Bubble Up & Trickle Down Economics, What are they?
Trickle Down Economics is the theory that if you allow more money to flow into the high income class, people in this class will invest in businesses and spend more money, and the resulting spillover will trickle down to the lower income class, benefiting them as well. . .
Bubble Up Economics is the theory that if you allow more money to flow to the lower income class, people in this class will spend more money which will eventually move up to the higher income class, benefiting them as well.
The question that arises here is which Model is better for the Economy as a whole?
But America is a free market capitalist system. It is not like this?
Doesn’t the Market decide who gets what, not the Government?
The United States is far from being a purely capitalist free-market society. There are numerous laws and tax codes that favor people differently, typically benefiting the higher or lower income classes more. The market dictates a lot, but certainly not all, of “who gets what.”
Our tax laws, of course, are the simplest example, with different tax rates applied to different levels of income. But there are many other types of laws that benefit the low and high income classes more, and deviate from a purely “free market” or “capitalist” model of system.
Laws that benefit the low-income class:
Laws against blacklisting.
Protections for Unions.
Child labor laws.
Prohibitions of discrimination based on race, age and gender.
Employee rights laws.
Restrictions on Political Donation (so that the rich do not steal the elections).
Minimum wage laws.
Laws that benefit the high income class:
Land and mineral property rights.
Capital gain benefits.
Corporate loop holes.
Patriot Act restrictions limiting offshore transactions for individuals but not for businesses.
Lobbying permits (so the wealthy can influence new laws).
Do you still think we are a free market capitalist system?
This is what it would look like if we were.
There are many strictly non-free market regulations that benefit one income class more than another. A “truly” free market society would be unrestricted, with companies and individuals free to do as they please:
1. Commercial Hiring: Companies could hire children, at poverty wages, to work in coal mines because they are shorter and cheap. This was the case for a long time until laws restricting the employment of minors were enacted, as well as minimum wage laws.
An employee who causes trouble (asks for a raise or complains about unsafe working conditions) could be fired and other companies in the area notified that the individual is a “troublemaker”, effectively ruining the employees’ chances of finding work. Laws against blacklisting grew out of this practice.
2. Mineral Resource Rights: Someone who finds a rich gold or oil reserve on your land could keep every cent of the wealth on that land. Currently, the resource is treated as a public good and is taxed at a much higher rate.
3. Political donations: An individual or company could give as much money as they want to a candidate, essentially ensuring their victory. We currently have many restrictions on how much a person or business can donate.
Lobbyists may freely give money to politicians to “encourage” the passage of laws that favor the lobbyist. There are restrictions here, but the lobbyists certainly wield a lot of influence.
The list is truly endless, and these are just a few obvious examples.
Since we’re not really a true Mercado Libre system, how should we decide who gets the most? Which economic model is best for the economy?
The question is, if you’re not going to insist that we should live in a purely free market system, how would you balance taxes and financial benefits to achieve the strongest and healthiest society as a whole: towards the low or high income class? ? What happens when we favor one class over the other? Here is a proposal for how each class could spend their extra money.
1. Holiday expenses:
Bottom: More likely in a destination closer to home, benefiting the US economy more.
Higher: more likely abroad, benefiting foreign economies more.
2. Invest:
Bottom: USA Products – Bank Savings, Mutual Funds…
Superior: Foreign products, Off-Shore High risk/return companies.
3. Running a business:
Bottom: Create or expand a small business (certainly within the US).
Superior: Transfer part or all of its commercial structure abroad.
4. Automotive:
Bottom: A family car, economy, average performance, made in the USA.
Above: A high-end, gas-guzzling, sexy, foreign-made vehicle.
5. Discretionary:
Bottom: More likely to spend on education, career advancement.
Superior: You are more likely to buy luxury items, boats, jewelry.
6. Education:
Bottom: Adults are more likely to pursue a professional career. Children more able to afford college.
Higher: You already understand the benefits of higher education, you can afford it, so extra money probably wouldn’t be spent here.
7. Home purchase:
Below: Definitely a house in the US, perhaps the first.
Above: More likely a second home, possibly a foreign getaway.
8. Stability:
Bottom: Additional financial resources can mean a stay-at-home parent, more time with family, relief from stress.
Senior – you can already afford to stay at home with parents, spend time with family, relieve stress.
As you can see, when the low-income class spends money, it helps the US economy more.
As this list suggests, putting money into the low-income class makes that money work through the US rather than foreign economies. It favors US products and businesses and provides a healthier and more productive underclass.
Additional Economic Benefits when the Lower Income Class gets more.
I would say that when you transfer money to low-income people, it will eventually end up in the hands of the upper class anyway, with these added advantages.
1. It benefits every part of the US economy: Money will circulate through the economy once before reaching the upper class. In goods and education, every part of the US economy can “touch” this money before it reaches the upper class. This will benefit local businesses, liquidity, incentive for education and career advancement.
2. Incentive to invest in the US – The upper class will have more incentive to invest in US companies and the US economy than abroad, as there is now more money in the US. to acquire. This provides additional stimulus to the US economy rather than some other emerging economy.
3. Adds to the US tax base: Larger corporations often pay much less in taxes than sole proprietorships or small businesses, through corporate loopholes and offshore business shifts. Money held by the low income class adds directly to products and businesses increasing the US tax base. A higher tax base gives the government more to improve infrastructure (transportation, healthcare, schools) , education and small business grants and loans, and disaster relief.
Conclusion:
Feed the roots and the tree will grow strong. Plant in the desert and the tree will die.
Allowing more money to flow to the lower income class, through tax breaks and incentives, benefits the US as a whole much more than money flowing to the higher income class.
Of course, the additional income will eventually end up in the hands of the rich anyway, that’s where it goes. But at least the rich will have to earn it, investing more in the US economy to eventually acquire it. The less wealthy will be able to keep it at least for a while and develop a taste for it that could encourage them to acquire even more, spurring labor productivity, small business, and education.
The notion here is certainly not that people in the upper income class don’t deserve it. In some cases these people inherited their wealth. But in many if not most cases, they got there as a result of extra effort, extra talent, and/or extra luck. Any or all of these are going to be successful and are completely worthy traits.
However, it would be healthier for society as a whole to even out the distribution between the haves and have-nots, not in a Robin Hood fashion, but by leveling the playing field. This can be done with adjusted tax rates, investment in public schools, and cheaper, more readily available college and business loans.
“Bubble Up” far surpasses “Trickle Down” in benefits to the US economy. The US started out as a government “by the people for the people”, maybe it’s time to really believe it.