The best definition of Trickle-Down Economics I can think of is the metaphor about the richest 1% up in the tree eating cherries while popping the pits down on the 99% percent down below.
Economic activity is not driven by supply but by demand. Demand will generate supply, while it should be fairly obvious to anyone that supply without purchasing power generates only bankrupt companies unable to sell what is on offer. And to generate demand it is the 99% that need to be employed at decent wages. The 1% may have tons of money, but as consumers and generators of demand and economic activity they are not worth beans.
In case you are unaware of this, out of every 100 dollars of U.S. Gross Domestic Product, 75 dollars are generated by household consumption, 15 dollars from consumption by government (federal, state and local), with only 15 dollars being channeled towards gross private and public investment. You will have noticed that this adds up to 105 rather than 100 dollars. That is because we consume 5% more than we produce by importing from other countries more than we sell to them.
The above should make it pretty obvious where the attention has to be: ON THE PURCHASING POWER OF THE CONSUMER, NOT ON THE INVESTOR .
Henry Ford understood the relationship between demand and ability to purchase when he invented assembly line mass production of automobiles in the early 1920s. He doubled wages to 5 dollars per day so that his workers could afford to buy all those cars he was now able to turn out. The lesson has obviously long been lost.
Some politicians and pundits talk and think as if we were in an ordinary garden-variety short term cyclical recession, and that all we need is some fiscal discipline and lower taxes on wealthy one-percenters and corporations for them to regain confidence enough to start creating jobs with their idle cash. Those politicians and pundits are barking up the wrong tree.
From the time globalization got under way in a big way in the early 1980s, median U.S. household income measured in constant 2010 dollars has increase by 0.2% per year. In other words, not grown at all. Between 1999 and 2010 household income actually fell by 12% in real terms. But with credit being abundantly available consumption continued unabated, coming to a screeching halt only after household debt had doubled to an unsustainable 200% of median income and home equity collateral had disappeared.
Why has household income stagnated and declined, instead of accompanying the annual 2.3% real growth in gross national product during the period? After all, that was the way it used to be. It is because globalization in short order doubled the world labor force, and that over-supply of labor drove down wages everywhere. This has caused a massive transfer of wealth from the consuming 85% of the economy to the investing (and gambling) 15%.
And where did all that abundant credit come from? Thanks to globalization (and increasing oil prices) the value of world trade grew faster than the world economy. While you'd think world trade by definition should be a zero sum game (world exports equaling world imports), unfortunately this does not quite hold true. Most of the main export-driven economies and oil producers have no ready use for all the money they are raking in and consequently run huge current account surpluses.
These surpluses in turn have left the world financial system awash in funds for which the bankers desperately needed to find profitable outlets. Too much cash chasing too few quality investment opportunities drives bankers to increasing financial ingenuity, skullduggery and risk-taking. The first installment of that saga blew up in the face of western taxpayers in 2008, and worse is yet to come from a probable implosion of the Euro monetary union.
Let us have no illusions. We have been digging ourselves a hole for some 25 years, and it is not going to be easy nor painless to dig out again. We have accumulated the mother of all world debt overhangs which have to be pared back to sustainable levels. Since one person's or nation's debt is another's asset, much of those assets are in fact smoke and mirrors.
And then there is the unbalanced pattern of trade created by the globalization of world labor and the hunt for the lowest common denominator, which is fundamentally how we got ourselves into this mess. Until we find ways to gainfully employ the 99% at home where consumption takes place, the hole we have dug will just continue to deepen.
