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Instead of “trickle down” economics, why not “bubble up”?

Thomas Piketty

Thomas Piketty

Thomas Piketty is a French economist who recently took the economics world by storm.  He demonstrated that, in a modern, “free-market” economy, growing inequality is inevitable, unless we do something deliberately to counteract it. Piketty shows that, over hundreds of years and in technologically advanced economies in particular, the return on capital will always rise faster than the growth rate in the economy as a whole. The rich, in other words, will inevitably get richer, while the rest of us get comparatively poorer – and sometimes absolutely poorer as well.

It was only in exceptional times – for instance, in the period immediately after the Second World War – that we were able to buck this otherwise inexorable trend, and that was only because we elected governments that were inspired by post-war optimism to make a fresh start – to try consciously to create better and fairer societies, and to include everyone in what was hoped would be better times.

But, in New Zealand and the UK and in most of the western world, the long-term trend is now back.  The gap between rich and poor is widening again, and more rapidly, and – in the absence of governments willing to do much about it – it will go on getting worse. We are constantly urged by the wealthy, and by politicians representing their interests, to accept that it is good for all of us that the rich should go on getting richer.  Wealth at the top will, we are told, “trickle down” to benefit the rest of us.  This, it is argued, is the mainspring of economic growth; if we interfere, then the economy as a whole will slow down and we will all be worse off.

The “trickle down” theory enjoyed a considerable vogue for a time, and it has certainly been given an extended trial period.  But the results have confirmed the doubts of the sceptics. Gravity, as an economic driver, doesn’t seem to have worked too well.

Not only have the poorer sectors of society continued to miss out on the prosperity enjoyed by the better-off, but the economies which have most assiduously applied the theory have done worse in economic terms than those (in Scandinavian countries, for example) which have consciously tried to maintain a reasonable degree of wealth and income equality.

The reasons for this are not hard to find. If most new wealth ends up in the hands of those who are already wealthy, (which is exactly what has happened in much of the post-war world), it is odds on that much of it will be hoarded or used to produce an unearned income or spent on conspicuous and non-productive consumption.

To the extent that it goes into productive investment, it will be spent on new capital equipment, which does little for the jobs and wage rates on which the poor depend but simply extends the income-maximising advantage enjoyed by the wealthy.

It has always seemed to me that the metaphor that envisages money as a liquid that “flows” or “trickles” downwards is a misconception of what really happens.  Rather than hoping to see money automatically “trickle down” from the wealthy, in the vain hope that it will somehow reach those who need it, it is surely better to direct money quite consciously into the hands of the poor where it can do most good and so that it can “bubble up”.

It will then benefit us all since we can be very confident that every dollar in the hands of those with little money to spare will be spent and will do much to alleviate poverty.  Every cent will then bubble up through the whole economy, like yeast in dough, passing through one set of hands after another, the increased purchasing power and demand providing higher incomes to tradesmen, small shopkeepers and businesses, and in turn leading, as the great John Maynard Keynes argued, to increased economic activity and to more employment and investment.

We pay a heavy price for failed “trickle down” policies – not only a poorer economy, but a weaker and less integrated society as well.  Why not give “bubble up” a chance to build a stronger economy and a healthier and happier society?

Bryan Gould is a former Labour MP and a former member of the Shadow Cabinet

4 Comments

  1. Rob Green says:

    There was never any trickle down unless of course you lived in the imperialist heartlands or were part of some labour movement or communitarian bureaucracy. Capitalism is a zero sum game by which every pound in the rich man’s pocket is taken directly from those of the poor a fact that growth tends to disguise. Now that there is no more growth and cannot be any more growth the zero summness becomes increasingly obvious to increasing numbers of people. But it is worse than that. Since 2008 not only is there no trickle down but there is a `torrent up’ via the bank bail out and austerity which turns the welfare of the sick, the disabled, the unemployed, the old, the young, workers into payments for the super rich and corporate creditors of the bankrupt banks who incidentally when they went bankrupt owed £6.7 Trillion in this country alone ($34 Trillion in America). This is why they rich are getting richer and fewer and the poor poorer and more numerous at an alarming pace. Every Western country is facing a Bankers’ Versailles that makes the one imposed on post-WW1 Germany by the Allies look like small change. The Great Dissolution of Capitalism is quickening by the day.

