A Serious Flaw of Trickle Down Economic Thought

The idea of trickle down economics is very simple and its simplicity is one of the reasons it sells so well to people who do not really benefit from it, otherwise known as 99% of the population.  Someone at the top of the economic ladder is given more money than they already have, they spend the money they are given, and the money then trickles down the ladder and everyone’s financial lives are boosted by this spending.  This is sold as a way to stimulate the economy.  Just one (of a few) problem here: what happens if the money isn’t spent?

An article appeared last week noting this problem is not only happening but could be getting worse.  Some key stats from the piece:

One Percenters…savings rate soared to 34 percent in the second quarter of 2012, up from 12 percent in 2007…Higher savings would normally be good for the economy. But not now, when capital is needed to invest in growth and jobs. The One Percenters put 56 percent of their available cash into savings accounts and money markets in 2012 – that’s up from 24 percent in 2007.  They’re investing just 44 percent in financial markets – down from 76 percent in 2007.

This highlights one of the key flaws in trickle down thought.  You can give the wealthy money, but you cannot make them or even guarantee they will actually spend that money.  Take a super-rich person as an example.  Let’s say someone (not naming any casino-owning names) has enough money to just blow $100 million dollars on a presidential election if they chose.  By giving that person an additional (paltry) $5 million dollars, what are the chances that money is spent relatively quickly and put back in the economy to trickle down?  Not great.

By contrast, what if you spread that money out in a new infrastructure project that puts many lower or middle class people to work building something to improve the country (roads, bridges, etc.)?  What are the chances this money gets spent and put into the economy quickly?  Extremely high since these folks are more likely to pay bills and buy necessities with their new earnings.  This is a big part of what happened during World War II as the emergence of the Unites States economy from the Great Depression occurred and government spending levels skyrocketed to levels never seen since that time (contrary to beliefs about the Obama budgets).  People, mostly unemployed, went to work in factories as part of the war effort and the economy healed after such a long downturn.

Another part of the problem with trickle down thought was not addressed when these theories were being born since it was not as much of an issue: where the money is spent.  Just because a tax cut (or corporate welfare) is given in one economy, it does not guarantee that money is spent in the same economy in a globalized market.  If the same person mentioned earlier is given that $5 million, how much does it help the U.S. economy if he travels to Italy and spends it all there?  “Not as much as the planners of the policy were hoping” would be the proper answer.

One last aspect of the article should be noted.  A quote from a supposed One Percenter:

One respondent in the study said “My savings rate has gone up and I’m not spending, which I realize is bad for the economy … but I like having a wide moat around me so that nothing can bother me.”

Remember that we are not to debate the economic disparity between people because that is “class warfare”.  What is it called when someone at the top has built a psychology that has them thinking in terms of moats when protecting themselves financially?  He is thinking along the lines of feudalism but the rest of us are not allowed to point out the problem?  And is it fair to point out that moats were used to keep out and inhibit enemies?  Does this person need to be reminded that his lack of spending is hurting, not his enemies, but his fellow countrymen?  Maybe another question should be asked here.  Are they his enemies in his mind?

I suppose we must remember it’s only “class warfare” if you aren’t rich enough to declare it apparently.