Why trickle down only trickles

The Thinker by Rodin

We have more than thirty years of evidence that giving more tax cuts to those that don’t need it has hurt the economy, not to mention hollowed out the middle class. Why do so many of us still believe that doing more of what hasn’t worked will make us richer? Are we that impressed by talking suits on Fox News or CNBC?

Let me see if I can clear your head on this. This way the next time you hear this bullshit you can call the person on it. Let’s go through a thought experiment. What would you do with an extra $100, $1000, $10,000, $100,000 and $1,000,000? My assumption is that you are likely of modest means, which is a good assumption because most of us are not in the top 1%. I certainly qualify although since I am nearing retirement and the end of my professional career, unsurprisingly, I am in my peak earning years. According to the New York Times, I am in the top 7%, except when I retire I’ll be demoted to the top 23%.

So if I had an extra $100, I probably would not even notice it. Most likely you would not either. But, if you are of very modest means, you live paycheck to paycheck, and you found yourself $100 richer you would probably spend it. Maybe you would go to Target and buy a few gizmos from their electronics department. If this happens to a lot of people of relatively modest income at the same time over a significant period of time, not only do you get stuff that you want, but more money flows into the economy. Target and Wal-Mart would likely to report higher sales. The extra money might give them confidence to build new stores, or expand existing ones, and perhaps some people will have jobs they might not have. This is one reason raising the minimum wage makes a lot of economic sense. Almost all this extra money by the lowly paid will get spent, which is good for the economy.

With an extra $1000 most people with modest means would probably spend it, or perhaps use it to pay off debt. If you are rich, you won’t notice $1000. It won’t have any more of an effect on your spending patterns than an extra dime would have to someone on food stamps. It goes into an account somewhere and gets forgotten about.

With an extra $10,000 you might do some serious purchasing. Perhaps it would be a substantial down payment on new car. The smart thing to do for those of modest means would be to save it. But most likely it would be spent. A rich person won’t notice it and thus won’t spend it.

With an extra $100,000 you might be able to pay off your mortgage, or all your credit cards plus take a couple of nice vacations. If you are wealthy, $100,000 won’t buy you a new house except maybe in a bad neighborhood of Detroit. In any event you don’t have a mortgage. The money could buy you a super fancy car, perhaps a Tesla. If you are that rich though, then you probably have a Tesla already. You’d likely have a hard time finding the motivation to buy another car, probably because you would drive it sporadically at best, as you have as many as you want already anyhow.

With an extra $1,000,000 most of us would think we would be living grand, but it doesn’t buy as much as you think. You can buy a nice house in a nice neighborhood for cash and maybe afford to pay the taxes and maintenance on it with what’s leftover if you invest the money carefully. You might even have a house built to your exact specifications. That would keep a lot of people gainfully employed for a while. They would take the extra money and spend it elsewhere and where they spent it, those merchants or service providers would see a modest bump in income perhaps. By itself, $1,000,000 won’t have a huge wealth effect on the larger community because it’s just you spending it, and it’s unlikely a hundred people in your area will be similarly fortunate.

That’s what you might do with the money. If you are rich, say Mitt Romney, $1,000,000 goes into your portfolio. Maybe his son Tagg gets a bit larger inheritance than he expected when Mitt passes on. You already have a bunch of houses across the United States. You probably won’t use it to buy another one. It’s not enough to buy a private jet, assuming you don’t have one already. Mostly though Mitt has everything he needs. So whether it’s $1,000,000 or $10,000,000 or even $100,000,000, about a third of his net worth, he’s much more likely to save the money rather than spend it. A lot of it might go into stocks and bonds, which hopefully will generate more wealth, and is essentially another form of saving.

Perhaps with so much money, a rich person would put it into venture capital funds. Venture capital funds exist to fund the next Facebook, because most of the money put into them will be bad bets. It’s that one in 100 that beats the odds that you are hoping to have invested in, so you can snag part of its meteoric growth. Venture capital money is useful to these start ups, and does stimulate some growth, although much of it is ultimately unproductive because most of these start ups fail. Rest assured though that while the really rich people may be investing in some venture capital, mostly their money is not being spent this way. Mostly it is sitting in vaults, often in offshore banks and in stocks and bonds. It’s unlikely to go to a venture capitalist in your neighborhood. It is money that will not trickle down to you or your neighbors.

