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Economic Inequality in America: Transfer of Wealth- Part 3

January 30, 2019

Economic Inequality in America: Transfer of Wealth- Part 3

The Myth of Trickle-Down Economics

Trickle-down economics represents a flawed American ideology that states that tax cuts, higher executive compensation, and increased benefits to the wealthy and corporate, class trickles down, like water falling from the top of a tree to the roots at the bottom, to everyone else in the lower levels of the economy; eventually boosting the entire economy and lifting the compensation for workers, who still lack the purchasing power to compete in an inflationary, competitive, and corporate-dominated market.

Politicians consider trickle-down economics a supply-side macroeconomic theory, which argues that growth may be achieved by lowering taxes and decreasing regulation of the market. Then, politicians and corporations say that consumers will, in turn, benefit from a greater supply of goods at lower prices, leading to an increase in employment. Supply-side economics leaves the demand-side out of the equation; a greater supply of goods and services does not automatically imply that the demand from consumers increases.

Many individuals that grew up in the late twentieth-century point to the economic policies of President Ronald Reagan as an example of trickle-down economics, or, Reaganomics. Reagan believed in complete laissez-faire capitalism, meaning no government intervention or regulation; and a self-correcting free market. Reagan cut taxes significantly, but increased government spending and tripled the federal debt in only eight years, from $997 billion to $2.85 trillion, mostly from an increased military defense budget (taxpayer money used to increase the profits of the war-profiteering military-industrial complex and its public stockholders).

Inflation increased during the Reagan years, but monetary policy from the Federal Reserve played a role with increases to interest rates, not just trickle-down economics; and though profits improved for the corporate sector, sustained improvement for the poor and middle class did not meet the promises of trickle-down economy ideology. Poverty rates increased during Reagan’s presidency and employee wage compensation remained at the levels before Reagan took office.

Trickle-down economics assumes that corporations are completely rational actors that will use their tax cuts towards improving the overall economy through higher wages and benefits for workers but leaves out the notion of capital investment and the greed of corporations that desire to accumulate greater sums of wealth by hoarding it in capital away from the regular consumer economy. Rather than an economic theory, trickle-down economics represents a political ideology, perpetuated and paraded around by politicians that are paid by corporations to believe in that specific set of beliefs. Ideology corrupts the minds of those that are blinded by the pervasive and powerful effect of money and its influence over our interpretation of economic growth and social success.

Those that fall victim to the common destructive and short-sighted patterns of ego and ideology become entrenched in the belief of that ideology, even if that belief is based around false notions and irrational ideas that are not based on objective reality. An individual that attaches oneself to an ideology becomes a slave to their idea and abandons the credibility of criticism from outside sources; ideologues restrict themselves to a limited view of the world and neglect to address important factors that may discredit or delegitimize their idea. The threat to their ego inflated worldview prevents ideologues from even considering facts that may contradict their beliefs.

The belief that wealth trickles down from the top of the economy to the bottom without the raising the incomes and benefits of poor and middle-class Americans stands as a convenient ploy of misdirection, distraction, a fallacy of illusion, in which corporations deploy in order to prolong and increase their control over politicians and the federal government without contributing to the financial wellbeing of the poor and middle class.

I have always strenuously supported the right of every man to his own opinion, however different that opinion might be to mine. He who denies to another this right, makes a slave of himself to his present opinion, because he precludes himself the right of changing it.

Thomas Paine

A study conducted by Harvard Business Review, of 449 corporations in the S&P 500, from 2003-2012, provides an example of the flawed logic and failure of trickle-down economics. After the Bush tax cuts of 2001, meant to stimulate economic growth, the corporations in the study used 54 percent of their earnings- $2.4 trillion- to buy back their own stock in order to boost their shares and increase the overall price of their holdings; an additional 37 percent of profits went towards paying off stockholders as dividends (regular payments made by corporations to stockholders), bringing the total to 91 percent of profits going back into the corporations, without entering the regular consumer economy. In this type of capital-driven economy, wealth trickles up into the coffers of the already wealthy corporations, not down to stimulate the regular consumer and labor economy.

If we wish for the tree to grow, then water its roots. A strong and thriving middle class with high purchasing power through proper wage and benefit compensation represents the greatest factor in economic growth for the United States. The middle class spends the majority of what they earn on consumer purchases, which increases the amount of money circulating in the regular economy.

Trickle-down economics assumes that investors and owners of capital are the leaders for economic growth, and relies on the myth that they will use tax cuts to expand business and pay workers; the ideology does not acknowledge the fact that corporations would rather increase their wealth through capital investments and stocks, rather than purchase goods and services in the economy or immediately give their tax cuts away towards paying for labor. Trickle-down ideology adds an additional and unnecessary factor in the process of systemic economic growth. If the improvement of the poor and middle class is the goal, then greater purchasing power through improved wage compensation is the answer.

