Trickle-Up and Trickle-Down Economics! Ever wondered what that really means? Neither did I, until now! I came across these terms while reading some articles on Mark Cuban. He quoted these terms in one of his interviews where he suggested measures to improve the American economy. It felt intriguing to deep dive into this! So let’s find out!
what is Trickle-Up or Trickle-Down Economics?
Well, Trickle-Down as the term suggests, means something that starts at the top of the pyramid and eventually drips or trickles down to the bottom of it.
Trickle-Down Economics is a theory which supports the ideology that the government should cut tax rates or relax regulations in order to provide more money / capital in the hands of the wealthy people/corporates /big businesses. Doesn’t this sound unfair?
The reason behind applying this theory is that these corporations and wealthy people would spend the excess money / capital in creating jobs, ultimately increasing the purchasing & investing power of people, resulting in increased demand. In a nutshell, these benefits would eventually trickle down to the lower sections of the society.
On the flip-side, Trickle-Up Economics supports the ideology of providing wealth directly in the hands of the lower sections of our society − or the people actually in need of it − so they spend this money to fulfill their needs, thereby creating immediate demand in the country. This in short means harnessing the ability of the lower sections of the society to drive and support the economy.
India's Economic Stimulus Trickle-Up or Trickle-Down?
This got me to think about the recent liquidity boost that was injected by the government to fuel the economy of India. The recent injection of a whopping Rs.20 lakh crores was commendable and much needed. The funding needs of the MSME sector were addressed; measures to improve the lending power of banks were announced; a reduction in provident fund contribution so as to put more money in the hands of individuals; the swift action to address the panic redemption in the mutual fund industry − were some of the necessary measures.
However, various expert economists consider these measures as ways of increasing the supply-side of the economy (Supply-side economics is another term for our fancy phrase – “Trickle-Down Economics”). According to these experts, the implementation of such measures will certainly add to the supply in India, but the consumers currently do not have the purchasing power or the will to absorb even the available supply!
The increased supply created by the liquidity boost may not get fully absorbed even now when the lock-down restrictions are being relaxed, due to losses in income and employment opportunities, and an overall sense of insecurity among people during this COVID-19 era.
Some of these experts as well as journalists have also questioned that why a direct credit of funds from the government to the people has not been considered. Well, these people who support a direct cash-in-bank approach are those who could be called supporters of the Trickle-Up Theory. Their idea is pretty simple that if money is directly credited to the banks of the lower sections of the society, this section will spend more and the increase in demand would subsequently lead to absorption of the current and the increased supply as well.
Keeping all of it in mind if the government was to provide money directly in the hands of people, they might end up saving it, instead of spending. The demand problem would then be unresolved, and the government’s time and money would be spent without even an inch of increase in demand.
Mark Cuban's Solution
In Mark Cuban’s (appointed by Trump as a part of “Re-Open America” advisory committee) interview referred to above, he mentioned that in order to resolve such an issue in the American economy, a “use it or lose it” policy could be implemented.
Basically, cash which would be credited directly to the bank accounts of the public would need to be compulsorily required to be spent, and not saved. As easy as it sounds, the way such a policy could be implemented in America or India or in any other country for that matter, is an interesting food for thought!
The debate on the Trickle-Up or Trickle-Down approach has been going on since ages and could go on for many more years to come. Having said that, I believe it is still early to say that the government does not have anything more up its sleeve. Until then, while keeping ourselves locked down till things get better, let’s keep our hopes up and expect for an improved version of India or India 2.0, so to say.
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