For ages - since the 1970s in the US, to be more precise -
some people have advocated for ‘Trickle Down Economy,’ which will make everyone
have more money by making sure the rich can make more money. The latter will be
achieved by giving them less regulations for their companies (such as minimum
wages or suchlike) and forcing less taxes on them. That is supposed to make
them spend more money which will then lead to more jobs and more money for the middle
class and the working poor. But does it work? Well, obviously not.
Before we get back to the ‘obviously not,’ we have to talk
about the economy as a such and how it works. Every economy on our planet (yes,
even in communist countries) is based around consumption. Or around supply and
demand. Both are essentially the same, because supply and demand (what is
offered and what people want) leads to consumption. What drives economy is
actually the flow of money. As long as money is flowing, as long as we all
consume the goods and services offered to us, economy works. Because we make
the demand and, as workers, we also make the supply. We keep the money moving,
by buying goods and services and by earning the money made by those goods and
services. It’s a huge circle, albeit not the Circle of Life™.
So far, everything is pretty clear, I think. You get money
from your work or through other channels (perhaps through investments, through
the government, through some inheritance) and you use this money to buy goods
and services you plan to consume. Consumption is very important, okay? Because
if companies just pushed goods back and forth, the production chains would
disintegrate and everything would go broke.
With this in mind, we have to ask ourselves the next
question: who is keeping most of the money running as a consumer? Is it the poor?
The middle class? The rich?
Actually, it’s the poor. You see, there’s a lot of poor
people and they usually have to use up all the money they make in a month just
to pay for what they absolutely need (shelter, food, necessary utilities, what
you might call their ‘overhead’). Sometimes, they make less in a month than
they would need just to go on staying alive. What would happen if they got a
little more each month? They’d probably spent it, too. Not because they have no
idea how to keep their money together, but because they’re far from the point
where they can afford not to spend it.
The next-biggest group of consumers are the middle class.
They keep a little money on the side, save it up, but usually with a specific
idea. They want to buy a new car, send the kids to college, or go on a nice
vacation. They might also put aside a little for the ‘bad days,’ but those do
come sooner or later. They pay for their overhead, they can afford a few
luxuries, but they still hand most of the money they make back to economy. What
if they got a little more? They’d probably spent most of it as well. They might
put a little of it in the ‘bad days’ account, but most of it would go back into
economy.
The smallest group of consumer and the only one with a
strange problem are the rich. They only spend a relatively small percentage of
what they make in a month, even though they nominally spend a huge amount, of
course. But they are few and compared to what the rest spends during the month,
all rolled together, it’s not all that much. And the problem they have? There
actually is an upper limit to what you can spend in a month. You see, they’re
not spending so little of their income because they’re all Scrooges. Some may
be, yes, but quite some of them dive into all the luxury they can imagine. They
spend a lot, but they make much, much more than what they spend. And so the
money adds up in their accounts. They would spend more than they have already,
but, oh, it’s the first again, the new money is in the account, the spending is
reset. And this is the group which ‘Trickle Down’ advocates say needs more
money. Think about it for a moment, I’ll wait until you’re done.
In the 1950s, Franklin Delano Roosevelt had a very shocking
plan. He wanted to put a 90% tax rate on the net income of all companies in the
US. Nine out of every ten dollars net income should belong to the state. Was he
greedy? Was he mad? No, he was neither. He was clever.
You see, the net income is what a company makes in a year
after all of their spending has been subtracted. Every dollar they spend on
something, be it resources, personnel, research, machinery, advertising etc.,
does not count for the net income. And that was what he wanted: he wanted the
companies to spend more money, so they wouldn’t have to pay that high tax rate.
How could they spend it? On bonuses at the end of the year. On higher wages for
the employees. On new machinery (which means buying as a consumer from another
company). In new branch offices somewhere else (creating new jobs). On research
and development. Boy, can you leave money in R&D. It’s basically a
bottomless pit in a lab coat. Like this, Mr. Roosevelt thought, they were
investing in their communities. And if they didn’t want to - well, then the 90%
tax rate would allow the communities to invest instead.
He didn’t get the 90% rate, but he did get 70%, which was
also fine. And the tax rate stayed at 70% until the 1970s, until someone told
Ronald Reagan that Trickle Down was a great thing and companies and their
owners needed to be able to keep more money. Until then, economy in the US was
booming, because a lot of money was on the move. Employees were paid well, the
middle class had a solid foundation, the poor were slightly less poor than they
are today. After Trickle Down became a thing, wages went down in relation to
the costs of living. People made less money, people could spend less money.
Production moved overseas, where it was even cheaper. Nobody asked who was
supposed to actually buy the products if nobody in the US could still make
money. Greed ran rampant through the economy, through the management offices
everywhere. Manager wages rose higher and higher as the wages of the actual
employees fell. The job market shifted, people started to work two or three
jobs, just to keep afloat. Not for something extra or some luxury, just to pay
for all the bills and the rent and the food, for their overhead. Temp agencies
sprang up, at first only as a help for employers who needed someone quick and
for a certain time (temporary, which is where the ‘Temp’ comes from), then to
rent your workforce for unlimited time.
Today, the US, where everyone thinks the economy was
basically invented, has a greedy businessman (well, a greedy man who has
managed to tank businesses which should be un-tank-able, such as casinos) as
its president who only looks out for himself and his friends. And people still
believe that Trickle Down will start working right now … or next year … or
sometime in the future.
Wake up! It’s never going to work … unless you’re rich!
