Tuesday 10 December 2013

The Failure of Trickle-Down Economics in the USA

I used to be a great believer in "trickle-down". Up until 1980, there was evidence that it always worked. This evidence couldn't be ignored.

However, I did not foresee that there was a tipping-point in the concentration of wealth where it made far more economic sense to buy the governm
ent than to invest in plant.

This means that regulations which restrain monopolistic and anti-competitive practices are repealed or not enforced, while ever more burdensome regulations that strangle upstart competitors at birth are enacted. The more of the latter there are, the more persuasive the argument to relax regulations against the big boys. The more the big boys get away with murder, the more persuasive the argument for regulations and yet more regulations that only affect the small end of town in practice.

Trickle-down cannot help but grow an economy in an absolute sense; but when the distribution is too concentrated, most of the growth ends up in the hands of a very few, while the median standard stays steady, growing very slowly. In pathological cases, not just all the growth, but over 100% of it ends up in the hands of those who control the legislatures, and the median standard actually falls, as in the USA today.

This leads to a runaway effect, where 1% of the populace holds more national wealth than the rest of the country put together. The US hasn't reached that state yet, but it's 40% in 2013, and likely to hit over 50% soon, with 60, 70, 80% to come. The trend is clear, the concentration accelerating.

The result ' "too big to fail, too big to jail" is already visible. Disrupting the system by putting the brakes on would cause economic chaos, hence the need for bailouts and ever increasing corporate welfare. There are already commercial organisations essentially immune from legal sanction. Examples of CEOs paying less tax in absolute terms than their secretaries, and ridiculously less in relative terms, abound.

That's the diagnosis. The cure? Er... pass.

Signs of the times: From Rolling Stone:

For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico's Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that "they make the guys on Wall Street look good." The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.
"They violated every goddamn law in the book," says Jack Blum, an attorney and former Senate investigator who headed a major bribery investigation against Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices Act. "They took every imaginable form of illegal and illicit business."
That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy.
"Had the U.S. authorities decided to press criminal charges," said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."
Remember what I said : The result ' "too big to fail, too big to jail" is already visible. Disrupting the system by putting the brakes on would cause economic chaos, hence the need for bailouts and ever increasing corporate welfare. There are already commercial organisations essentially immune from legal sanction.
When it comes to wealth distribution... from HuffPo
The United States has such an unequal distribution of wealth so that it's in the league of corrupt underdeveloped countries, no longer in the league of the developed nations, according to the latest edition of the world's most thorough study of wealth-distribution.
The most authoritative source comparing wealth-concentration in the various countries is the successor to the reports that used to be done for the United Nations, now performed as the Credit Suisse Global Wealth Databook. The latest (2013) edition of it finds (p. 146) that in the U.S., 75.4% of all wealth is owned by the richest 10% of the people.
The comparable figures for the other developed countries are: Australia 50.3%, Canada 57.4%, Denmark 72.2%, Finland 44.9%, France 51.8%, Germany 61.7%, Ireland 58.4%, Israel 68.9%, Italy 49.8%, Japan 49.1%, Netherlands 54.6%, New Zealand 57.6%, Norway 65.9%, Singapore 61.1%, Spain 54.0%, Sweden 71.1%, Switzerland 71.5%, and U.K. 53.3%.
Those are the top 20 developed nations, and the U.S. has the most extreme wealth-concentration of them all. However, there are some other countries that have wealth-concentrations that are about as extreme as the U.S. For examples: Chile 72.5%, India 73.8%, Indonesia 75.0%, and South Africa 74.8%. The U.S. is in their league; not in the league of developed economies. In the U.S., the bottom 90% of the population own only 24.6% of all the privately held wealth, whereas in most of the developed world, the bottom 90% own around 40%; so, the degree of wealth-concentration in the U.S. is extraordinary (except for underdeveloped countries).
The broadest mathematical measure of wealth-inequality is called "Gini," and the higher it is, the more extreme the nation's wealth-inequality is. The Gini for the U.S. is 85.1. Other extremely unequal countries are (pages 98-101 of this report) Chile 81.4, India 81.3, Indonesia 82.8, and South Africa 83.6. However, some nations are even more-extreme than the U.S.: Kazakhstan 86.7, Russia 93.1, and Ukraine 90.0. But Honduras and Guatemala are such rabid kleptocracies that their governments don't even provide sufficiently reliable data for an estimate to be able to be made; and, so, some countries might be even higher than nations like Russia.

 At current rates, the Gini for the USA will be in the low 90's by 2020: the trend is accelerating, not tailing off.


Jamie said...

My partner just linked me this today and it feels relevant to this post, how there needs to be some balance in worldviews between the two current 'competing ideologies' (for lack of a better term), capitalism and socialism.


Hope you find it interesting, I did. As a citizen of both the US and Australia, it drives me mad to see Australia barrelling down the road idealising the worst parts of America. I've been there, and it depresses me that the US has fallen so far, let alone watching a second home do so as well.

Zimbel said...

"I used to be a great believer in "trickle-down". Up until 1980, there was evidence that it always worked."

- I'm curious what this evidence is; I've seen quite a bit of pre-WWII evidence to the contrary.

Anonymous said...

Growth is not an option in a finite world with finite resources.
Having more children than you can afford and living on government handouts is not a solution.
Each individual needs to be responsible for their own needs and their children's needs including education.


Billie said...

Despite my lack of education (other than public school) not all gals are dumb! I may have to resort to bartering.

Sevesteen said...

Depends on what you mean by trickle down. If you mean a mostly laissez-faire system, I'd agree that it works--but I'd say that it isn't what we have now in the US. Liberals (in the US sense) keep saying "big business is the root of all our economic problems, we need to tax and regulate them"...while big business mostly embraces the regulation.

Zimbel said...

One of the better papers I've read on "trickle-down" economics:


"We have estimated, for example, that less than 100,000 people, .001% of the world’s population, now control over 30 percent of the world’s financial wealth."

"...this unrecorded wealth might have generated tax revenues of $189 billion per year – more than twice the $86 billion that OECD countries as a whole are now spending on all overseas development assistance."

Anonymous said...

"generated tax revenues of $189 billion per year "
That would not cover the fraud in government handout programs.