The basic issue is that there are a relatively small number of very rich people. Mostly they already have everything they need. It’s not that they won’t spend money, but they don’t need to spend a whole lot more of it. They already have estate managers, the freedom to fly to Paris on a dime and stay at first class hotels. Their lavish spending will make life better for those providing these services, but only marginally so, because there are only so many rich people. It’s a safe bet though that Bill and Melinda Gates, for all their billions in net worth, have a hard time spending more than $100M a year for their own personal needs. Most of that will be to maintain the lifestyle they already have, not to make it a bigger lifestyle. After all, there are only twenty four hours in the day, so they can only enlarge their lives so much.

Money sitting in vaults of course just sits there. It doesn’t pay anyone’s salaries or stimulate the economy. It’s all about churning money to buy goods and services. That sort of stimulation is what drives growth. If it’s not spent, i.e. if someone doesn’t use their money over a finite period of time, it has no effect on the economy as a whole. (If a whole lot of people stop spending money, then we get recessions and depressions.) Whereas if you and people of modest means like you have some modest increase in income, you will most likely spend that money. It would drive a lot of growth.

So the “trickle-down” economic theory is actually well named. Just a trickle of the money the relatively few wealthy people have will get spent, which means lots of people competing for those relatively meager dollars. When the rest of us have to compete harder for a smaller slice of the economic pie, our incomes tend to decline. Our labor is cheaper to acquire. Which is exactly what has happened to most of us over the last thirty years if you look at median household income. Our standard of living has eroded because money that used to churn more frequently churns less frequently, often because it got acquired and held by the rich, who mostly don’t need to spend it.

The trickle-down theory was sold as prosperity flowing down to the masses from the rich because they acquire more money and know how to spend it more intelligently. But of course it really does trickle down, and worse most of their new wealth used to be our wealth. The bad news for the rich is that when our economic and social systems fail, they too are swept up in the change. Even the very rich only remain rich while there are systems in place that allow them to spend their money. In truth, the rich are utterly dependent on the system that made them rich, just like us. Just as we all need roads to get from place to place, we need our economic system to enable broad prosperity. And it works as long as prosperity is possible, i.e. all social classes have a realistic expectation that they can acquire more wealth.

Economies actually grow from stability, predictability and generally from the middle class out. Innovation does not come principally from the rich, but from the middle where talent, attention and drive are in abundance. Wise rich people don’t mind paying more taxes to help out the middle class because they realize that the prosperity of the middle will trickle up to them in time. Unfortunately, too many rich people are so caught up in their own puffed up egos that they cannot see this. They think that because a formula worked in their particular case, it will work for everyone.

Money is freedom

The Thinker by Rodin

Americans celebrate freedom. Everyone is free, we proudly proclaim. But what exactly is freedom anyhow? Freedom amounts to being able to do what you want when you want to do it. Based on this criterion, it’s clear to me that some of us are freer that others, and those are people with more money. When you have a lot of money, you have the freedom to go backpacking in Tibet. You are probably not going to realize this particular freedom if you are a product of a single-family household and your mother lives in subsidized housing.

We sometimes celebrate the homeless as free people. Perhaps there is a certain freedom in being a vagabond. You can go where you want but chances are to get there you will have to walk. You had best not walk into certain planned communities, particularly in Sanford, Florida. A George Zimmerman type anxious to try out the Stand Your Ground law may kill you. The homeless are free, but you are likely to frequently go hungry. I understand that the dumpsters behind neighborhood Burger Kings offer al fresco free dining opportunities. Sleep will probably be uncomfortable as you will be outdoors and subject to the elements. You likely won’t be allowed to sleep just anywhere, not even places you would think you would be, like a public park. So be prepared to be rudely woken up at 3 AM and asked to shuffle along, or hauled to a nearby police station and booked for being a vagrant. There you can at least you can get free meals and a warm place to sleep.

For most of us, this freedom is very limiting, and something to be avoided not embraced. In fact, it is a faux freedom. Wild animals have this sort of freedom too, but no one envies them. However, with money freedom becomes tangible. Money can buy you freedom from constant hunger and provide a safe place to call home. With more money it can buy health care and likely keep you out of a whole lot of unnecessary misery. With even more money you can become educated, attract a quality mate and take regular vacations. With yet more money you can take exotic vacations, afford homes in the Hamptons and maybe run for political office.

So in reality freedom is not so much about being free, it is about the how much freedom you can afford to purchase. And that depends on how much money you or your parents have. Consequently, in a nation that values freedom we also value wealth, because the more wealth you have the more freedom you have.

