Trickle-Down Economics

In economics, there’s a theory called “trickle-down economics”. It goes something like this – since it isn’t possible to know or make changes that can benefit huge number of people, the alternative can be to change policies to make a decent number of people much better off than before. Hopefully, if they are large enough in number, they will spend their extra money in ways that create more jobs for other people. A larger middle class that gets better off buys more discretionary items, eats out more, hires maids and drivers, you get the idea – that’s trickle- down economics, the economic benefits “trickle down” from one set to others.

 

Politicians everywhere understand that this can work in theory. They also understand this is a practical option since it aims to improve the economic situation of a small set, rather than everyone’s condition (which while desirable is impractical). But, in politics, and especially in democracies, politicians also have to worry about 2 risks with trickle-down economics.

 

First, it can be perceived as a policy that doesn’t care about some group – they care about the middle class, not the poor. Such optics can cost elections.

 

The second concern is the trickle-down effect never happens. This concern is best explained via the metaphor used by then-Prime Minister, VP Singh in a discussion with Montek Singh Ahluwalia:

“Montek, what we need is growth that falls like the rain on the mountains and flows down in streams to the valleys and plains below, not growth that is like snow, which sticks to the mountain tops.”