August 17, 2010

How to Fix Trickle Down Economics & Make It Work

Advocates of trickle-down economics often say that the ones at the top of the structure generate all the wealth of society, and those at the bottom are nothing more than bottom feeding parasites. And they're not entirely wrong about this.
Something that might shock you--I actually don’t think that Trickle Down Economics is entirely wrong.

Trickle Down Economics, aka Supply Side Economics, aka Voodoo Economics! I think of it as being like a giant physics equation that just had a couple variables in the wrong places. Let me explain:

So traditionally, Trickle Down Economics has looked like this:

You’ve got this big pyramid, and the people with the most money are at the top. Let’s say the top 10%. If you cut taxes on the top of the pyramid, then the money is free to fall down and enrich the rest of society.

However, in reality, it doesn’t work that way. If you cut taxes on the wealthiest, the money just stays there at the top. It goes into savings accounts. It goes into wall street mathematical equations that only create virtual wealth. It actually doesn’t create any new wealth for society.

Now, this idea of adjusting one part of the economy in order to bring prosperity to the entire system isn’t totally unfounded. Here’s where trickle down economics has a fatal flaw in their understanding of how the world works.

The chart should actually look like this: [flip pyramid upsidedown]

See, how the economy works, is that wealth is first created by the labor working class. That wealth then proceeds to trickle down to the bottom of this funnel. It does so through various means: franchise contracts, paying the salaries of the management class, CEO Bonuses, sales, the stock market, poorly-written intellectual property rights laws, and most often, the consumption of material goods by the working class.

Through worker’s wages, there are small eddies in this constant downward flow of wealth, in which wealth temporarily floats upwards against the torrent of downward trickling. However, the overwhelming majority of wealth flows steadily to the bottom of this funnel.
If no method intervention is taken, eventually all the wealth collects at the bottom of this funnel and becomes stagnant.

Once the water becomes stagnant, the top stops being able to transfer their wealth downwards via consumption. Then they are laid off from their jobs and stop being able to introduce new wealth into the system.

When the constant downward trickling ceases, and the economy goes into recession, and the wealth begins to dry up and disappear.

So how do we prevent this? There are many ways. The monetary wealth that has settled here in the bottom can be brought back to the top through higher wages to the working class. This ensures that they have more purchasing power, and ensures that their consumption of goods will continue fueling the economy.

Wealth can also be brought back to the top through other means, such as taxation.
If we tax the wealth of the richest folks at the bottom of this funnel, and pump it back to the top of the funnel through public services like Single-Payer Healthcare, through building infrastructure that facilitates our economy, things like railroads, bridges, trains, highways, water purification, renewable energy sources, etc, we then can ensure that the economy has a steady flow of wealth from the top of the funnel to the bottom.

And that’s good for everybody at every level of this funnel, from the labor at the top, to the parasites at the bottom.