Trickle-Up Economics

I suffer from a certain amount of cognitive dissonance every time I hear a conservative politician or pundit talk about the need for tax cuts for the wealthiest 2% of Americans in order to stimulate the economy. What I hear on the news almost every night is that the biggest factor driving the economy is consumer spending, and that they economy is not recovering because consumer spending remains weak.

So, if lack of consumer spending is the problem, the solution should be policies that give consumers more income to spend, right?

No, the mantra from the right is that we need more money in the hands of wealthy individuals and businesses. Of course, the very meaning of "wealthy" is having more income than you need to spend, which means that increasing the disposable income of the wealthy does not increase consumer spending but simply makes the wealthy wealthier. Investments in plants and equipment would also help the economy, but businesses are investing now because the economy is so bad (the kind of self-reinforcing behavior that makes "boom and bust" cycles work), and most investors are not putting their money into new businesses creating new jobs but into government securities, which is why interest rates are so low.

During the Reagan years, the belief that reducing taxes for the rich would stimulate the economy was called "trickle-down economics." But if consumer spending is the issue, then what we really need is trickle-UP economics. We need to adopt policies and programs that put more money into the hands of the lower economic levels where it will translate into consumer spending and economic growth for the entire economy.

The following chart presents empirical evidence of this truth also. This chart was originally published by Slate and it shows the income growth of different income levels during Republican administrations and Democratic administrations based on data compiled by Princeton political science professor Larry M. Bartels.



The chart obviously shows what it was intended to show, which is that the policies of Democratic presidents cause greater economic growth among the lower income levels, while the policies of Republican presidents promote more growth at the higher levels and less growth at the lower levels. But there's another inference which can be derived from the chart, which is that everyone does better when the lowest income levels are rising. For the top 5%, the income growth might be pretty much the same either way, but for everyone else, there is a correlation between income growth at the lowest levels and income growth at all levels.

So it's not necessarily a zero-sum game, and the "class warfare" that conservatives complain about might not be necessary, because policies that benefit the working class are going to benefit the wealthy, but policies that benefit the wealthy don't seem to benefit wage earners.