Trickle Down is Toxic

Since the 1980’s, part of the Conservative creed has been the belief that greater good would arise from giving our wealthiest even more wealth. The assumption was that it would eventually “trickle down,” to everyone’s benefit. But there’s evidence that the belief was wrong and the creed was harmful.

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The government’s long experiment with “trickle down” economic policies has had one obvious result: it has created even greater inequality of income and wealth. Does it matter? It doesn’t matter to the nation’s wealthiest corporations and individuals, the “1%.” They’ve become even more wealthy. But what’s happened to the other 99%, to the country as a whole?

In 2011, epidemiologists Richard Wilkinson and Kate Pickett published The Spirit Level, in which they examined the degree to which differences in income inequality among the wealthiest nations could be associated with various social problems. They found that greater national income inequality was significantly related to several harmful social phenomena, including
• lower levels of trust,
• higher rates of mental illness,
• greater use of illegal drugs,
• greater infant mortality,
• lower average life expectancy,
• higher rates of obesity,
• lower education scores,
• higher rates of teenage pregnancy,
• higher homicide rates,
• greater rates of imprisonment, and
• lower social mobility.

Pickett and Wilkenson suggest that nations with extreme income inequality might be able to reduce their level of income inequality by acting to "plug tax loopholes, limit 'business expenses,' increase top tax rates, and even legislate to limit maximum pay in a company." However, Pickett and Wilkinson prefer an institutional solution: encouraging the creation and spread of corporations in which employees have a share in ownership and management.

Of course, their analyses have been criticized and questioned. Their responses can be found both here and at the end of their book’s latest edition.

They have just recently published a sequel, The Inner Level, in which they present research indicating how greater inequality also harms people psychologically.

Meanwhile, British economist Stewart Lansley has been busy analyzing how gross income and wealth inequality has hurt national economies. He’s published a book titled The Cost of Inequality about this, as well as several articles (see here, here and here). Lansley supports the view that the increasing inequality of income and wealth in the U.K. and the U.S. is due to their decades-old policies of deregulation, tax cuts and union-busting. Government leaders assumed that giving corporations and wealthy individuals more freedom and more wealth would lead, ultimately, to prosperity for all. Lansley says that the increasing wealth and income inequality actually created three major economic problems:

• In reality, not enough trickled down to maintain demand. Wages didn’t rise as much as production. The effect was a dramatic increase in indebtedness.

• The increased income and wealth enjoyed by corporations and a wealthy minority was NOT used to enhance production so much as to engage in financial speculation and corporate takeovers. This quest for quick profit led to asset “bubbles,” which increased the risk of a financial crisis.

• With their increased income and wealth, corporations and a wealthy minority were also able to increase their political influence and obtain government policies which favored their interests.

What should be done? Lansley says that “the great concentrations of income and wealth need to be broken up – just as they were in the 1930’s.” More specifically, he believes that governments need to add and monitor economic indicators for ratios of pay [going to the top 1%], for the share of profit going to wages, for concentration of income, and for patterns of average tax rates within the population.* For each indicator the government would set a target historically associated with economic stability, and deviations would trigger responsive government actions [presumably like the Federal Reserve does with respect to monetary conditions]. He suggests that nations can reduce their gross income and wealth inequality by also creating “social wealth funds.” He describes these as “collectively owned pools of wealth,” or “public ownership funds,” created on the basis of public sector assets. Lansley notes that social wealth funds could used for direct economic and social investment, to strengthen public finances, to ensure that gains from economic activity are shared by all, and even to provide citizens with dividend payments. He points to the Alaska Permanent Fund as an example of what he means.

