Friday, November 07, 2008

The Trickle-Up Theory

I'm once again suffering from a head cold, which is my excuse this week for being a day late with my post (it's always nice when it's something tangible.) I'm going to just dip my toes into politics this week--I don't quite feel the need to wallow in it at the moment, because I think emotions are still running very high from a historic election and there's just no way to talk about it without someone being unhappy, but this is a bit more generic. Let's talk taxes.

We're all familiar with the "trickle-down" theory of economics, which is the idea that if you set government policies to benefit the rich (including, but not limited to tax rates), they'll have more money to invest in the economy, which creates jobs, which helps the poor make money. The benefits of the rich making more money "trickles down", you see.

But this ignores the basic rule of economics, which I am just now making up: In an environment of laissez-faire capitalism, money always flows from the poor to the rich, just like water always flows downhill. It's absolutely inexorable, because the rich have more money than they can ever spend, and the poor have to spend all the money they have.

This is really pretty obvious, easily supported by everyday observation and common sense. The richer you get, the more money you have, pretty much by definition. Income rises on an unlimited curve, whereas expenses don't--eventually, no matter how extravagant you are and how much you invest, you hit a point where new money you make just goes onto the pile. That money is removed from circulation--for all that it helps the economy, you might as well burn it.

Whereas on the low end of the curve, income matches or exceeds expenses all the time. This is what's known as "living paycheck to paycheck", and lots of middle and lower-class people do it, because there's always a car to fix or rent to pay or clothes to buy for the kids. And that money goes to the makers of the clothes...some of it to the individual workers who make them, who are themselves living paycheck to paycheck and spending money as fast as they make it, but some of it to the owner of the clothes factory, who is not living paycheck to paycheck. Everyone who's in the middle-class is spending money, everyone who is upper-class is hoarding money. Eventually, that money is bound to wind up in the hands of the rich, and pass out of circulation.

So what's needed is, yes, a "trickle-up" theory of economics. The rich need to be forced to get that money back into circulation, through policies that reward investment and punish large accumulations of capital. And yes, this does mean higher taxes on the rich, but the rich shouldn't care about this. That money will always come back to them. The government will spend that tax income to build roads (and who owns the construction companies?), make tanks and guns (and who owns the defense companies?), and aid banking, housing, and other industries (and yes, "industry" generally means someone well-off to own their own company.)

This is not socialism, this is simply tending the garden of capitalism. Farmers don't just rely on rain to water their crops, because they understand that water always flows downhill. They pump the water to where it needs to go. We need to irrigate the middle-class and keep it healthy, because they in turn support the rich on a sustainable basis. The rich can stay rich, but the mindless accumulation of capital is disastrous, in the long run, to the health of the economy...and that means they gotta spend money to keep making it. And if they won't do that voluntarily, then the government should help them out a little.


David Wynne said...

What? WHAT? I thought this was a GEEK blog! You're not supposed to give us well thought out, clearly written essays on political/economic theory!

I want my no money back!

...Brilliant. And I agree whole-heartedly, as well.

Unknown said...

Love the blog. Don't usually post.

You obviously haven't worked much with economics (your tongue in cheek) tone makes it clear you know this.

The problem with your theory is that rich people's money doesn't just sit in the mattress. At the very least it it goes to a bank, which (in normal economic times) promptly lends it out to businesses. The better your banking system the better allocated this capital is. Spend 100 bucks and somebody else gets a hundred bucks. Take a 50 bucks and invest in capital (a machine or whatever) and 50 bucks to pay the person to make it and your economic activity increases (sell the goods at a profit, pay the bank back, etc).
This capital is what allows an economy to function.

(this is a really simple example, most people don't leave their money in a bank, they usually invest in a number of different ways but the effect is similar).

You may not like way that wealth is distributed (personally I'm not thrilled with it); but the accretion of wealth with the wealthy doesn't magically remove it from the system.

But I love your system; narratively it makes for a great story.

John Seavey said...

