MICHAEL KEATING. Trickle down economics and the Emma Alberici article.

The ABC says that their decision to withdraw Emma Alberici’s article was because it represented an opinion for which there is allegedly no evidence.  In fact there is plenty of evidence that increasing corporate profits will not lead to any increase in investment or employment and wages if aggregate demand continues to remain weak.  Furthermore this evidence has been endorsed by the IMF, the OECD and others.  Can the ABC cite anyone or provide evidence to the contrary, other than the ramblings of Scott Morrison and the Business Council?  

The following is a repost of Michael Keating’s article of 18 January, Trickle-Down Economics and a Company Tax Cut.

Despite the evidence of the last few decades that ‘trickle-down’ economics doesn’t work, big business and its apologists in the media are calling for a company tax cut to stimulate investment. The reality, however, is that increased investment is principally in response to increasing aggregate demand. The required increase in aggregate demand in turn requires less inequality and faster wage growth, not bigger business subsidies.

The two outstanding facts regarding the developed economies in the 21st century are:

  1. Economic growth has been very sluggish over almost two decades, and since the global financial crisis economic growth in the advanced member countries of the OECD has averaged less than half the annual rate of the previous quarter century
  2. Income inequality has risen in almost all the developed economies for the last 30 years or more.

In our forthcoming book, Fair Share, which will be released at the beginning of March, Stephen Bell and I show why these two central facts are connected. Nevertheless, big business and its spokesmen in the Business Council and media organisations, like the Australian and the Australian Financial Review, are busy trying to persuade us that a company tax cut is the solution to slow growth, and that the benefits will trickle down.

The argument by these apologists for self-interest is that a company tax cut will increase the incentive to invest, leading to an increase in investment, which will create more jobs, and that will eventually trickle down into higher wages. Put simply, they are asking us to believe that we all win from a tax cut for the rich, and we shouldn’t worry if some win by more than others and if those who are most disadvantaged must wait longer as well.

In a forthcoming article (based on our book), Stephen Bell and I show that at some times in the past, some economies have been “profit-led”, but the more common experience has been that an economy’s aggregate demand is “wage-led”. ‘Whether an economy is wage or profit-led, depends on structural fundamentals in a given economy: comprised mainly of the relative contribution of key sources of aggregate demand (consumption, investment and net exports), as shaped by structural economic factors including labour market dynamics, the distribution of income, the propensity to consume or invest, and the relative size and sensitivity of exports to costs, such as wage costs’ (Bell & Keating, forthcoming). We argue that these structural economic factors can change over time, perhaps flipping a given economy from being wage-led to profit-led and back again. In recent times, however, the economies of most OECD member countries, including Australia, have been wage-led, and in these circumstances, any further shift in the income distribution towards greater inequality can only further impede economic growth.

Furthermore, our findings are independently supported by the two most significant international organisations engaged in macroeconomic policy, with the IMF (2015: 7) finding that:

If the income share of the top 20 per cent increases by 1 percentage point, GDP growth is actually 0.08 percentage points lower in the following five years, suggesting that the benefits do not trickle down (my emphasis). Instead, a similar increase in the income share of the bottom 20 per cent (the poor) is associated with 0.38-percentage-point higher growth.

While, the OECD (2014: 2) has similarly found that, ‘Raising inequality by 3 Gini points, that is the average increase recorded in the OECD over the past two decades, would drag down economic growth by 0.35 percentage points per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5 per cent’. As the IMF (2015: 4) concludes, ‘income inequality matters for growth and its sustainability’.

Right now, the reality is that profit rates have never been higher in most developed countries, but investment has been lagging. Increasing the rate of return through company tax cuts is not going to increase investment so long as aggregate demand stays depressed. Instead, the evidence is that the huge increase in profits during this century has been largely returned to shareholders through increased dividends and buybacks of shares. The most extreme example is probably the US where the ratio of these payouts to shareholders from profits has more than doubled over the course of this century. But this increasing failure to use rising profits to create new assets is a common phenomenon.

Two former governors of the US Federal Reserve Bank, Ben Bernanke and Alan Greenspan have each attributed this lack of investment in new assets to a shortage of good investment opportunities, and this shortage is likely to continue so long as aggregate demand remains depressed. In addition, a further explanation for the increase in pay-outs to shareholders is that the remuneration of managers is tied to the share price and managers therefore have a vested interest in increasing asset prices rather than in increasing the amount invested in new capacity. Furthermore, these managers, and shareholders more generally who benefit from higher pay-out ratios, are mostly in the top income groups, so this shift to profits is one of the factors leading to higher inequality and depressed aggregate demand.

In any event, aggregate demand will stay depressed so long as wage growth is depressed, and therefore so will business investment. Indeed, the situation has got worse since the Global Financial Crisis (GFC). Prior to the GFC, many countries were able to escape the low-growth trap caused by lower wages, by increasing household debt, or by increasing their exports and thus exporting their ‘excess savings’. However, exporting your way out of stagnant demand is not a sustainable solution to inadequate demand, as it is only available to some countries, and comes at the expense of others. Similarly, increasing consumer debt is equally non-sustainable, and in fact ceased in many countries following the GFC.

