Forget the trickle down, what the UK needs is a midstream economy | Economic policy

As millions of British families struggle to pay food, fuel and rent costs, Liz Truss and her chancellor, Kwasi Kwarteng, have unveiled their economic plan: cut taxes for businesses and the wealthy.

The policies announced in the mini budget – canceling planned rises in corporation tax and national insurance, cutting stamp duty, scrapping the top rate of tax – will put millions of pounds in the pockets of the wealthiest people, not to mention the bankers, who will see the cap on their bonuses removed.

Truss is a strong proponent of trickle-down economics – the theory that if you lower taxes for corporations and the wealthy, it will spur economic growth, which will eventually trickle down to higher wages and higher living standards. for the rest. As Truss said last week, “Lower taxes lead to economic growth, there’s no doubt about that in my mind.”

There may be no doubt in the Prime Minister’s mind, but there is a lot of doubt in the data. The United States has experimented with this type of economy for four decades, and the evidence is clear: not only does it not work, but it causes enormous damage to the economy and to society.

Jared Bernstein, a member of Joe Biden’s Council of Economic Advisers, summarized the evidence against trickle-down economics in a presentation to the Joint Economic Committee of Congress several years ago. Bernstein noted that, if the trickle-down theory were correct, we would expect that when tax rates fall, growth will rise and vice versa. But using data from 1947 to 2015, Bernstein showed in Nope case was it true.

Not only have tax cuts failed to spur growth in gross domestic product, but they have also failed to spur job growth, wage growth, investment growth, or productivity growth. And there have been many periods when taxes were high, especially for high earners, and growth too.

Not only did the ripple effect fail in the US, it failed in the UK and 16 other developed countries. A study by researchers at the London School of Economics showed that over the past 50 years the impact of tax cuts on growth in all of these countries is “statistically indistinguishable from zero”.

Researchers have found, however, an important impact of trickle-down policies: they redistribute income from workers to the wealthy – they lead to a trickle-down effect. A Rand study we participated in shows that decades of trickle-down policies in the United States have redistributed about $50,000,000,000 in wage growth from the bottom 90% to the top 1%.

It turns out that if you massively cut taxes on the rich, and at the same time take away workers’ wages and reduce workers’ power (in “deregulation” and “market efficiency”), it’s really good for the rich.

The trickle-down economy won’t work any better in the UK today. Britain already has the lowest corporate tax rates in the G7, one of the lightest regulatory regimes and seven times more millionaire bankers than any other country in Europe. Too high taxes and too few wealthy bankers cannot be the cause of Britain’s economic problems.

As Truss took the stage at the UN General Assembly meeting in New York last week to promote his trickle-down agenda, Biden tweeted, “I’m sick of the trickle-down economy. It never worked. We are building an economy from the bottom up and from the middle out.

Biden was articulating a different theory of economic growth – a theory we helped create and call an “intermediate” economy. Decades of evidence and policy experience now clearly show that, in reality, growth is generated by those in the middle of the income distribution, from the 10th to the 90th decile.

They do most of the work, saving, consumption and innovation in the economy, and if their finances are sound, the economy will grow and be sound as well. In other words, a robust economy made up of prosperous middle-income families is not a consequence of economic growth, it is its cause.

The policy priority is therefore to invest in the whole working population: education, health care, childcare, care for the elderly, training of workers, affordable housing and good public infrastructure, from transport to broadband. It is also essential to support people with a living wage and sufficient economic security so that they are not economically trapped and can take risks, from starting a new business to making time for retraining.

It is these investments that really increase the productivity and wages of workers. Yet by gouging a huge hole in the state budget, indirect tax cuts do the opposite – they inevitably lead to austerity cuts to essential services and investment.

The Truss predecessor upgrade program was a step towards a conservative version of the middle. But Truss threw that out the window, embracing long-dead theories from the 1980s. These are dangerous times for the zombie economy. The pound is at a 37-year low and a widespread currency crisis is not out of the question as Britain enters a catastrophic loop of high inflation, high interest rates and unsustainable budget deficits.

Tories who still believe in fiscal responsibility and race to the top should work with Labor to end this madness. Growth comes from the middle, not from the top down, and that is where the UK needs to invest.

Professor Eric Beinhocker is Executive Director of the Institute for New Economic Thinking at Oxford Martin School, University of Oxford, and Nick Hanauer is the founder of Civic Ventures in Seattle

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