I'm aware that rich people do, in fact, invest their money; but unless they're bad investors or philanthropists, they tend to invest it in ways that will return all that money to them and then some. :)

Eric Longo said...

your missing the point john!! its THEIR money!!. if someone goes to college, gets a degree in business, goes to wall street and makes a fortune, then its THEIRS. theye made it. no one should be forced to give up what is theirs unless they want to. people have a right to be generous or selfish.

Anonymous said...

You make the mistake that so many people make- you assume that the rich and the poor are always the same people, and that there is no movement up or down.

The truth is that the "poor" normally improve their position upward. You start out working for the Burger Barn, get raises, move into management, or find better jobs.

Look at the list of the 100 wealthiest individuals. Now look at the list 20 years ago. While some people remain on the list, their place in the list varies, and many (probably over half) weren't on the list before.

Oprah wasn't born rich. Bill Gates had advantages, but built Microsoft into a huge paycheck for himself. Ditto Steve Jobs.

So the poor of today, are not the poor of tomorrow. Your argument is based on a false assumption.

But at least you are thoughtful and avoid being dogmatic.

John Seavey said...

But the problem is, you've just mentioned three people and generalized it into an entire concept of "class mobility". Whereas as a general rule, people don't move very much--even on a generational level, it tends to be an incremental shift. The auto worker's son gets enough money to go to college and maybe gets a better job as a result, for example.

But in general, no, if you're poor now, you're going to be poor twenty years from now. Maybe slightly less poor--you'll go from making six dollars an hour to ten, or even twelve, but you're not going to go to sixty or six hundred dollars an hour. The rich do stay rich and the poor do stay poor.

Which isn't automatically enough to necessitate redistributing wealth--as Eric Longo points out, it is in fact their money. But the problem comes when the rich keep getting richer and the poor keep getting poorer, until suddenly the whole cycle is so unbalanced that there's no longer anything in between. That's when someone needs to step in and at least notch the whole thing back down to sane levels, before the poor remember that they outnumber the rich and can beat them to death with sticks. :)

Anonymous said...

Boatman wrote the falsehood, “The truth is that the 'poor' normally improve their position upward.”

This was once true, Boatman, and the people in power exploit the fact that most Americans absurdly believe it still to be true, but any credible economic analysis from 2000 to 2014 has proven that it has ceased to be true for a long time.

The incoming generation will be the first in recent history to have a poorer economic prospect than had their parents.

TheGoof wrote the falsehood, “At the very least it it goes to a bank, which (in normal economic times) promptly lends it out to businesses.”

That may once have been true, but these days, it tends to go into foreign investments rather than into the bank. In other words, the money made off Americans by the 1% doesn't tend to trickle back into the American economy -- it tends to trickle down into the enconomies of those nations where workers die of starvation from tiny wages and where small children go to work instead of going to school.

The 1% are not part of an ongoing economic cycle in the United States anymore : they are now (for the most part) part of a drainage system which transfers the money of the American working poor and middle class from America to other countries.

EricLongo demonstrates complete economic ignorance when he wrote, “if someone goes to college, gets a degree in business, goes to wall street and makes a fortune, then its THEIRS. theye made it”

If someone can get into a good college, it means he or she attended a good school (paid for by ALL OF US), lived in a good neighborhood with an effective police force and effective services (paid for by ALL OF US), ate good food transported to his or her local stores on public highways (paid for by ALL OF US), and had good medical health care (in a system in which the majority attended medical school on government loans which were supplemented by ALL OF US).

If someone makes a fortune on Wall Street, he or she could do so because Wall Street exists thanks to the infrastructure paid for by ALL OF US.

This is not a difficult idea to grasp. All it requires is the basic courage to look past one's ideology at the facts.

And then, of course, there are the many wealthy people who claim they deserve religious exemptions for being allegedly Christian when Jesus Christ Himself quite clearly disagreed with EricLongo's statement about “a right to be generous or selfish” -- according to the Gospels, Christ stated that no one who wishes to call himself or herself a Follower of Christ has any right to be selfish.

But then, as EricLongo could point out, self-serving hypocrisy and insincerity are not illegal.

Note: I love how the capsha for this post is "unpoll sacred"!

Anonymous said...

John, the wealthiest do spend their money in America --

they purchase election wins.

Just look at the Koch Brothers.