Post No.: 0855
Immediately after UK Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng’s libertarian policy of tax cuts for the richest, lower government interference and ‘trickle-down economics’ was announced in 2022 – the markets said ‘no confidence’ by selling the British pound and consequently devaluing it to near historic lows. Low taxation for the richest along with high economic growth didn’t add up – and that was the free market itself affirming that!
Trickle-down economics is a myth. As Nobel Prize in Economics winner Joseph Stiglitz points out – as a result of the 1980s deregulation of wage-setting and financial and labour markets, median incomes have stagnated and the median income of full-time male earners (adjusting for inflation) became lower in 2012 than in 1968, whilst richer people’s incomes rose.
The rich, despite seizing a greater share of economic growth, don’t actually invest as much as they could in either new, innovative or established companies because they tend to buy assets and capture more wealth rather than create more wealth in the economy. They don’t spend in the economy and consume that many goods/services created by others. They only need and want to consume so much of anything every day (e.g. the richest still only eat about three meals per day). They also tend to seek ways to automate their businesses or hire cheaper labour abroad rather than hire local, many aggressively avoid paying their fair share of taxes, and megayacht and luxury hotel businesses aren’t typically your small local businesses for them below to feel a trickle-down effect. Exclusive supercar manufacturers don’t employ that many people compared to manufacturers of cheaper mass-marketed cars too. They therefore don’t create as many jobs as they could, and in turn won’t lift everyone’s incomes eventually, compared to if wealth were better distributed, particularly to those who need to buy things they don’t have.
In fact, inequalities have only widened regarding both earnings/income and capital/assets despite increased net employment rates and economic growth. An increasing number of jobs are only part-time now though. More women work nowadays than 30 years ago, many part-time. (Additionally, while many of these women are fine about this, many who are working full-time don’t get paid as much as equivalent men.) Another trend that has grown is ‘zero-hours contracts’ and so much job insecurity even if one has a job. Some prefer the flexibility but others suffer ill mental health for not knowing whether they’ll secure any work on any given day. There’s no statutory sick pay for self-employed workers hence many will need to work even if sick or there’s a viral epidemic. And trade union power has generally decreased, and thus wage inequality has increased.
Global market forces and technological change (e.g. automation) can contribute to inequalities but it’s arguably not inevitable. Globalisation, cheap labour competition applying downward pressure on already low wages (or increasing the unemployment rate of low-qualified workers) in ‘developing’ countries, and technology changes, have favoured highly-skilled workers and have indeed contributed to inequalities – but less so than changes to labour market regulations since the 1980s, according to the OECD. It’s not inevitable because many countries have experienced the same changes and global market forces but have encountered very different levels of income inequality – due to differences in regulation, compensation, taxation, benefits and other redistributive policies that reduce inequalities (e.g. in relatively high-tax-rate and socialist countries like in Scandinavia, their economies have done no worse, even according to over-simplistic GDP measures, and their citizens are generally happier too, partly because of less social status insecurity directly because of the lower inequality levels in these countries).
Reducing inequality is not detrimental to economic growth or the efficiency of capitalism – greater equality isn’t opposed to growth. The OECD and others agree that more equal economies have robust and healthy economic performance indicators too. Had income inequality remained at the same levels as in the early 1980s (before those aforementioned deregulations) – larger economic growth over the following 30 years could’ve led to GDPs ending 9% higher on average across the OECD countries, according to the OECD.
Some try to morally justify existing inequalities, by claiming that the rich deserve it and everyone else is just jealous – but no one makes it on their own. They benefited from large contributions from all parts of society, like the school and healthcare systems for themselves, their employees and collaborators; and the transport and internet infrastructures to deliver or transmit their goods/services. Previous discoveries by scientists later led to other innovative processes and products that were then lucratively exploited by private businesses (e.g. integrated circuits and GPS, which were R&D funded by, invented by and/or run by public organisation projects and government funds). All rich and poor people alike relied and rely on the welfare state throughout their lives (healthcare, education, pensions, benefits) so it’s naïve and wrong to divide society into ‘skivers and strivers’ or ‘givers and takers’.
Some argue that they’ve paid their taxes to cover all they’ve personally gained when younger for their education and health – but some things are priceless, like a country in a state of fluffy peace, which requires the cooperation of all citizens (business isn’t so easy to conduct in a country that’s in conflict). And some usages are perpetually ongoing, like the use of public roads and infrastructure, a healthy and educated workforce, police and national security. Moreover, the bigger your business, the more you directly or indirectly use and depend on these things to create and maintain your wealth. (You generally pass more pollution costs onto others too.)
