Why trickle-down economics should work…and why it can’t.

**I’m not an economist. Nor did I stay at a Holiday Inn Express last night. So, any of my economist friends are welcome to tear me a new poo hole as necessary**

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Trickle-down or supply-side economics is a concept that has always rubbed me the wrong way. It always seemed ridiculous that to “give” richer people more money (in the form of tax breaks) was a better way of helping people economically, as a whole, than any host of alternative options. Note how I didn’t say I thought the theory didn’t work. That came more recently.

For some basic background, here is the Wikipedia entry. Better still, HowStuffWorks did a great synopsis for the lay person. And, if you want to get your economics geek on, there was an interesting discussion on the forum of Wrongplanet.net of all places.

TDE - 02 trickle-down-economics-1

While the links above are filled with solid examples of why the theory should work, here is my own, brief view of it. People with more wealth will want products/services from people with less wealth (i.e. the investment banker buying groceries from the cashier has more wealth – in all probability – than him), or they will hire people with less wealth to work for them in an effort to create profit later on. This leads to essentially a redistribution of the wealth initially injected at the “top” in the form of tax breaks. Sounds simple. Sounds effective.

Why can’t it work? The answer is everyone’s favorite punching bag these days, the corporation (more specifically, large corporations). The investment banker is not buying his groceries from the cashier, he is buying them from a $200 million supermarket chain. If a household only needs to make $166,000+ per year to be in the top 95% of American families, exactly how many of their transactions are going to be with businesses small enough for there to be a “trickle-down” effect?

Yes, I get that large corporations employ people, and those people get paid, and therefore they can see an increase in wealth… but where do they spend their money?!?! Anyplace netting $50,000+ probably qualifies for a trickle-UP effect. One or two more cycles of this, and damn near every penny a person spends is trickling-up, not down. Furthermore, any situation where both the corporation AND the employees are making more than you is a complete reversal of the intent. The most obvious example of this I can think that applies to most of us is hiring a lawyer. Though I suppose the legal secretary may be earning less.

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So what we have is illusory wealth distribution that actually leads to only one possible outcome: greater wealth inequality. Now, if everyone amazingly reversed and only spent “below” them on the wealth chain (mental masturbation here), that would continue until we essentially had 100% wealth equality. I’m not saying that should be a goal. Who knows how the world would fair with every adult living on $51,000/year. Still, splitting money spent 50/50 (above/below) sounds nice, right?

That’s all for now. Next up? Time.


About Chris Fountain

Start small, but think BIG.
This entry was posted in Finances & Economics, Lifestyle and tagged , , , , . Bookmark the permalink.

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