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Trickling the Economy Down

Clay Bennett
© Clay Bennett

A must read article on Juan Cole’s website by Anthony Orlando points out that not only has the theory of trickle down economics been completely disproven, but there never was any evidence of it. A quick look at the historical record shows that.

Economists at the International Monetary Fund looked at 140 countries over 60 years, and “consistently found that countries with less inequality experienced stronger, more sustained economic growth and fewer, less severe recessions.” The reasons for this should be obvious. Workers are also consumers. The economy is a tight loop — as workers earn more they spend more, which grows the economy for everyone, both the rich and the poor.

Even the rich know this (or at least some of them). As one wealthy entrepreneur put it, “an ordinary middle-class consumer is far more of a job creator than a capitalist like me. [...] Anyone who’s ever run a business knows that hiring more people is a capitalist’s course of last resort, something we do only when increasing customer demand requires it.”

The simple fact is that as income inequality between the rich and the middle class grows, the economy struggles. That’s right. Not only does the money NOT trickle down, it makes things worse for everyone, including the rich. Ironically, another study showed that in countries where there is greater income inequality, the rich are less healthy and less happy.

Reducing income inequality means fewer boom/bust cycles as the rich chase investments, less spending on “guard labor” (police, prisons, factory supervisors), and more spending on infrastructure (health, education, research and development, safety).

But the worst thing about out-of-control income inequality is that it makes the 99% feel like they will never succeed — that the game is rigged against them. So the theory that extreme inequality motivates the middle class to try harder to get rich is completely backwards.

I agree that too much income inequality is a bad thing. But we also know that complete income equality (where everyone earns the same, no matter what they do) is also a bad thing. So, is there a magic number for income inequality that maximizes the outcome for the most people? My gut feeling is that there is not a magic number. The real goal is to maximize equality of opportunity, not of income. If everyone has the same chance to succeed, that is the best situation. So make things like education and good health care affordable for everyone, then let people like Steve Jobs and Elon Musk earn as much as they want or can.

After all, isn’t that the American dream?

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9 Comments

  1. Hassan wrote:

    Your last paragraph is very important. We cannot obtain absolute income equality without being unjust to some/many. The system should be fair for all, and some may end up getting rich and some may end up poor.

    We need to explore why there is such drastic income inequality in America. I can think of following reasons:

    1. Half free market. Government should stay out of market (except enforcing fundamental principles). But also market should stay of government. The businesses and rich has too much influence on government to make laws favor of them.

    2. Sick combination of capitalism/socialism. Similar to point 1, rich/big corporations get bailed out (socialism) while middle/poor class is told to own up to their mistakes.

    3. Welfare programs inefficiency. Seems like these programs do not get people out of poverty for generations. It seems like they are designed to permanently keep people poor instead of educating/training people with assistance to get them out of poverty or at least next generation.

    4. Banking and interests, usury is forbidden in all major religion, it is a trap people never can get out of

    Thursday, December 19, 2013 at 7:59 am | Permalink
  2. Iron Knee wrote:

    Hassan, I agree with you wholeheartedly, but you have to be careful with your points. Your first point says government should stay out of [the] market, but regulation of business by government is absolutely required. You make that point yourself in #4 — where things like usury need to be illegal.

    Thursday, December 19, 2013 at 8:40 am | Permalink
  3. Hassan wrote:

    IK, yes the fundamental principles need to be enforced, like no cheating, no monopoly etc.

    Thursday, December 19, 2013 at 8:43 am | Permalink
  4. PatriotSGT wrote:

    I agree with you both on this one. And to Hassan’s #1 and IK response -I don’t think the Gov’t should pick market winners or losers, simply regulate and enforce the laws. That to me means stop subsidizing all the markets including banks, oil, cars, ethanol, solar panels or milk. Let the markets operate independant while government enforces the rules of fair competition. There should also be no subsidized entity allowed to contribute any money to any political party, becasue its a kickback in my book. Also the government can and should invest in research, but just not manufacturing, private venture capital should be for that so we stop picking winners and losers.

    IK- I also like what you wrote “:maximize equality of opportunity, not of income”. That is exactly right. Now exactly how do do that is a debate for another post.

    Hassan – I agree with #3. In the history of their existence they have not helped the poor rise above poverty. The unintended side effect of welfare is creating a subservient class dependant on governemnt assistance. Long term aid IMO creates a mentality of “I’m not good or smart enough” to do this on my own so I won’t.

