The Rise of Trickle-Up?

Trickle Up

The one thing most people now agree on is that this global financial crisis is exactly that, that it is a crisis. It is very serious, historically significant in its size, global in its reach and at a time when countries are more vulnerable to global problems than ever before, and with huge potential downside risks.

The response by central banks and governments worldwide has been unprecedented in such a short time frame, with waves of nationalisations and pseudo-nationalisations, deposit guarantees, coordinated interest rate slashing and very significant fiscal stimulus packages.

The appropriate response on a national level is to look hard at everything that can be done. In Australia we are not yet doing everything we can. We have pulled the basic levers so far, a significant cash injection, significant cuts in interest rates to a mildly expansionary setting, some infrastructure commitments and bring forwards, some dilly-dallying about perhaps maybe sort-of going into deficit if we have to, maybe, not promising anything.

I would argue that of concern, though, is that we do not yet have a plan to tell us everything that we could do. It is appropriate for the federal and state governments to start an open process now to identify additional levers that can be pulled and to free up the levers we already know about.

An example of freeing up a lever would be Independent Fiscal Policy. The first step of which would be as simple as the Federal Government asking the RBA what it thinks the next Federal Governments budget deficit should be. This could set the fiscal lever loose from its current and untimely political stickiness.

An example of the identifying additional levers would be altering of the super contribution level. Another might be the adoption as official policy of a trickle-up effect fiscal policy.

A trickle-up effect fiscal policy would entail rebalancing the tax and spend settings to significantly shift money from the hands of savers to those of spenders for at least the short to medium term. It is the opposite of the widely discredited trickle-down effect.

In the Australian context it is the logical extension to the Federal Governments December stimulus package that focused solely on low income earners and pensioners to give the economy an immediate shot in the arm. If giving to pensioners and low income earners is a better stimulus than giving to higher income earners, due to their lower marginal propensity to save, then it follows that to introduce a structural stimulus the spread of the tax burden should be rapidly shifted to favour the spenders.

I should mentioned that the trickle-down effect has been widely panned in the US, its spiritual home. The 2003 Bush tax cuts to dividend tax and capital gains tax were roundly denounced as ineffective by Paul Krugman last year and contrasted very poorly with the growth effects of Clintons increased taxes for higher income earners.

The first policy implication of adopting trickle-up would be to re-jig the next round of income tax cuts scheduled for the May budget to favour lower income earners at the expense of higher income earners.

Delivering the next round of tax cuts as designed by Peter Costello in the gilded age of plenty that was early 2007 is an election commitment by the commitment-committed Rudd Government. But staring down the barrel of a serious recession and the risk of a depression should surely be enough to put its modification or at least tweaking on the table.

What do you think, is it time for the rise of trickle-up? Any other levers we should identify?

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1 Response to The Rise of Trickle-Up?

  1. Fred Argy says:

    I certainly like the idea of a temporary income tax reduction to favour low income earners. I also favour a temporary increase in the much-neglected Newspoll.

    Longer term, structural efficency will need to be looked at again – but not now plesse!

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