Friday, 28 October 2011

Is trickle-down economics a myth

Since the Occupy Wall Street movement started there has been a lot written about the growing inequality in wealth and income, particularly in the USA. Saul Eslake in Why some incomes are just gross writes:
According to data published in the Paris School of Economics' World Top Incomes Database, the share of total household income accruing to the top 10 per cent of the income distribution in the US rose from 34.6 per cent in 1980 to 48.2 per cent in 2008 - an increase of 13.6 percentage points.

Put simply, the top 10 per cent of Americans control almost half the country's household wealth.

Over the same period the share accruing to the top 1 per cent of the income distribution more than doubled, from 10 per cent to 21 per cent; while the share accruing to the top 0.01 per cent of US households ranked by income increased almost fourfold, from 1.3 per cent to 5 per cent.

Indeed, from 1980 to 2008 the average gross income of the richest 1 per cent of American households rose by 172 per cent in real terms.

Over the same period the average real incomes of the bottom 90 per cent of American households rose by just 2 per cent.

Quite staggeringly, the average gross income of households in the bottom 90 per cent of the income distribution was, in real terms, lower in 2008 than it had been in the early 1970s.
He also states:
An increasingly polarised distribution of income and wealth can have adverse consequences for economic performance.
But there's absolutely no guarantee that the distribution of income and wealth produced by markets will be socially desirable, or politically sustainable; indeed, there's plenty of evidence to suggest that more often than not, it won't be.

Thus, if there's to be less government intervention in the means by which incomes are generated by the operation of market forces, based on the belief that the result will be a higher aggregate level of income, there may well need to be more government intervention in the way in which that higher level of income is distributed, in order that the end result is socially and politically sustainable.
To quote Wikipedia:
"Trickle-down economics" and "the trickle-down theory" are terms used in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole. The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy." The term is considered pejorative by some proponents of tax cuts.

Proponents of these policies claim that if the top income earners are taxed less that they will invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals.[citation needed] Proponents argue that economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work, and that the trickle-down effect may be very slim, if indeed it even exists at all.
So, the idea is that the more income available to the wealthy, the more money will flow to everyone else. Yet the reality, as seen in the statistics quoted by Saul Eslake above, seems to suggest that this is not the case.

Edit 03/11: Jessica Irvine is of the opinion that Top bosses' riches are undeserved. Dan Ariely, Professor of Behavioural Economics at Duke University, looks at level of executive compensation, particularly in the financial sector in Better (and more) Social Bonuses. He has a great graph comparing the pay of the leaders of the world's top banks to their market capitalisation. For example, James Dimon of JPMorgan earns $19,651,560. JPMorgan has a market capitalisation of $158.6 billion. Jiang Jianqing of ICBC earns $235,700 while ICBC has a market capitalisation of $250.2 billion.

Edit 20/11: Bruce Guthrie writes that They're not the messiahs, just very overpaid and wonders if executive salaries should be capped at 10 times the Prime Minister's salary. Of course that would mean a significant pay cut for many CEOs.

Edit 21/11: Tony Webber on Why executives are worth their fat salaries.

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