As hopefully we all know by now, trickle-down economics is basically a load of rubbish. It has never worked and it never will. If you say something enough times people will start to believe it and that is exactly what government propaganda machines repeatedly told us with regards to the trickle-down theory, “tax cuts for the rich are a good idea, it will encourage large business owners to expand, creating more jobs and eventually their money will trickle down to you!”.
Since the Thatcher and Regan governments inequality has widened and the trickle-down theory turned out to be bogus, here are some of the reasons why:
1. Between 1979 and 2005 in the United States, after-tax household income rose 6% for the bottom fifth of income earners. That sounds great, until you see what happened for the top fifth – an 80% increase in income. The top 1% saw their income triple. Instead trickling down, it appears that prosperity gushed up. (Source: Steven Greenhouse, The Big Squeeze)
2. Taking into account inflation, minimum wage has either gone down or become stagnant since the 80s. If the trickle down theory had worked, business and corporation owners should be paying their workers more. Instead they are just keeping the profits for themselves, increasing wages for the few at the top of the tree. (Source: The Stanford Poverty & Inequality Report)
3. Manufacturing and production has been moved overseas and companies have exploited cheap-labour and taken advantage of the lack of wage regulations in developing nations. They have kept their increasing profits, accelerating their own monetary wealth but no-one else’s.
4. Consumers create demand. Businesses and customers create jobs. When the middle-class find their pursue-strings tightened no amount of spending from the 1% will make up for the loss of income to local businesses from ordinary middle-class consumers.
This model of trickle down economics was actually implemented in the U.S. in the 1890’s under the name horse-and-sparrow theory, implying if you feed a horse enough oats, then it’s droppings will provide enough leftovers to feed the sparrows. It’s a pretty inefficient way to feed sparrows, and predictably we all ended up eating shit.
Ha-Joon Chang, an Economics Professor at the University of Cambridge, has some interesting things to say about trickle-down in Pt 6 of this series entitled 23 Things They Don’t Tell You About Capitalism
To create growth in the economy we need to work from the middle out. And it could go something like this:
1. Preserve and improve the economic institutions that are important to ordinary people such as, Social Welfare, the National Health Service (Medicare / Medicaid in the U.S.) and good quality free Education. It is important to strengthen such institutions to maintain middle-class living standards.
2. Tighten up rules on tax evasion and raise top tax rates. The ‘1%’ have already claimed vastly disproportionate shares of income growth. If you have more, then share it out a little, put it back into society, after all, thats where you got it from in the first place.
3. Raise minimum wage and the salaries of lower-income earners. Shave some money off the top and spread it around at the bottom. The impact in lifestyle for the top earners would be negligible but would make a huge difference for those working long hours for low hourly pay.
What Nick Hanauer has to say on middle-class consumers and their value to society is spot-on. It is worth noting that this little segment was never published on the official TED website as it was deemed too political and would upset sponsors.