    Thursday, December 19, 2013 at 12:19 pm | Permalink
  5. Iron Knee wrote:

    PSgt, it is too easy to say things like “the government should not subsidize any markets” or “the government should not pick winners or losers” but the reality is not so simple. Are you saying that the government should not pay for roads, since that subsidizes the auto industry? Or how about how emergency response to disasters like hurricanes subsidizes the housing industry (not to mention the income tax deduction for mortgage interest). You of all people should realize that the military strongly subsidizes many industries. Beyond that, there are what economists call “externalities” — paying for education subsidizes high-tech industries, and paying for health care subsidizes companies that pollute.

    The reality is that our government has a strong interest in seeing that certain industries succeed, including those that contribute to national security. It also has an interest in seeing that certain industries do not succeed, for example industries that would cause important species to go extinct.

    What annoys me about the “government should not pick winners or losers” is that it is almost exclusively said by people when the government is subsidizing something that they think shouldn’t be subsidized. But the same people are silent when it is subsidizing something they like. Pure hypocrisy.

    Thursday, December 19, 2013 at 3:11 pm | Permalink
  6. David Freeman wrote:

    I’d be interested in the basis for PTSgt’s statement, “In the history of their existence they (welfare programs) have not helped the poor rise above poverty”. Certainly welfare programs have not eliminated poverty, but to say that they have not helped many poor people to rise above poverty seems far fetched to me. Social Security pulled many desperately poor elderly out of the worst levels of poverty overnight. Much of welfare is targeted to children and the elderly, neither of whom are in a position to be independent. Personally I haven’t seen much evidence that any large percentage of the poor are being held back by low self-esteem resulting from welfare assistance, especially since so many are children, elderly or disabled.

    As to “maximize equality of opportunity, not of income”, I don’t believe it is even remotely possible to maximize equality of opportunity unless the larger disparity of income is also addressed. Studies and common sense indicate that children do not learn as well on an empty stomach. School lunch programs (welfare) is a very logical but small step to equalizing opportunity. Public education would perform the same service except that rich neighborhoods can afford better schools and wealthy folks can afford even better private schools than the better public schools. How can we have equality of opportunity without equality of opportunity to learn?
    Finally, inherited wealth maintains inequality of opportunity across generations – even Warren Buffet knows that.

    Personally I think current levels of welfare are the least we can do. We should do more like providing advanced education, whether college or training, to all our children. We should improve funding for our poor schools dramatically. Healthcare should be a right rather than a privilege even if that means my wife, a doctor, would make less. Taxes should be more progressive like they were after WWII.

    I hope I didn’t sound too strident. I do not want to leave the impression that I do not respect the other opinions expressed just that I do disagree with some parts strongly.

    Thursday, December 19, 2013 at 5:37 pm | Permalink
  7. Iron Knee wrote:

    David, I fully support “equality of opportunity to learn”, including making sure school children aren’t hungry. And as I’ve said many times in the past, I would raise inheritance taxes dramatically (over a relatively low base exemption). And I totally agree that we need a strong safety net, especially for those people (children, elderly, disabled) who cannot be independent.

    You don’t sound strident, you sound reasonable and logical.

    I did try to pick my words carefully — I said that everyone should have the same opportunity to succeed. That includes children, seniors, and the disabled.

    The only remaining question might be, how can we structure the social safety net so that it encourages people (other than children, elderly, or disabled) to become self sufficient?

    Thursday, December 19, 2013 at 7:39 pm | Permalink
  8. David Freeman wrote:

    Structuring of the social safety net is not an area of expertise for me so I’m flying by the seat of my pants but here goes:

    Perhaps the question “how can we structure the social safety net so that it encourages people to become self sufficient?” doesn’t need to be addressed until we have a better idea of how big a problem it is. Perhaps if we first address building ‘equality of opportunity’, we may find people become increasingly desirous of self sufficiency. I think belief that the deck is NOT stacked against oneself is motivational. Perhaps inferior opportunity and/or the perception of one’s efforts being hopeless is the problem. My guess is that grossly unequal opportunity is more likely the cause of the intractable cross generational poverty, not some hypothetical unintended consequence of a overly generous social safety net.

    After we have better opportunity for all, then lets see whether the safety net is too broad.

    Thursday, December 19, 2013 at 9:36 pm | Permalink
  9. PatriotSGT wrote:

    David -IK, I’m not saying that our social safety nets havn’t improved the quality of life for many of our needy, it’s just that it is not designed to help them up, just to help them out. By that i mean it is designed to keep them at a level of poverty. I interact with many who utilize our social safety net and the biggest complaint is if they try too hard they lose the net. If they begin to work they get cut off, which is the most ridiculous thing I ‘ve ever heard of. Talk about a disincentive to try harder. SO I think if the enitire program is remade, like Obamacare for example, we can help people up intead of out. We can scale assistqnce to reward effort to improve. We can offer some kind of bonus to people who shed dependence on assistance and stay off. I think there are many creative ways to do that.

    Friday, December 20, 2013 at 12:11 pm | Permalink