Perhaps the strongest voice against gross inequalities of income and wealth is that of Joseph Stiglitz, the Nobel Prize-winning U.S. economist and author of The Price of Inequality: How Today's Divided Society Endangers Our Future. In this book, Stiglitz also identifies specific ways in which the government’s enactment of “trickle down” economic policies itself created national economic problems. As discussed earlier, the “trickle down” approach emphasized deregulation of industries and markets, as well as tax cuts for corporations and wealthy individuals. Our national economy has paid dearly for this experiment, he says:

• Deregulation enabled deceptive accounting, unconventional banking practices and riskier investments. These conditions enabled the rise of financial bubbles, which eventually burst, with devastating effects on the national economy. In their wake, the nation experienced deep financial losses and higher unemployment.

• Reduction of tax revenue, combined with a disdain for government spending, has led to reduced government investment in infrastructure, education and research. Stiglitz maintains that this has amounted to underinvestment in goods and services that benefit all of us.

• Reduced public investments, such as for education, have reduced economic mobility in our population. According to Stiglitz, the children of poor and middle-income families have a lower likelihood of getting a good education than children of the rich. For the nation, that means our population will not be as productive as it could be.

• A large portion of our income and wealth inequality has been due to “rent-seeking.” People and corporations have focused on ways of getting more money from ownership of something, rather than from producing something. Stiglitz says that this focus has increased the prices and fees we are charged for things like medicine, health care, credit cards and cell phone service. He notes that the rates we pay for these goods and services are higher than the rates paid in other countries for the same things.

• Studies which have analyzed economic growth in a range of countries and over long periods of time have found that higher levels of income and wealth inequality are associated with lower levels of economic growth.

• The increased income and wealth of the top 1% of the population has allowed them to get laws, regulations and government actions which benefit them. The remaining 99% of the population often pays the price for that [for example, with more pollution]. But the corporations and individuals in the top 1% will have obtained a lot of concessions to minimize the harm to them.

• The increased income and wealth of the 1% has also allowed them to control information media to their benefit. As a result, there is less trust in the information provided about the economic and political system. That’s bad for a democracy. Voters are supposed to be able to make informed decisions.

• A majority of Americans perceive their economic and political system as favoring the wealthy, and therefore unfair. That perception decreases their trust, and negatively effects their economic and political activity. People are less willing to cooperate. Their cooperation may be compelled by force or threat of force, but having to compel them will diminish their productivity, efficiency and participation. They may be more inclined to agitate outside the system.

The remedies proposed by Stiglitz are basically legislative acts and regulations designed to end the privileges and advantages enjoyed by the nation’s wealthiest corporations and individuals, as described above. It’s a rather long and detailed list. Here’s an abbreviated, partial list of his suggestions:

• in the financial sector, restrict leverage and ensure liquidity, require transparency in derivatives, and limit the interest rates on consumer loans

• there also ought to be some control over international capital flows, especially those involved in short-term speculation

• stop the revolving door between working on Wall Street and working in Federal administrations

• follow a monetary policy which focuses on growth and full employment, rather than inflation

• make bankruptcy laws more debtor-friendly [rather than lender-friendly, as now]

• close off avenues for tax evasion and tax avoidance

• end government “giveaways,” corporate welfare, and subsidies hidden in tax code exemptions

• create a progressive tax code, one which taxes speculation and inhibits the maintenance of an oligarchy [AB: a “caste of the 1%”] with estate taxes

• “tax corporations that operate in the United States on the full basis of the profits they derive from their sales in the United States, regardless of where their production occurs”

• tax pollution

• grant tax credits for private investments that save jobs and save natural resources

• use public funds to increase opportunities for education [of the 99%], especially at public and non-profit institutions

• invest public funds in those areas which historically increased economic growth – infrastructure, education and technology

• ensure that health care is available to all

• strengthen the social safety net

• stop efforts to suppress voting, and make it easier to vote

• enact real campaign finance reform laws

• support labor unions

• create a “Chapter 11”-style bankruptcy provision for homeowners

I don’t know whether these actions will reduce income and wealth inequality and remedy the social and economic harms we’ve experienced, but I think they’re worthy of consideration. I am sure of one thing: recovery begins when you recognize the problem and resolve to stop doing what got you there.


* It could be a good idea for the Department of Labor also to monitor pay and employment rates associated with education levels and minority categories.