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Feeling the Trickle-down effect…Part II

From Adam Smith’s invisible hand to John Rawls’ Theory of Justice to Vladimir Lenin’s New Economic Policy — it’s all trickle-down theory.

As the liberal West loses ground, the rich are getting richer — taking the lion’s share of our reduced rates of economic growth.

By Nazarul Islam

Except that on this definition, almost everyone is a trickle-down theorist. If you see any common good at all in allowing some people to be richer than others, then you’re in the club. From Adam Smith’s invisible hand to John Rawls’ Theory of Justice to Vladimir Lenin’s New Economic Policy — it’s all trickle-down theory.

Clearly, we need a tighter, more technical definition — one that can be ascribed to those who defend the neoliberal status quo. But that’s when you discover that trickle-down theory doesn’t exist.

Google down on “trickle-down” and you’ll get a long list of speeches, articles, tweets and other arguments against the idea. Politicians like Bernie Sanders economists like Paul Krugman, business people like Nick Hanauer (see above) — are all vociferous in their condemnation. What you’ll be hard-pressed to find, however, are arguments in favor of it.

That’s odd because there are all sorts of ideas the Left doesn’t like — for instance, monetarism or libertarianism — that free-marketers are happy to defend. But with trickle-down economics there’s nothing there to argue for. It’s a phantom — the cause of much fear and alarm, but lacking substance.

This is what Thomas Sowell, the economist and social theorist, had to say about trickle-down:

“No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter’s monumental 1,260-page History of Economic Analysis. Yet this non-existent theory has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena… It is a classic example of arguing against a caricature instead of confronting the argument actually made.”

But might there be a real idea advanced by the Right for which trickle-down is simply the Left’s insult of choice? The most obvious candidate is the proposition that cutting taxes (especially on the rich) can increase tax revenues. That might seem counter-intuitive, but it makes sense. There has to be a point at which a tax rate is so high that it disincentives whatever activity is being taxed, while incentivizing avoidance and evasion.

From a revenue raising perspective, the optimum tax rate will therefore be somewhere between 0% and a 100%. If the current tax rate is above the optimum, then cutting it will raise more revenue. This is the principle behind the famous Laffer Curve.

It’s a perfectly reasonable theory — most economists accept it to some extent. To use it to argue for tax cuts isn’t trickle-down economics, it’s just an argument over where the optimum tax rate is (albeit one influenced by ideological biases).

The big problem with the Left’s trickle-down rhetoric is that it misdiagnoses what the Right gets wrong — and it fails to understand what motivates free market ideology.

Trickle-down suggests that the only benefit that most of us get from capitalism is the crumbs falling from the rich man’s table. But why would free marketers subscribe to such a limited view of what their beloved marketplace can achieve?

With some justification, what they actual believe is that economic liberalism benefits just about everyone directly: both as producers, by setting people free to achieve their full economic potential; and as consumers, by providing the widest possible choice of good and services at competitive prices.

That’s not to say they don’t also celebrate the special contribution made by the most talented individuals — the entrepreneurs, inventors and other pioneers of material progress. But in doing so, and in asserting the right of such individuals to get filthy rich, they argue that the rest of us get much more than crumbs. In fact, thanks to those pioneers, we enjoy lives of plenty beyond the dreams of our pre-industrial ancestors.

So no trickle-down here but a gushing torrent of wealth flowing in all directions – That’s the real narrative of economic liberalism — and as a summary of the last 200 years of economic history it’s at least partly true.

However, it’s not the last 200 years that most people care about. The politically relevant timeframe stretches back, say, two or three generations. Basically, we’re talking about the neoliberal era — a period in which taxes have been reduced, industry privatized, regulations relaxed and markets globalized.

And yet, over these same decades, growth and productivity have slowed, wages have stagnated and innovation has faltered. Tax revenues have not kept up with spending and public and private sector debt has grown. Oh, and the global financial system would have collapsed without taxpayer bailouts.

Just as the statist Left struggles to explain the last 20 years of political failure, the free market Right struggles to explain the last 20 years of economic failure. The best they can do is point to global progress against poverty, sickness, illiteracy etc.

These things are to be welcomed, of course, but ‘the world is getting better’ is not the argument that the neoliberals think it is. Not when most of the progress is being made by implementing the breakthroughs of an earlier era (vaccines, running water, electricity etc.) — and not when the countries making the progress (especially China) are openly authoritarian.

And yet as the liberal West loses ground, the rich are getting richer — taking the lion’s share of our reduced rates of economic growth. The problem with free marketers is not that they defend this state of affairs, but that they have no convincing explanation for it. Some of them might argue that we need even more tax cuts, deregulation, free trade etc. — but who wants to listen that broken record?

So much has been argued that economic inequality is itself the cause of slower growth. That’s because the rich spend a smaller proportion of their money than do people on ordinary incomes. Therefore if the rich take a greater slice of the pie, the economy is deprived of consumer demand and slows down.

That is why Economists want to replace “idiotic trickle-down policies” with what he calls “middle-out” economics — i.e. measures taken by both government and business to boost ordinary incomes:

“If workers have more money, businesses have more customers, which make middle-class consumers, not rich business people like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.”

But if that’s the whole story then how have the rich got richer at a time when the middle has evidently not prospered?

The answer is that they have found other ways of enriching themselves. Instead of competing to provide better jobs, goods and services to the rest of us, they game the system to their advantage alone.

Property speculation, asset stripping, tax avoidance, share buy-backs, taxpayer-subsidized low wage business models — there are many ways in which the rich can financially engineer and lobby their way to further riches without creating value. Indeed, they’re all about extracting value from what remains of the productive economy.

What’s killing capitalism isn’t trickle-down theory, but the trickle-up practices of the rentier class….. (Concludes) 

Click here to read Part-I 

Nazarul Islam

The Bengal-born writer Nazarul Islam is a senior educationist based in USA. He writes for Sindh Courier and the newspapers of Bangladesh, India and America. He is author of a recently published book ‘Chasing Hope’ – a compilation of his 119 articles
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