by Allen Laudenslager and Bryan Neva
How are the current economic
policies working out for you? Salaries
and buying power for the vast majority of Americans have been declining for
decades. In 1972, the average hourly
earnings was $20 per hour; in 2008 it
was $18 per hour (in constant 2008 dollars).
And over that same period, the cost of life’s essentials have risen a
staggering 176%! Despite the official
unemployment rate of around 6%, a staggering number of Americans have dropped
out of the workforce entirely. The
middle class is shrinking as more Americans than ever are receiving some sort
of government assistance while at the same time corporations are recording
record profits. The rich are literally
getting richer and the poor are literally getting poorer.
We believe there are several
reasons for the current economic mess the United States currently faces, but
the the biggest single element is the decision makers fundamental failure to
understand how the economy really works.
This lack of understanding stems from accepting some wrongheaded, common
wisdom that is represented by these three adages:
1. Wealth
trickles down from the top;
2. A rising
tide lifts all boats;
3. Nothing
happens till somebody sells something.
Far too many people who should know
better (including trained economists, politicians, and most of all the pundits)
have heard these economic adages for so long and so often that they have come
to believe them as the gospel truth. In
fact, these statements are misstatements, if not outright perversions, of how
the economy really works. Trying to
formulate economic policy while believing these falsehoods results in
government policies and corporate decisions that actually make things worse and
not better. These three adages
illustrate the huge gap between what many believe and the truth.
Myth 1: Wealth trickles down from
the top.
Fact 1: Wealth does not “trickle
down” rather it “trickles up!”
We talk about the really rich as
the 1%? Why that number? Because as of 2007 the top 1% owned over 33%
of the wealth in America. Moreover, the
top 10% owned over 71% of the wealth.
The bottom 90% of Americans owned the remaining 29% of the wealth. And get this, the bottom 50% of Americans
owned only a measly 2.5% of the wealth in America.
If we could magically keep
inflation constant, what would happen if we confiscated every single dime of
the top 10% of people and gave an equal share to everyone else? Over the course of time the distribution of
wealth would end up about the same as when we first started. Why is that?
Because the bottom 90% of the population would actually put the bulk of
that money back into circulation and the money would “trickle back up” to the
corporations, banks, and eventually back into the hands of the wealthy. See, trickle up and not trickle down!
The bottom 90% of the population
that just received their windfall from the top 10% would, individually, go out
and buy new cars, homes, appliances, etcetera and deposit the rest in a
bank. All this money spent would be
collected by businesses and be deposited into banks or paid out in dividends to
shareholders. Banks are just resource
aggregators: a place to collect all those small sums into one big pot so it can
be put back out as car, home, or business loans. At some point it gets turned into interest
payments to people with large savings or as dividends to people with stocks or
bonds. And most of those rich people
(that notorious top 10%) don’t spend their entire income, they store their
“excess” money in stocks, bonds, and savings accounts.
By understanding that the system
only works when the bottom 90% of people have money to spend, you also
understand that any injection of money into the system has to be at the bottom
and not the top. Giving money to banks
as low interest loans is easy for the government but ineffective in priming the
economic pump. Similarly, giving tax
breaks to large corporations or the rich in hopes they’ll spend their surplus
is also ineffective. Injecting that same
amount of money in smaller chunks to lots of people is very hard for the
government to manage but much more effective in getting that money to
circulate.
So why doesn’t the government or
their trained economists recommend priming the pump at the bottom rather than
the top of the well? Because figuring
out how to get the money out to the 90% and then get it back again is a big
complicated job; it’s much easier to give big blocks of money to a few large
corporations even though it has proven less effective.
Myth 2: A rising tide lifts all
boats.
Fact 2: A rising tide can swamp any
boat that’s tightly anchored to the bottom.
This one seems to make a lot of
sense until you include a couple of inconvenient but essential elements.
