Remember
how the country was sold the idea of “trickle down” economics? “Oh, if we just
give the wealthy more, they will create wealth for the poor and middle classes
by increasing spending, investing in new factories, hiring more workers, etc,
etc, etc.”
In reality, after over 30 years of trickle down, or “supply side”
economics, we are looking at just the opposite: the rich have gotten richer,
and middle class incomes have stagnated. Now, even some in the financial
community are admitting that trickle down economics is a failure.
According
to an April 17 story on Bloomberg.com,
While the wealth of American households has jumped more than $25
trillion since early 2009 amid rising equity and home prices, the
pass-through to consumer spending is lagging the $1 trillion fillip
that would have been anticipated historically, according to Michael
Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
One reason for the adjustment may be that those enjoying gains
in wealth are already rich, so have less propensity to increase spending
incrementally.
That’s
a polite way of saying, “The rich are getting richer, but they already have
everything they want and need, so they’re not spending much of their new
wealth.”
This
past February, Harvard Business Review blogger Andrew
O’Connell made the following observation:
Since the end of the recession in 2009, inflation-adjusted
spending by the top 5% of U.S. earners has risen 17%, compared with just a 1% average rise for everyone else in the country, according
to The New York Times.
So
you might be thinking, “Doesn’t that prove that trickle down works, if the
wealthy are spending more?” The answer is “no,” and here’s why.
The wealthy can’t spend enough for trickle down to work.
Of
course wealthy people buy more things, and more expensive things, than the rest
of us do. But there’s still a limit to what they buy. And there just aren’t
enough of the wealthy out there for the things they buy to make a difference
when it comes to boosting the economy through consumer spending. Take the
example of a toaster.
There
are, according to the LA Times, 132,000 American households
with a net worth of at least $25 million,
excluding the value of their homes. Let’s assume, for the sake of using
round numbers, that each of those families owns ten houses, and in each house
they have two kitchens. Now suppose that they all decide to buy top of the line
toasters for each of their kitchens. They will purchase 2,640,000 toasters. A
nice temporary bump for toaster production. But those families are not going to
buy 20 new toasters every few months, even though they can.
In
2010, there were 63 million American households that earned between $25,000 and $100,000.
Many of those households may need new toasters, but their money is already
tight, so they make do with their old toasters. But suppose that, through a
different tax structure or an increase in wages, those households all saw
increases in income. If even half of them took some of their new income and
used it to buy toasters, then toaster producers would see a 31.5 million unit
increase in toaster sales.
That makes the 2.6 million toasters purchased by the
rich pale in comparison. When you consider that not all of those households
will buy new toasters at the same time, what you wind up with is sustained
growth in toaster sales, leading to increased production, leading to more jobs,
and so on. So, who are really the “job creators?”
That
example is very simple, but it illustrates the buying power of the middle class
— IF they have the money to spend. That buying power has been steadily eroded
over the past 30 plus years of Reagan’s trickle-down economics. Add to the mix
the offshoring of jobs, a move from a manufacturing economy to a service
economy, and a tax structure that favors the wealthy.
The middle class has
watched the failure of trickle down from the time it started. Now at least some
in the financial sector are starting to see it as a failure as well. When will
Republican politicians stop worshiping at the altar of trickle down? Don’t hold
your breath while waiting.
Author: Wes WilliamsWes
Williams is a lifelong political junkie, stuck in the red end of blue Delaware,
where he lives near the beaches with his wife of 33 years and three cats. While
politics of all sorts are his passion, he is particularly interested in issues
involving labor, education, and the justice system. Follow Wes on Twitter at
@WesWilliams_AI or on his Facebook page, LeftOfLiberal.