Remember how the country was sold the idea of “trickle down” economics? “Oh, if we just give the wealthy more, they will create wealth for the poor and middle classes by increasing spending, investing in new factories, hiring more workers, etc, etc, etc.” In reality, after over 30 years of trickle down, or “supply side” economics, we are looking at just the opposite: the rich have gotten richer, and middle class incomes have stagnated. Now, even some in the financial community are admitting that trickle down economics is a failure.
While the wealth of American households has jumped more than $25 trillion since early 2009 amid rising equity and home prices, the pass-through to consumer spending is lagging the $1 trillion fillip that would have been anticipated historically, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
Feroli’s numbers show that since the end of the recession, households have spent only 1.7¢ of each extra dollar they earned in wealth. That compares to an average of 3.8¢ for the years from 1952 to 2009. Simon Kennedy, the author of the Bloomberg story, offers a possible explanation for the difference:
One reason for the adjustment may be that those enjoying gains in wealth are already rich, so have less propensity to increase spending incrementally.
That’s a polite way of saying, “The rich are getting richer, but they already have everything they want and need, so they’re not spending much of their new wealth.”
This past February, Harvard Business Review blogger Andrew O’Connell made the following observation:
Since the end of the recession in 2009, inflation-adjusted spending by the top 5% of U.S. earners has risen 17%, compared with just a 1% average rise for everyone else in the country, according to The New York Times.
So you might be thinking, “Doesn’t that prove that trickle down works, if the wealthy are spending more?” The answer is “no,” and here’s why.
The wealthy can’t spend enough for trickle down to work.
Of course wealthy people buy more things, and more expensive things, than the rest of us do. But there’s still a limit to what they buy. And there just aren’t enough of the wealthy out there for the things they buy to make a difference when it comes to boosting the economy through consumer spending. Take the example of a toaster.
There are, according to the LA Times, 132,000 American households with a net worth of at least $25 million, excluding the value of their homes. Let’s assume, for the sake of using round numbers, that each of those families owns ten houses, and in each house they have two kitchens. Now suppose that they all decide to buy top of the line toasters for each of their kitchens. They will purchase 2,640,000 toasters. A nice temporary bump for toaster production. But those families are not going to buy 20 new toasters every few months, even though they can.
In 2010, there were 63 million American households that earned between $25,000 and $100,000. Many of those households may need new toasters, but their money is already tight, so they make due with their old toasters. But suppose that, through a different tax structure or an increase in wages, those households all saw increases in income. If even half of them took some of their new income and used it to buy toasters, then toaster producers would see a 31.5 million unit increase in toaster sales. That makes the 2.6 million toasters purchased by the rich pale in comparison. When you consider that not all of those households will buy new toasters at the same time, what you wind up with is sustained growth in toaster sales, leading to increased production, leading to more jobs, and so on. So, who are really the “job creators?”
That example is very simple, but it illustrates the buying power of the middle class — IF they have the money to spend. That buying power has been steadily eroded over the past 30 plus years of Reagan’s trickle down economics. Add to the mix the offshoring of jobs, a move from a manufacturing economy to a service economy, and a tax structure that favors the wealthy. The middle class has watched the failure of trickle down from the time it started. Now at least some in the financial sector are starting to see it as a failure as well. When will Republican politicians stop worshiping at the alter of trickle down? Don’t hold your breath while waiting.