Transfer of Wealth

Ego and ignorance corrupt the minds of the impulsive, short-sighted, and uninformed who sit in positions of power and influence and use their dominance to control and dictate the actions of the poor and the weak. When the mainstream media and hyper-partisan political parties bring up the concept of socialism or socialist policies, they may mention the disaster in Venezuela, or the failure of Soviet Union, or other twentieth-century horror stories intended to strike fear in those that may subscribe to the protection, safety, security of the human condition, and our innate ability to help and provide for one another if given the opportunity.

Mainstream media talking-heads and politicians may decry handouts, freebies, the welfare state, growth of government. Rarely will you hear these groups mention the success of socialism in Norway, Denmark, Sweden, and other Scandinavian countries, an ideology that these countries call Democratic-Socialism, which provides education, pensions, and healthcare to its citizens; or even more so, the success of socialism in the United States, with the ubiquitous nature of socialist programs like Social Security, fire departments, the police force, public education, public libraries and hospitals, infrastructure, national parks; also Medicare and Medicaid, which provide for the public good and the advancement of the nation as a whole through greater opportunities of maintaining health and prosperity.

Even more rarely, still, will you hear these same polarizing, partisan politicians and mainstream media talking-heads bring up corporate socialism, or socialism for the wealthy that the United States government provides to those that purchase federal influence. Yet the devolution of the United States from a nation of citizens to a nation of corporations over the past 50 years shows a nation ripped to its democratic foundation with cuts to social spending that primarily benefit the poor and middle class, and replaced with a corporate-dominated market that pollutes the environment and harms and exploits American citizens for profit; also with corporate socialist policies written by corporations and handed to politicians through lobbyists that infiltrate the government to bribe politicians, receive freebies, handouts, promises of taxpayer-funded bailouts and subsidies to dying industries.

The United States, a nation built by immigrants, for immigrants, for democracy, for liberty and freedom, but sold to the highest corporate bidder, stands as a nation not of the people, by the people, or for the people, but a nation of corporations with rights that supersede those of regular citizens in matters of safety, protection, and security. This would not be possible with a government built on principles of honesty and integrity, but a government that relies on the private-corporate funding to sustain its existence will quickly abandon democratic principles and the welfare and happiness of the general public to prolong and increase its control over the population. Modern governments cannot help but act with paranoia, suspicion, corruption, and deception; their secretive actions are intended to mislead and distract the population from the real issues and the hidden truths that sit beneath the public’s understanding. It is in a government’s nature to use power and influence to capitalize on the public’s ignorance, to grow and prolong their control over the population.

It is in the interests of tyrants to reduce people to ignorance and vice. For they cannot live in a country where virtue and knowledge prevail.

Samuel Adams

Free-market capitalism brings along with it a certain level of economic inequality. In a free society, some people will, inevitably, feel free to work harder than others; while others, will feel free to exhibit laziness and a poor work ethic. Educational inequalities prevent certain middle and lower class income groups form pursuing a college degree, creating an institutional education gap that prevents some individuals from applying for higher-level jobs. But the current levels of economic inequality cannot be explained through just education and work ethic alone.

The past 50 years shows a massive transfer of wealth from the poorest American workers to the largest corporations and richest owners of capital. Not because of any particular increase in skill or knowledge for corporations or owners of capital- or any lack of skill or work ethic from the poorest Americans- but rather, due to the corruption of politicians and a system of government that allows corporations to dictate, dominate, and control the economic direction and social purpose of the United States.

The shift from a labor-intensive society to a capital-driven society means less money going towards wage-earning employees and more money going towards executives, owners of stocks, and real estate investors. Wages and total income from labor fell from 51 percent of GDP in 1970 to just 43 percent in 2013; while the share of employee compensation decreased from 58 percent in 1970 to 53 percent in 2013, which equals a loss of $850 billion, in 2013 dollars, for the wage-earning population; or a loss of $7,000 of income for each of the roughly 120 million American households compared to what they would have earned with a 1979 labor-intensive income distribution.

Economic Gains After Recession

The great recession impacted all income levels in the United States, with massive losses to corporate profits and worker’s savings and wages, but federal economic policies before, during, and after the recession ensure that new wealth disproportionately goes towards the highest income earners. A study conducted by Emmanuel Saez, an economist at UC Berkeley, found that during the years of the recession, from 2009-2012, the top one percent of the population received 91 percent of the real income growth, with their pre-tax incomes growing by 34.7 percent; while pre-tax incomes for the bottom 99 percent of the population grew by just .8 percent.