  2. Bazza says:

    The only trickle or rather flood going on is what the New Internationalst argues is about 50 trillion dollars or more going into illicit offshore bank accounts and money into the back pockets of the rich and powerful.
    Perish the thought the rich pay more to society for the NHS, adult social care, poverty etc. they are TAKERS NOT GIVERS!
    Oh and Bankers Bonuses are back up to about £3b a year (Guardian Business) for those who caused the 2008 crisis in the first place.
    Of course it is the labour of the working billions that really creates the wealth and makes societies work and the real dependency culture is that of the rich, they totally depend on the working billions turning up for work on Monday.
    Of course Tory propaganda sets neighbour against neighbour re welfare to distract working class/working people from tax cuts for millionaires, hedge funds etc. as millionaires are distant from most people’s lives.
    Oh and there is a massive upper class welfare state – the rich and powerful with tax relief are practically subsidised on everything – working class welfare bad, upper class welfare (like public schools as charities) good?
    And as Streekt argued quantitative easing is only buying the rich and powerful time as they don’t really have a clue what to do.
    Of course as Watkins in the New Left Review argues capital wants everything for free, our taxes, national insurance etc. pay for healthy and educated workers etc, infrastructure, R&D etc. and we even pay our own fares to get to work or buy cars and petrol to get there thus subsidising employers!
    So yes we do need state-led public investment, windfall taxes on big business (to get chunks of our wealth back when we need it), serious taxes on the rich and corporations, to close offshore banking and tax loopholes so the rich pay their share to the community, have global financial transaction taxes and global living wages, global shorter working weeks and better health and safety.
    But I think we need more than bubbles we need a massive redistribution of wealth.

  3. David Pavett says:

    Bryan Gould has picked the bits from Thomas Piketty that suit his case but ignored those that don’t. Thus on the the issue of implementing tax policies to reverse the growth in inequality Piketty says

    The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration. It is not within the reach of the nationstates in which earlier social compromises were hammered out. Many people worry that moving toward greater cooperation and political integration within, say, the European Union only undermines existing achievements (starting with the social states that the various countries of Europe constructed in response to the shocks of the twentieth century) without constructing anything new other than a vast market predicated on ever purer and more perfect competition. Yet pure and perfect competition cannot alter the inequality r > g, which is not the consequence of any market “imperfection.” On the contrary. Although the risk is real, I do not see any genuine alternative: if we are to regain control of capitalism, we must bet everything on democracy—and in Europe, democracy on a European scale. Larger political communities such as the United States and China have a wider range of options, but for the small countries of Europe, which will soon look very small indeed in relation to the global economy, national withdrawal can only lead to even worse frustration and disappointment than currently exists with the European Union. The nation-state is still the right level at which to modernize any number of social and fiscal policies and to develop new forms of governance and shared ownership intermediate between public and private ownership, which is one of the major challenges for the century ahead. But only regional political integration can lead to effective regulation of the globalized patrimonial capitalism of the twenty-first century. (From Capital, concluding chapter)

    The illusion that being free from regional arrangements frees nation states to counter global capitalist trends as they see fit is thus a clear part of Piketty’s case.

    P.S. Bryan Gould’s gravity metaphor has not been thought through. In dismissing “trickle down” he says “Gravity, as an economic driver, doesn’t seem to have worked too well”. He does not seem to understand that “bubble up” is every bit as much “gravity driven” as “trickle down”

  4. Mervyn Hyde says:

    The reality is whether bubble up or trickle down both understand that money has to get into peoples pockets in order for the economy to work.

    Trickle down though was just a gimmick playing to a compliant audience, only the sceptics pointed out that the rich are hoarders of wealth and use it to grow more wealth for themselves.

    David, whilst I understand how you believe that taxation in a Neo-Liberal economy is the essential prerequisite for government spending, that is in fact not the case.

    My guess is you will refuse to accept that but that is the reality, our government does not have to raise tax in order to spend.

    The proof is, where then did we get the money to bail out the banks, when the whole world banking system had crashed?

    Look at what Iceland is planning:

    http://www.telegraph.co.uk/finance/economics/11507810/Iceland-looks-at-ending-boom-and-bust-with-radical-money-plan.html

    Look what Shinso Abe is Doing:

    https://www.theguardian.com/commentisfree/2013/jan/22/shinzo-abe-quantitative-easing-japan

    We are currently bouncing along the bottom of a depression, it is impossible to create hyperinflation by stimulating the economy with infrastructure spending or spending on our public services, until we exhaust the human or natural resources that are needed for any economy to work.

    Again I doubt you will agree, so go back to the period after the second world war and ask yourself how we grew the economy with debt to GDP ratios of 250% when today they only stand at 89%.

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