Trickle down theory is an economic concept steeped in the belief that the economy will become stronger as a whole if the conditions improve for the wealthiest members within it. According to the theory, those wealthy individuals will then be stimulated to produce more as a whole, a situation that would then benefit the poorer individuals as well. This theory became popular in the United States in the 1980s as the driving force behind the economic policies of President Ronald Reagan. Critics of the theory believe that it only increases the disparity in wealth between the rich and poor.
When a nation's economy is suffering, there are many contrasting theories on how to rally that economy from the doldrums. The trickle down theory is a somewhat controversial one because of its counterintuitive nature. Instead of attempting to directly boost the fortunes of the poor, the theory instead posits that any direct economic stimulation should benefit the wealthy. Their good fortune, according to the theory, would then filter throughout the rest of the economy, or, to put it another way, trickle down to help the poor.
The proponents of trickle down theory believe that, by boosting the fortunes of the richer members of the economy, those people will then be inspired to pour that extra wealth into the economy. This stimulation is achieved by tax breaks for the wealthy or by providing incentives to encourage entrepreneurship. When this occurs, according to trickle down theory, these wealthy individuals may then pass that wealth indirectly on to the lower rungs of society. For example, a business might increase its operations and need to hire more, or it might produce more, allowing it to lower prices.
Much of trickle down theory is based on the laws of supply and demand. It follows the work of certain economists who believe that a stagnant economy can be boosted by increasing the supply side. The theory goes that people are still willing to work in a recession, which means that they are trying to earn money and, thus, still have a demand. Hence, increasing the supply would give these struggling workers a chance to meet these demands.
This theory flies in the face of the one that says that a lack of demand is actually the problem for an economy. Critics of trickle down theory don't believe that helping the rich is a way to help the poor. They believe that it just makes the rich get richer because they can simply keep the extra wealth instead of pumping it back into the economy. Worse yet, according to trickle down critics, the wealth then stays within rich families through inheritance, thus perpetuating the disparity of wealth throughout future generations.