Trickle-down or Trickle-up?

I’ve always been skeptical of “Trickle-down Economics”. When government decides to gift the rich, or tax the rich a bit less, why is there any hope that this gift will re-enter the economy and trickle-down to the masses?

When Bill Gates, Warren Buffet or General Electric, get this nice little bundle of money, what do they do? 

In the case of Bill Gates, or Warren Buffet, they haven’t been sitting around hoping that they would find an extra few million from the government in order to make an addition to their house, buy that fifth or fiftieth sports car, or to expand their businesses. That extra million goes into a bank account. If that bank account is offshore, then the money has exited our economy. Given tax laws, and the current trend for the USD($), offshoring is the preferred option. If the money is saved onshore, it may end up in a fund or an investment. Unfortunately, most investments won’t directly, if at all, lead back to the actual vehicle of investment, helping it expand, hire new workers, or create new products. That money goes to, mostly, a handful of already millionaires, who, like Bill and Warren, aren’t waiting eagerly to spend it on anything the American worker is likely to benefit from. (What benefits the American worker is when a new bridge is built or a massive transportation initiative like a high speed rail system or a job boom like the Dot Com craze).

In the case of General Electric, the subsidy, the tax break, and other gifts, rarely make it to the employees of GE, unless they are executives. In fact, in most cases the extra cash gets passed along as a bonus to an already multimillionaire exec or as a dividend to the shareholders – and given that the average American worker doesn’t have a huge stake on Wall Street, except in the form of retirement investments, virtually none of the dividend “trickles down”, and makes it into the pockets of the average Joe. And to make matters worse, there is extra pressure on GE to maintain and beat profit levels and to do so in any way possible, which includes moving jobs overseas, and keeping as much cash as possible, in offshore accounts.

What about “trickling up”? I firmly believe that when the masses have a larger income, then the money trickles up to and through companies, small and large, to the Gates and Buffets and GEs. Think about it, if the masses can’t afford to purchase products, whose left to pay for the products that need to be sold to make these rich folks rich? There’s only so many of them rich folks and they can’t just make each other rich by becoming their own cross-customers.

And keep in mind that the most recent boom, Dot Com, was primarily driven by R&D that was subsidized by the government, decades before, and it was finally the rush of ordinary people, who, in the 90s had enough of a disposable income and disposable time to get online and access all sorts of data that fueled the boom happen. (Let’s not forget that it was B2C, before B2B). Netscape, Altavista, Hotmail and the likes, targeting the end-user, made it possible for Amazon, EBay, Webvan, eTrade, Pets.com, etc. to take money from the masses and trickle them up.

Now, it’s hard to see this happening during a “wartime” economy, where Homeland Security spending and other defense related expenditures create wealth at the top-end and compete with (and stifle) all other spending. However, keep in mind that this wealth, or the money that fuels this wealth is money that is being printed arbitrarily, and is a loan from our children and grandchildren who ultimately will have to repay it as taxes (if there are jobs available, despite the odds). In other words, the multimillionaires from these industries are being paid by a good percentage of our offsprings’ future earnings. You could say it’s trickle-up, but from future masses.

Today, it’s plain to see that despite years of lower taxes and a focus on creating wealth at the top-end, we have seen an erosion of the middle-class and now, a spike in home foreclosures and a dip in home-ownership. Despite the ever-increasing size of the Forbes or Fortune Billionaires list, the past eight years have brought more poverty and lower incomes to those in the bottom 99%. 

For tangential reading, you might be interested in the following. I will address this in more depth later.

RGE – Capitalism and Skepticism.

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~ by mz on September 22, 2008.

One Response to “Trickle-down or Trickle-up?”

  1. Given the proposed bailout of the financial sector, I wonder who should really be getting the bailout benefit: those who erred and are being foreclosed or those who got too greedy and created the mess. More later.

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