The average income for the top one percent (excluding capital gains, which would increase the number drastically) increased from $871,000 in 2009, to $968,000 in 2013; the average income for the remaining 99 percent of the population fell from $44,000 to $43,900 over this same period. The top one percent owned over 38 percent of the nation’s wealth in 2012, while the bottom 90 percent of the population owned just 23 percent of the countries wealth.

Americans subsidize the riskiest behavior of the largest financial institutions that control the most assets and the most money. In a 2009 study conducted by economists, Simon Johnson and James Kwak, of the top 18 financial institutions with over $100 billion in assets each, found that these banks were able to borrow from the Federal Reserve at rates .78 percent more cheaply than smaller banks with fewer assets, profits, and holdings. This corresponds to a $34 billion per year subsidy for the biggest financial institutions. This is free money given to financial institutions during a recession that their actions caused that could go towards healthcare, education, infrastructure. Financial institutions take greater risks with your savings when they know that the government is there to bail them out and unwilling to punish the offenders with significant jail time, which is the definition of ‘too-big-to-fail.’

Financial institutions received $9 trillion in taxpayer-funded, zero-interest loans from the Federal Reserve after the recession that their risky and corrupt actions caused. Financial executives received some of their largest bonuses ever in the years after the recession. Yet no one went to jail; Americans lost their jobs, homes, entire savings, their health, many lost their lives.

Banks are bigger than they were before the collapse with greater profits and control over the economy; corporate wealth continues to increase while regular American citizens are left paying for the risks and failure of financial institutions that received no significant punishment. When corporations increase their profits, they hide those profits from the regular economy; when corporations risky behavior causes global financial collapse, they turn to the government, to American taxpayers, to pay for their corruption; that is corporate socialism at the highest level. Socializing the losses while privatizing the gains.

Worker Productivity

Worker productivity signifies the total amount of output in an average hour of work in accordance with the input; where output represents goods and services and input represents wages from labor. Productivity growth should raise the countries standard of living over time for all income levels if the economic system is fair and balanced, not skewed too much in favor of the higher or lower ends of the income scale. In an advanced, modern economy such as that in the United States, productivity growth and employee wage compensation should rise and fall in tandem; as workers productivity increases or decreases, so should employee compensation.

From the end of World War 2 in 1945, until the early 1970s, productivity growth and workers wage compensation increased at a consistent rate. The United States realized widespread economic growth and prosperity during this period, as all income levels benefitted from an advancing economy with increased worker productivity. But the period from the 1970s until today shows a sharp divergence between productivity growth and worker’s compensation, as a majority of America’s poor and middle class have not received fair payment equal to the major improvement in productivity output.

Research from the Economic Policy Institute (EPI) shows that in the period after WW2, as the American economy increased its productivity, the standard of living improved for all income levels within the population. But economic policies in the early 1970s began to shift employee compensation from labor from the lower income levels of society, into higher corporate executive compensation. These policy changes directly coincided with a shift from a labor-intensive economy, which benefits poor and middle-class workers who derive a majority of their wealth from labor, into a capital intensive economy, which benefits, primarily, owners of capital and corporations whose profits and payments deal in stocks, investments, and capital.

The EPI’s studies show that between 1973 and 2017, worker productivity increased by 77 percent, while employee wage compensation increased by just 12 percent, which is 12.4 times lower than the growth to productivity. When adjusting for inflation, the average hourly wage compensation for the poor and middle-class worker is equal to the amount workers received in 1978, even though productivity continued to improve each year. This means that even though the American workforce generated a 77 percent increase to the rate of output, their wage compensation has remained stagnant for the past 50 years.

Productivity-Compensation Divergence beginning in the 1970s

Some may argue that wage compensation has not increased in relation to productivity because non-wage benefits- such as health insurance programs and pension plans- represent a greater share of the poor and middle-class share of income from their employers. Yet the share of employees non-wage benefits increased by just 1.3 percent, from 18.3 percent in 1979, to 19.6 percent in 2014; and with the decline of workers unions collective bargaining rights to demand higher, equal, and fair pay, the poor and middle-class workforce fails to obtain the political power to demand paid time off, paid sick days, maternity leave, and other benefits that a fair system generates in an economy that continues to produce and improve.

The growing gap between worker productivity and employee wage-compensation exacerbates economic inequality by funneling employee wages and benefits into corporate executive profits. This redistribution of middle-class wealth from their contribution to the improvement of the American economy, into corporate stocks and capital profits, signifies a radical shift in the United States from a nation of citizens, into a country that prioritizes the safety and political protection of corporations over that of the general public. Part 4

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