As the Governor of our own Reserve Bank, Philip Lowe (2017) recently commented: ‘The crisis really is in real wage growth’. Pleas for company tax cuts by big business and their media lackeys, on the grounds that the benefits will trickle down, are the height of self-interested hypocrisy. They are not supported by any evidence, not by any authorative commenters who have explored that evidence.


Bell, S. & Keating, M., 2018, Fair Share: Competing Claims and Australia’s Economic Future, Melbourne University Press, Melbourne. This book is expected to be available in bookshops from 1 March next.

Bell, S. & Keating, M., 2018 forthcoming, The Limits of Neoliberalism and the New Demand-Side Imperatives: A Distributional Theory of Sustainable Economic Growth in Capitalist Economies.

IMF 2015, ‘World Economic Outlook: Adjusting to Lower Commodity Prices’, World Economic Outlook, International Monetary Fund Publication Services, Washington, DC

Lowe, P., 2017, ‘Remarks at Reserve Bank Board Dinner’, Melbourne, 4 April.

OECD, 2014, Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? OECD Publishing, Paris.

Michael Keating, AC, is a former Head of the Departments of Employment and Industrial Relations (1983 -86), Finance (1986-91), and Prime Minister and Cabinet (1991-96).


Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations.  He is presently a visiting fellow at the Australian National University. 

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6 Responses to MICHAEL KEATING. Trickle down economics and the Emma Alberici article.

  1. Ian Bersten says:

    It would be very interesting to see the same article but with a chart showing the $ dividends paid to shareholders by the to 300 companies.

  2. mark elliott says:

    pearls before swine i’m afraid.

  3. John Jeffreys says:

    A great article that should be mandatory reading for all journalists and media commentators. Anyone with at least half a brain who has read anything on the effect of “trickle down” economics over the decades would realise it just doesn’t work. What is needed is wages growth. Low wages = low spending = no point investing in extra productivity. A no-brainer!

  4. Peter Phillips says:

    Thankyou Michael for your timely and authoritative intervention and clarification – most particularly against the looming background of the impending official visit to the USA by Prime Minister Turnbull and his clearly-intended plan to seek common cause with President Trump and his administration and wallow in a bit of shared self-congratulation on the legitimacy and merits of top-tier tax relief and its demure hand-maiden, trickle-downism.

    Sadly, though, not quite timely enough to take the pressure off Emma Alberici whose professional reputation remains the unfortunate victim of the combined forces of a Prime Minister who is desperate for a distraction ( ANY distraction) from Barnaby and twenty-seven Newspolls, the typical blustering and brow-beating of an out-of-depth Treasurer, and the sad display of ‘ I- will- roll-over-and- you -can-tickle-my- tummyism’ of the ABC’s CEO.

  5. Don Richards says:

    Thank you for this reasoned article in a world where greed and self serving propaganda seem to prevail .

  6. Malcolm Crout says:

    Triple Down Economics – lol

    Anyone with a very basic understanding of macroeconomics can call BS on the trickle down theory, so that’s hardly news to most. although our politicians are clearly not the sharpest tool in the glove box, so expect more shrieking and nonsense from the group think that masquerades as informed comment out of Canberra.

    The tragedy of all of this, with the exception of the ABC breaching it’s own independent journalistic standards, is that Alberici had the right idea, but with the wrong reasoning. By attempting to discredit the corporate tax cuts as having a drastic impact on the national accounts (i.e the dreaded deficit), she bought into the greatest neoliberal con job being paraded around the western economies.

    A currency issuing sovereign is able to do whatever it deems necessary with taxation to advance their economic policy, despite tax cuts to the top end being a shitty idea while employment prospects are in the toilet. The IMF and other global parasites are even admitting that fiscal austerity is strangling recovery and growth prospects in the western world, which is a far cry from their efforts in the EU of late, but anyone who takes notice of what Lagarde and her cronies said about Greece are clearly oxygen deprived.

    But back to the article. The GFC was an economic disaster visited on the real economy by the financial shenanigans of the FIRE sector who do very little to promote economic growth. Those parasites were bailed out by the Governments world wide and even here in Australia and within a short space of years are back playing the same game, because the perpetrators were never punished. In fact they rewarded themselves handsomely with CEO’s, managers and Boards sucking repulsive amounts from shareholders in their of salaries, bonuses and fees. Talk about a feeding frenzy!

    In Australia a massive fiscal expansion protected most from the GFC despite the doom sayers predicting the Government would be bankrupt. None of these geniuses predictions came to pass although their noise was enough for the fiscal injections to stop too soon and the economy has been bumping along on the bottom ever since. The only reason dividends are high is because of cheap money is sloshing around the globe and that is supporting the casino – sorry, the share market. Just look at the capital losses on Wall Street as the Fed lifts rates for anyone who has deluded themselves into thinking the share market capitalisation levels with continue forever. They won’t and the real correction is yet to happen when the CDO chickens will come home to roost………… again. As the Fed lifts rates, the financial egg heads predict the end of civilisation, but really, where’s the evidence? There is none.

    I notice at his latest soiree with the politicians, Lowe retreated from his early position on low wages enunciated in this article and hedged around the issue completely. How the chamber didn’t break out into hysterics when he lamented about his children being indebted by public spending is testimony to the ignorance around macroeconomics in this country. When the highest level of what passes for banking in this country makes those sorts of idiotic comments I pull out the travel brochure to escape the place. There really is something in the water these people drink!

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