nations to undertake.
Most of the times, these structural reforms come in the wake of economic disasters such as the Asian financial crisis of 1997 and the debt crisis in Latin America in 1980s. Naomi Klein, author of the famous book The Shock Doctrine described this as ‘shock capitalism’ and claimed institutions such as the IMF use shocks and disasters to implement pro-market reforms in the aftermath of such shocks.
Neoliberal reforms — which rely on the false myth of the trickle-down effect—were indeed implemented in the wake of the oil crisis that gripped the world in the 1970s.As mentioned already, these reforms relied on large across the board tax cuts which grossly favoured the rich. These tax cuts were meant to spur investment which would lead to higher employment, increased aggregate demand and hence rising economic growth.
The state of the global economy since the rise of neoliberalism shows that this chain of thought has failed miserably. Not only has the world witnessed extreme levels of inequality, the global economy has also become more susceptible to economic downturns as evinced by the Asian crisis in 1997 and the Great Recession of 2007.
In fact, attempts to tackle the recession of 2007 once again relied on tax cuts to ‘boost’ investment and on favouring of the rich. This was witnessed by Barack Obama’s support of Wall Street and large banks in America as one of his first acts as president.
The outcome of these attempts has been to further increase inequality in the world. America’s median income owner was indeed worse off in 2016 than in 2007, while the wealthiest one percent saw momentous increases in wealth.
History has proven the trickle-down effect myth to be false. We must instead chalk out a path towards economic prosperity that prioritises income equality and does not oppress the less privileged
All this highlights that the trickle-down effect is in fact a myth which neoliberal policy makers use to perpetuate global income inequality. The idea that wealth will find its way from the top to the bottom has proven false, and neoliberal policy failed to ameliorate the economic woes of billions around the world.
Neoliberal ideology has also forced economically struggling nations to adopt policies of ‘austerity’ in the false hope that this will lead to improvement. These austerity measures take the form of tax cuts and low government spending to balance the budget. We saw this in the wake of the debt crisis that rocked Ireland and Greece. In Spain’s case as well, where unemployment hovers at twenty five percent, the EU and the IMF have advocated the use of austerity measures to improve the country’s economy.
These austerity measures are a fundamental tenet of neoliberal ideology and are in fact designed to remove the use of fiscal policy as a tool to improve the lives of people. Austerity measures force nations to reduce public spending, which mostly takes the form of budget cuts for social welfare reforms.
Greece once again serves as an apt example where the nation was forced to cut back on its extensive pensions program in order to ‘balance’ the budget. When the nation resisted, the EU and the IMF threatened to withdraw Greece’s bailout package.
We must strongly question the direction today’s economic theory is taking which relies on false myths to perpetuate income equality. This is especially true for developing nations like Pakistan which are looking to improve their economic standing.
History has proven the trickle-down effect myth to be false. We must instead chalk out a path towards economic prosperity which prioritises income equality and does not oppress the less privileged.
The writer is a member of staff and graduated from Aitchison College and Cornell University, USA. He also studied at Oxford University and can be reached at [email protected]
Published in Daily Times, July 26th , 2017.