Why 'Trickle Down' Will Never Work

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!