Saturday, June 9, 2012

Why Trickle-Down Economics Never Worked

You still have some hard-core Republicans insisting that millionaires and billionaires need more tax breaks as the sole way to “stimulate” the economy, create jobs, etc.  There are a lot of reasons that this self-serving , trickle-down theory has never worked and will never work. 

To begin with, rich people, by definition, already have more money than they need, or they would not be called rich, would they?  So they don’t need an extra “tax break” in order to afford to hire another butler or limo driver.  Rich people don’t sit around saying, “I hope the government passes that tax break so that I can afford to pay those illegal immigrants to mow my lawn”.  Poor people are the ones who sit at home hoping that there will be a little extra in this month’s check to be able to afford to go to the beauty parlor or get a massage. 

So, generally speaking, rich people can already afford to hire additional servants, or purchase additional goods and services, but they don’t want to.  I mean, after all, there are limits on what a person can consume, and when you’re already rich and have already satisfied all your basic appetites, giving that person a little bit more money will not make it any easier to eat or drink or party more.  When your belly is already full, money will not make more room inside of it.  It won’t make you hungry when you’re already stuffed.  It won’t make you party hardy when you’re already partied out. 
Just to reiterate, since rich people already have more money than they need, giving them additional money on top of what they are choosing not to spend right now, logically speaking, doesn’t seem like a good formula for changing that behavior.  Especially for billionaires, who may not even notice the excess funds, the idea that a small additional pittance from the government will inspire an avalanche of consumption is naïve, to say the least.

See, there are plenty of things that rich people can do with money rather than spend it.  Classically speaking, they can always afford to just hoard it.  It might not be logical to sit on it and do nothing, but psychologically, it may give a sense of “security” to hold onto that money for a “rainy day”.  As the Bill Gates character on the Simpsons said, “I didn’t get rich by writing checks”.  Rich people are still human and, even in their yachts, they too must worry about running aground on unexpected financial shoals.  In fact, in the words of a rather well-known rich person who goes by the notorious initials B.I.G., when you have “mo’ money”, you often also have “mo’ problems”, since you have mo’ to worry about losing. 
After all, it’s actually work for a rich person to hire someone and then have to manage that labor.  If you suddenly give a rich person more money for doing nothing, why should she want to immediately run out and expend a lot of time and effort figuring out what to do with it.  Where is the urgency when you already have plenty, and, for that matter, why work hard when you don’t have to?  Again, this might be what poor people do when they get an extra $50, but it is not necessarily what rich people do, even when they get an extra $50,000.  It is almost as if trickle-down economics is a poor-person’s misconception of how they think rich people are supposed to act. 

Of course, some of the slightly more sophisticated tricklers may be thinking to themselves that only rich people will have enough concentrated money to invest it in things like purchasing a factory, and increasing the “supply side” of our economy.  However, there are such things as stock markets, or a business partnerships, or even crowd-source funding, which allow people to pool their money.  So one does not have to be a single, wealthy individual in order to invest money in ways that grow business production.  For that matter, most businesses do not need to be big.  The vast majority of American businesses are not only small, but micro.  Whereas a small business is often defined as anything up to a couple million dollars, many businesses are started with far less than few million dollars. 

Alternatively, there is a much stronger case to be made for giving tax breaks to non-wealthy or “po’ people”.  Even poor people who might be tempted to save some money for a rainy day often do not have enough money to do that, and are therefore are not in the habit of doing it regularly, just based on necessity.  In the same way that we defined a rich person has having more money than he or she needed, a poor person generally has less money than needed.  Therefore, when a poor person gets money, it is a safe bet that this money will already be spoken for in any number of different ways.  There will be past due bills to pay, and repairs put off, and needs that are crying to be met.  The sense of urgency which was found lacking on the part of wealthy people will be found in abundance among the poor. 

For that matter, there is likely to remain a sense of urgency even among the middle class.  People often live up their means, so people who make more tend to quickly spend more, and may feel as strapped for excess cash as the poor.  It is only after people reach a certain level of affluence, which some have estimated at $80-90 thousand / year in present US dollars that people find they can pretty much afford all the basic wants and needs, and excess money becomes of diminishing importance. 

However, for most middle-class people they had to work their way up and they know what it is to be poor, either as struggling college students, or due to temporary layoffs and unemployment experienced in the past.  Try as some might, many cannot forget where they come from, because they are only one pink slip away from returning to poverty.  Thus, many middle-class people carry with them the mindsets of their impoverished days, perhaps explaining the rampant consumerism, and “live for today” credit card sprees that are all too common, instead of savings, and investing. 

Yet, I would argue that this does not mean that we must only count on the rich for savings and investing.  Indeed, many in the upper-middle class, where all their basic needs are being met, have to do something with that excess money, and they are the ones who are likely to start looking for places to put that money which cannot be easily spent right away.   Furthermore, most middle class people have pension plans which come with their employment, in the form of 401Ks or the equivalent.  The more affluent end of the middle class can probably also afford supplemental plans, Roth IRAs , and a variety of additional investments, including stocks and bonds.  Thus, we do not need to rely on the millionaires and billionaires to shoulder that burden either. 

There are also other reasons that trickle down would be questionable.  Since the time of Pareto, wealth disparities in the 80:20 (wealth to population) range have given way to 90:10 and higher.  This suggests that wealth has not been trickling down for quite some time, and, in fact has been moving the other way.   Even if a poor person gets some money, he or she runs out and spends it at Walmart, owned by some of the wealthiest individuals on the planet.  Even among the rich there is stratification where the wealthiest 1% owns far more than the rest of the top 10%.  The point is not to make any judgments about these people, but merely to suggest that money is more likely to suck up than to trickle down.  

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