Trickle Trickle Little Dollar
There's this story floating around these days that goes something like this: "If the rest of us will just leave the rich alone - don't tax them, don't regulate their business activities, don't force them to pay a minimum wage or cover employee benefits, etc. - then quite naturally, almost as if it's a force of nature, the 'excess' wealth they accrue will flow down to the rest of us like mana from heaven and we all will live happily ever after." Or, another version of the story - a much more threatening one - says: "If we tax the rich, or regulate the rich, or do anything that lowers their bottom line, then they will stop creating new jobs and, if we keep it up, then they'll ship what few jobs that remain overseas." And the title of this little economic story, whatever version is told, is: "Trickle-Down Economics". Catchy title, isn't it? And its moral seems to be: "The richer we allow the rich to be, the better off all of us will be".
And so, we have to ask, is there any truth to this story? Does the world of economics really work this way? What do history and common sense have to say about it?
Before digging into this stuff, however, I'd first like to provide a little real-world math problem with its solution. I can then use the problem as a sort of illustration during the next part of the discussion. Here it is:
"As a direct result of Samantha's labor, her employer takes in $80,000 per year. As compensation for her labor, Samantha's employer provides her with wages and benefits that amount to $60,000 per year. In addition, her employer pays expenses of $10,000 per year to provide Samantha with the workspace, materials, and everything else she needs to do her job. How much, therefore, does Samantha earn each year? Answer: Samantha earns $80,000 per year; out of this, her employer keeps $10,000, after expenses, for 'giving' Samantha a job."
Hmm, sounds to me like Samantha is the one who is actually producing the "excess" wealth, and the direction that excess wealth "trickles" is from lower to higher - nothing really "down" about it. Granted, Samantha's employer does indeed provide her with the job that produces this wealth; but the fact that her employer provides the job has nothing to do with the direction the wealth flows. And so it appears to me, based on common sense alone, that trickle-down economics (at least when it comes to employers and employees) is more a fairy tale than it is a factual story. After all, if Samantha wasn't earning enough money for her employer to take a share, Samantha wouldn't have her job in the first place.
But there's more to the story of trickle-down economics than just the employer and employee relationship. There are also the matters of taxing the rich, and regulating business operations and activities, and requiring employers to do things like pay a minimum wage, or provide employees with health insurance, or provide other benefits. If we allow the rich free reign in those areas, wouldn't the result be a better, more secure economic life for all of us? So, let's look at each of these things one at a time:
Taxing the Rich.
During the 1950s and 1960s, a period that most would agree was the most prosperous in American history for the majority of Americans, the wealthiest Americans paid income taxes of up to 91% (ninety-one percent - that's no typo)! In addition to high tax rates for rich individuals, corporate tax rates were also about two times what they are today. And yet, unemployment rates during that same period were as low as 3.4% and as high as 7%, but hovered mostly in the 4% to 5% range. So, is there any truth to the idea that making the rich pay higher taxes will destroy the economy and destroy jobs? I think the 1950s and 1960s make it pretty clear that the answer is NO! (I think a key factor to the prosperity of this period was in the fact that middle-class wages were high and taxes, comparatively, much lower than they are today - not only income taxes, but also payroll taxes such as Social Security and Medicare. The lesson the 1950s and 1960s teach, I think, is that a prosperous and growing Middle Class is the key to a healthy economy.)
Regulating Business Operations and Activities.
I think we only need look at the current world economic crisis to see that lack of regulation can lead to economic disaster, because there are, always have been, and always will be people who will exploit any situation for personal gain. And when the government does not make potentially destructive or dangerous activities illegal, then the group of people who will take advantage of that for personal gain is even larger. Common sense regulation of industries is, in fact, a key function and purpose of government, because the purpose of government is to protect the people from those who would harm them, whether those who would harm them are foreign or domestic, and whether that harm is physical, financial, or otherwise. So, would deregulation in fact benefit the American people and the economy as a whole? I think the answer is a clear NO.
Repealing Laws that Guarantee Minimum Wages, Benefits, and other Protections for Employees.
Imagine a world in which an employee has to ask his employer's persmission to marry, to move, or to grow a private vegetable patch; imagine that in this world the employer has the right to kick the employee out of his home, to take as large a share as he wishes of the employee's earnings, to confiscate the employee's possessions, or to sell his employee's spouse, or sons, or daughters. Such a world has existed, and even exists to this day. It's called slavery, and has a close cousin called feudalism.
Imagine a world in which employees are paid so little that their entire families must work in order to just scrape by - men, women, even little children; imagine that in this world if an employee is injured, crippled or even killed on the job, the employer has no obligation toward the employee or his or her family; imagine that in this world there are no laws governing workspace safety, and so employees get sick or die from breathing toxic fumes, or get caught up in and mangled by machinery, or die by the dozens when a garment factory catches on fire and the employer has failed to provide adequate fire suppression or escape routes from the building. Such a world existed not all that long ago in the United States and Europe during the Industrial Revolution, and exists, even today, in some parts of the world.
So, would cutting back on or getting rid of the laws that require a minimum standard of pay, safety, and other benefits to employees really benefit all Americans? I think the answer is a clear and resounding NO!
Is trickle-down economics really the answer to a prosperous America for all of our citizens? Is it true that "the richer we allow the rich to be, the better off all of us will be"?
Time and again, throughout history, allowing the rich free reign has had the same results: the rich get richer, the poor get poorer, the middle class disappears, and - sooner or later - the nation declines. I think it's high time that we, the people, cast off the myth that is trickle-down economics and make the prosperity of ALL Americans the focus of our political, social, and economic policies.
Those are the kinds of policies that make sense.
-Greg, October 2011