Hard work applies to all strata of the workforce, especially those who work long hours in undesirable but necessary jobs to make an economy and civil society work but for relatively little pay. Many at the top didn’t improve the world or create truly revolutionary products that changed everyone’s lives for the better, like telephones or penicillin, but were good at capturing ‘economic rents’ or economic benefits brought in by others. Rent-seeking involves seizing a larger share of the pie rather than making the pie bigger to benefit all, hence no trickle-down effect.
Personal hard work, taking risks, being clever and savvy, are hardly the only ingredients, or sometimes aren’t even required i.e. if you’re lucky or already asset-rich. Many wealthy people do indeed work hard, but only equally as hard and as long as many of those who earn far less than them. A system where £1 isn’t equal to another £1 (e.g. if some private schools or social circles are completely closed off to some unless they have over a certain amount – you can’t get 50% of the benefits even if you have 50% of the money; or it’s easier to make another £1M if you already have £1M compared to if you don’t have anything to start off with) is one not based on rewarding merit and only merit. Evidently, the most intelligent or hard-working people aren’t the richest in society (e.g. Stephen Hawking wasn’t a multi-billionaire). The cream doesn’t always rise to the top. Woof.
Most people agree that inequality should be reduced but not to perfect equality – people understand the need for incentives to work, but not this present gross level of inequality, which can be disincentivising in itself because of the low social mobility since the rich find it easier to get even richer while the poor find it hard to ever get rich in the first place. The disapproval concerns the gross extent of the inequalities and the way this inequality gap keeps widening. If it were mainly about skills and efforts rather than circumstances from birth then social mobility would be vastly higher across the world; but it isn’t. There may be some instances of a trickle-down effect, but if trickle-down economics worked then the net effect shouldn’t be inequality widening at the rates it has.
Many rich corporations in the financial sector had to be bailed out by their governments after the 2007/2008 Financial Crisis, otherwise they would’ve taken the rest of the world down with them. Now just because the rich get richer, it doesn’t necessarily mean every poor person will be dragged up too. Yet the belief in a ‘trickle-down economy’ was the key reason why the UK government opted to go for quantitative easing to save the economy. The government basically printed extra money by the billions (which is, by the way, like a stealth tax for everyone who holds the related currency because it devalues every unit of that currency – similar to how if gold were as common and accessible as grass on this planet then each unit of gold wouldn’t be worth as much compared to if it were rarer (as a tangent, gold is far less rare than grass in this universe though!)) They pumped this money into the financial sector, believing that the banks would use it to lend to businesses and individuals and thus stimulate the economy via a trickle-down effect. But instead, the banks invested this money into assets and private equity, which boosted the prices of assets. And guess who owned the most assets? The already-rich! So they got richer whilst the rest were left behind.
The rich were buying more assets like property, which didn’t benefit local businesses or anyone else. In fact, by doing so, they priced many poor first-time buyers out of the housing market. The government’s ‘Help to Buy’ scheme didn’t boost the supply of housing thus only boosted the prices of existing houses, which again benefited the rich who already owned them. The present middle-classes with property have been okay with this so far, but their children will suffer from this problem.
So the big winners ended up being the already-rich, who got richer – which stretched the inequality gap even further – even though the rich in the financial sector were the chief culprits who caused the crash with their over-exuberant risk-taking! Meanwhile, most of the poor experienced wage stagnation, greater personal debts, inflated house prices, and austerity measures like welfare and public service cuts. The reliance on food banks has increased since, even for vital workers like nurses. We have not all felt the hardships together.
To cut the growing national deficit at the time, the UK government could’ve instead increased taxes on the rich and/or pumped money into the paws of ordinary citizens so that they could use it to spend and thus boost the economy (the low interest rates to discourage saving were already in place), which would’ve been repaid via the tax receipts generated. Post No.: 0293 looked at how spending, wages and economic production are intrinsically linked.
The founding members of the failed football European Super League in 2021 tried to convince the public that it was about trickle-down economics too – make the richest clubs even richer and they’ll promise to help poorer clubs and grassroots football. But what would be far better than giving all the money to the rich so that they’ll ostensibly trickle it down the chain would be to share the money more equitably in the first place.
In short, the fuzzy hypothesis of a trickle-down economy has failed in the real world. Trickle-down economics is political, not scientific, in nature – there’s no scientific theory that shows that helping the wealthy (e.g. by cutting their taxes) inevitably helps raise the living standards of the rest in society (e.g. by increasing employment and wages, and thus consumer spending, and thus government revenues and public spending); and in fact there’s so much evidence that shows that it only increases inequality (like seeing slums or favelas existing side-by-side with the super-rich in many cities).
Woof. You can reply to the tweet linked in the Twitter comment button below to share your own views on trickle-down economics if you’d like.