We are also aware that freedom is constrained by law. In many mostly Southern states, your right to vote can be constrained by requiring state issued IDs to be shown at polling places, which curiously affects the poor almost exclusively. Sometimes fewer polling machines show up in predominantly poor neighborhoods as well, making it harder to have your vote count, such as happened in areas around Cleveland in the 2000 election. The consequence of actions like these is to give those with money more leverage to influence laws than those with less money. The rich also have disproportionate resources to influence others politically. This is perfectly legal. In its Citizens United decision, the Supreme Court also asserted something wholly absent in the constitution: that corporations have the same rights as people and can give unlimited amounts to PACs. Unsurprisingly then, our government tends to disproportionately reflect the interests of those with money over those without.

Effectively money not only buys freedom, but also allows some measure of being able to take away freedoms from others. Lately the aspiration that all should have roughly the same amount of freedom has been classified as socialism, a strange assertion for a nation founded on the assumption that all men are equal. Make health care available to all regardless of their ability to pay, and poorer people will effectively have more freedom, but in the eyes of many it is an unearned freedom, thus it should not be allowed.

How does one earn more freedom? If freedom is wealth, it happens through acquiring wealth somehow, which can be hard to do without a good education and the right connections. Some time back I wrote about the rags to riches myth. Yet there was one famous president who arguably demonstrated that it was possible to ascend from rags to riches. He was our greatest president: Abraham Lincoln. He had no formal education and never went to law school, yet he became a lawyer and eventually president of the United States. How on earth do you get to become a lawyer with no formal education? At the time it meant convincing the Illinois Supreme Court, which had only recently become a state, that you were competent to practice law. Honest Abe did it somehow.

Rest assured that Lincoln’s tactic no longer works in Illinois or likely in any other state. If you want to practice law, you had best get a law degree and join the local bar association. That of course will require money, and it’s unlikely some benevolent nonprofit will be giving it to disadvantaged inner city youth. Anyhow, if you can acquire a law degree then maybe the Illinois Supreme Court will deign to let you argue before it. Since Abe’s time, Illinois has tightened its standards on who is allowed to acquire higher levels of freedom, and it is generally doled out only to those with the means. In effect, it has cut one pathway that enabled someone to go from rags to riches. There are virtually none left, but the Republican myth remains that there are all sorts of ways to achieve the impossible.

We have created all sorts of barriers to keep people from moving from one socioeconomic level to the next. If it happens at all, it requires superhuman effort. Few of us are supermen, so we are virtually doomed to fail and we will stay in our social class. This seems to be fine for those who are already have wealth. Indeed, they seem anxious to add additional barriers that have the effect of making it even harder to ascend up the socioeconomic ladder. This is done in the guise of welfare reform, reducing or eliminating subsidized housing, and strict time limits to food stamps and unemployment benefits. The effect is to give certain classes of people more freedom than others and through lowered estate taxes give them the ability to extend those freedoms to their children. It also helps ensure a permanent underclass of citizens and keeps a permanent upper class as well.

The lack of defined pathways to become upwardly mobile feeds resentment and fosters insular behavior, heightening class-consciousness and dividing us as a society. To understand the brouhaha in Wisconsin, one has to look not at the bottom of the income scale, but at its middle and the brazen power of those at the top to push the middle class further down the income scale by lowering their pensions, making them pay more for their health insurance and not allowing collective bargaining. In effect, through legislation the middle class’s freedom and wealth is being moved to those with more wealth. Ironically, this is classified as being part of a pro-freedom agenda. The reaction by a vulnerable but politically important middle class was entirely predictable. It was fed by cluelessness and a sense of superiority of those with wealth that they know better. Mostly it is due to a fundamental unwillingness by those in power to understand the connections that implicitly bind us.

Some of the wealthy understand this connection. They know that their wealth is predicated on keeping the other 99% hopeful for a more prosperous future. They understand that marginally higher taxes on their income are actually an investment in their prosperity. Moreover, the smartest ones understand that for society to be stable there must be viable economic ladders to move between all financial classes. Most of those ladders have disappeared, mostly between the lower and middle classes, but also between the middle and upper classes. These ladders do not appear magically, or they would exist now. Instead they must be constructed by civilized society. While capitalism helps provide the wealth that makes these ladders possible, they do not occur from largess, but are a result of government.

In truth, upward mobility is what truly drives growth and by extension wealth and freedom. It is in the best interest of the rich to empower the poor and the middle class so their talents can be maximized for the benefit of society. For when that happens, rather than wealth trickling down from the moneyed, it trickles up. All are enriched, all share the benefits of greater connection, and all share in a greater freedom. It is a formula that worked well for America until it was abruptly changed with the election of Ronald Reagan. To become great as a country again we must rebuild these economic ladders. The decline of our country will be marked by the day when we deliberately destroyed these ladders of hope and opportunity.