Forget trickle down, what the UK needs is middle-out economics | Economic policy

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

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

Truss is a deep believer in trickle-down economics – the theory that if you cut taxes for corporations and rich people, it will spur economic growth, which will eventually trickle down into higher wages and rising living standards for the rest. As Truss put it last week: “Lower taxes lead to economic growth, there is no doubt in my mind about that.”

There may be no doubt in the prime minister’s mind, but there’s a lot of doubt in the data. The US has had four decades experimenting with this kind of economics, and the evidence is clear: not only does it not work but it does enormous damage to the economy and society.

Jared Bernstein, a member of Joe Biden’s council of economic advisers, summarised 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 was correct, we would expect to see that, when tax rates go down, growth goes up and vice versa. But using data stretching from 1947 to 2015, Bernstein showed in no case was that true.

Tax cuts not only failed to stimulate gross domestic product growth, they also failed to stimulate employment growth, wage growth, investment growth or productivity growth. And there were plenty of periods when taxes were high, particularly for high earners, and so too was growth.

Not only has the trickle-down effect failed in the US but it has 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 across all these countries is “statistically indistinguishable from zero”.

Researchers have, however, found one big impact of trickle-down policies: they redistribute income from working people to the wealthy – they lead to trickle-up. A study by the Rand corporation that we were involved with shows decades of trickle-down policies in the US redistributed about $50tn in wage growth from the bottom 90% of earners to the top 1%.

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

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

As Truss took the stage at the UN general assembly meeting in New York last week to promote her trickle-down agenda, Biden tweeted: “I am sick and tired of trickle-down economics. It has never worked. We’re building an economy from the bottom up and the middle out.”

Biden was articulating a different theory of economic growth – one we helped originate and call “middle-out” economics. Decades of evidence and policy experience now make it clear that, in actuality, growth is generated by those in the broad middle of the income distribution, from the 10th to the 90th deciles.

They do the bulk of the working, saving, consuming and innovating in the economy, and if their finances are healthy, the economy will grow and be healthy too. Put another way, a robust economy of thriving middle-income families is not a consequence of economic growth, it is its cause.

So the policy priority is then to invest in the broad population of working people: education, healthcare, childcare, elderly care, worker training, affordable housing and good public infrastructure, from transport to broadband. It is also critical to support people with a living minimum wage and enough economic security that they aren’t economically trapped and can take risks, from starting a new business, to taking time out to reskill.

These are the investments that really do increase productivity and worker wages. Yet, by blowing a huge hole in the government budget, trickle-down tax cuts do the reverse – they inevitably lead to austerity cuts in essential services and investments.

The levelling-up agenda of Truss’s predecessors was a step towards a Conservative version of middle-out. But Truss has thrown that out of the window, embracing long-dead theories from the 1980s. This is a dangerous time for zombie economics. The pound is at a 37-year- low, and a full-blown currency crisis is not out of the question as Britain enters a doom loop of high inflation, high interest rates and unsustainable budget deficits.

Tories who still believe in fiscal responsibility and levelling up should work with Labour to stop this madness. Growth comes from the middle out, not the top down, and that is where the UK must invest.

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

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