“The health of the economy is correctly measured by assessing how well the wealth is distributed. Human beings have always been driven to create and acquire more wealth and hence people's private fortunes have always grown and will continue to do so - so there's no need to worry about economic growth. Instead, we need to ensure that the wealth is circulating throughout the society and isn't just collecting in the hands of the few.”
This is the fourth post in a series of posts that explores how distribution is the key economic issue that we need to fix - not production. We also looked at why jobs should not be the focus and the errors in the Capitalist mindset. In this post, we take a look at so-called "trickle-down theory" or supply-side economics.
Part 4: What is Trickle-down Economics?
In the first presidential debate of the 2016 US federal election, Donald Trump unveiled his tax plan to cut the taxes of all Americans, including the rich. Lester Holt, the moderator of the debate, specifically asked him to defend his "tax cuts for the wealthy". This was his response:
"Well, I’m really calling for major jobs, because the wealthy are going to create tremendous jobs. They’re going to expand their companies, they’re going to do a tremendous job. I’m getting rid of the carried interest provision and if you really look, it’s not a tax, it’s really not a great thing for the wealthy, it’s a great thing for middle class. "
What Trump is saying is that the true winners of his tax cuts are the middle class who will benefit by the wealthy having more money because the wealthy will invest in the economy and this will create jobs. In other words, the benefits will "trickle down" from the rich to the middle class, hence "trickle-down theory". This idea was originally popularized by US President Reagan as "supply-side economics".
(On a side note, Islam has a very different approach to taxation, which will be explored in the future in sha Allah.)
The idea is essentially the same as the plover bird that cleans the teeth of the crocodile; the crocodile gets most of the meal while the 99% get to pick off what's left on the teeth.
What is really being sold, however, is freedom for the rich: give the rich greater freedom with their wealth and we will all win.
This idea is of course false: the current system is not working out for the 99%. As we previously discussed, 46.4 million impoverished Americans - can't access the 100+ trillions of dollars wealth that exists in the US economy.
How else do we know that this approach doesn't work?
In terms of refuting the concept, the IMF published a report in 2015 that debunked the idea that giving the rich more increases economic growth:
"...if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels."
Although the analysis focuses on the wrong metrics (i.e. economic growth), it illustrates that even from a Capitalist perspective that giving the rich greater freedom over their wealth fails to deliver the goods.
There other problem is the maldistribution of wealth. This post in the Guardian notes that the - "richest 85 people in the world have as much wealth as the poorest 3.5 billion – or half the world's entire population – put together" - as evidence that trickle-down doesn't work.
However, sometimes focusing on facts and figures alone can take away something we know is a reality - we are all worried about our jobs and our prospects for the future.
We only need to look at the 2016 US Federal Election and how people are fueling the fringe candidates because the system is not working.
On the "left", Bernie Sanders attracted many millennials who are "the product of austerity measures, deregulation, skyrocketing student-loan debt, high unemployment and a lack of affordable housing".
On the "right", Trump is seen, despite his proposed pro-rich economic policies, as a non-establishment candidate who champions the cause of poor white Americans.
Of course, I totally disagree with his anti-Muslim, anti-Mexican, anti-minority approach to attracting white voters. But is the real reason for their anger their bleak economic prospects? Regardless of how wrong Trump is, we can't ignore the populist themes he spouts attracts the disaffected. Specifically, he is appealing to the poor working-class whites by promising to be tough on corporations. As Rolling Stone's Matt Taibbi points out:
"Throughout his campaign, he's been telling a story about a $2.5 billion car factory that a Detroit automaker wants to build in Mexico, and how as president he's going to stop it."
(This NY Times article goes into more details describing how Trump's rhetoric has attracted working-class people away from the Democratic party.)
If the economic policies were working out great for the people, such messages wouldn't resonate with the electorate.
Consider Jacinta Mack's story.
She so succinctly describes how the austerity policies implemented by the Clinton administration tore apart her life as a little girl growing up in America:
" When I was younger, my family was on welfare, and Bill Clinton was in office. And they passed welfare reform. We weren’t qualified for food stamps any longer. The monthly money that we got was cut. And then the subsidized housing was also cut. And my mother was required to go out and apply for a certain number of jobs, but she was a single mother of six children and wasn’t able to meet their requirements. We struggled tremendously. And my mother actually became a sex worker."
What the quote doesn't capture, is the pain on her face when she had to admit the reality of the tough choice her mother had to make: feed her family or sacrifice her personhood.
These realities are important to reflect on because it humanizes the stats on poverty (e.g. how the growth of 165 million children were stunted due to malnutrition) and the stats on prosperity (e.g. Forbes list of billionaires). Focusing on stats and graphs alone can obscure the pain and privilege, respectively, that lies behind the numbers.
In the next installment, we will conclude this series by exploring the connection between wealth concentration and the elite ownership of society.