The idea is that each of us is one
of those boats floating on the surface of the economy and when the economy does
well (rises) each of us floats up on that surface. The idea is that more money circulating in
the economy is the rising tide. The
rising tide also represents inflation and inflation swamps the boats.
The first mistake is not
understanding that our economy is like a harbor where lots of boats congregate
and boats don’t just float around loose in a harbor, they are tied tightly to
the dock or tightly anchored to the bottom (otherwise they’ll drift off and
collide with each other). Either way if
those ropes are too short when the tide rises those boats gets swamped!
Metaphors can be dangerous when
pushed too far, so in this one what are the ropes? The ropes to the dock or to
the anchor represent savings and income.
The wealthy have enough extra savings and large enough incomes that when
the tide of inflation goes up they can let out more rope; the 90% who have much
smaller savings and incomes get swamped.
For the top 10%, their income and savings are large enough to permit
them to “let out some rope” and absorb significant price hikes while the 90%
get swamped.
(In real life, a large yacht or
ship actually use a heavy anchor and chain.
When the anchor is dropped, a large length of chain is also dropped to
the bottom. When the tide rises, there’s
enough excess chain at the bottom to allow the yacht or ship to rise with the
tide. Smaller boats are incapable of
carrying a heavy anchor and chain. They
must use a smaller anchor and a light marine rope. Any excess rope would allow the small boat to
drift in the harbor and collide with other boats.)
What this means for the bottom 90%
is that their salaries must increase at least at the same rate as inflation or
they must spend less, and that huge number of people spending less (because
their money buys fewer things than before) slows the whole economy.
If we accept this metaphor, then
the only way a rising tide lifts all boats is if salaries (that metaphorical
anchor rope) go up at the same rate as the tide. This tiny but critical adjustment to the
“rising tide” theory makes all the difference but gets overlooked because it
puts the responsibility squarely on the shoulders of the top 10% to ensure that
the wealth gets spread around and not collected by too few people or companies.
Myth 3: Nothing happens till
somebody sells something!
Fact 3: Nothing happens till
somebody buys something!
While it is true that someone does
have to sell something to keep production moving, a lot of product, sold to a
wholesaler or on a store shelf doesn’t do much for the economy, it is a
superficial viewpoint. The fuller truth
is that nothing happens until someone buys something!
You can be the best salesperson in
the world but unless your potential customer has money to spend, you’ll never
sell a single thing. To buy things, people must have income and income comes
from two sources: interest on savings (in whatever form) and salaries. That
means that people must first have large enough salaries to afford whatever
you’re selling.
What happens to the economic system
when food, clothing and shelter take up the majority of the 90%’s income? Why they stop buying luxuries of course and
the vast majority of what we produce and
sell are not the basics of food, clothing and shelter they are the luxuries of
new cars, bigger TV and a smart phone.
Companies operate on the same basic
principles as your own family. If you
don’t have enough money then you have to cut back on the “nice to have” in
order to pay for the “got to have.”
Remember when a lot of American companies asked their employees to take
pay freezes if not outright pay cuts?
And remember when they stopped giving automatic cost-of-living
raises? Remember when they began cutting
benefits and pensions because they were losing money?
Well, employees accepted those cuts
and still were some of the most productive (if not the most productive) in the
world. Those cuts by the employees constituted an investment by the employee in
the long-term success of the business.
Now, when many of those same companies are posting record profits, the
employees have every right to expect those same companies to honor the
unwritten and unenforceable social contract to return their investment.
In fact it just makes good business
sense! Since more people with money to
spend means that you have more people to sell to because people with money buy
stuff and people without money don’t.
By accepting the truth instead of
these fatally flawed adages we can clear our vision of the economic world and
use that correct vision to begin fixing our current problems and creating a
system to avoid the same kinds of devastating crises in the future.
While changing these three simple
beliefs won’t by themselves fix the economy correcting the decision maker’s
concepts will go a long way to helping them formulate better policy.
