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Trickle Down Economics: An Epic Failure

We are in the midst of an economic crisis that trickle-down economics can’t fix. We had what is known as a both a recession and a financial crisis, which take much longer to overcome when combined than individually. This has caused dramatic unemployment, underemployment, loss of homes, and financial calamity for many Americans. So many of us are struggling. Yet corporate profits are up, and wealthy people continue to acquire wealth and grow economically.  The core of the political debates between the Republicans and Democrats is how best to get us out of this mess. 

 The Republicans historically advocate what was known under Ronald Reagan as trickle-down economics. This theory goes that if you help the wealthy  get wealthier, they will create more businesses and jobs, and therefore all Americans will be better off.  The Democrats advocate a blended approach that still has corporate interest in mind (don’t ever forget this) but lean more towards government intervention in the economy that favors the working class. Many times both the Republicans and Democrats fail in helping the low to moderate income American people.  Today I will address the flaw of trickle-down economics that is advocated by many right wing politicians.

Juan Williams via a blog I follow Booker Rising in an article writes:

Americans reject the argument [about class warfare] and so do the facts. Corporate profits are the highest they have ever been. Despite the recession, the rich have been doing extremely well with the richest 400 Americans having more money than the bottom 150 million. Yet unemployment and underemployment have persisted with no change. If the GOP theory of trickle-down economics were true, then the rich should be creating jobs like crazy and stimulating the economy in the process. They have not.

If corporate profits are higher, then how also is unemployment so high if the concept of the trickle-down theory is correct. Remember, the slogan for the trickle-down economic theory is that a rising tide lifts all boats. 

People seem to forget that the fundamental challenge of corporatism is that it is geared towards maximization of shareholder value, and not worker upward mobility. Therefore the interest is focused on the hands of the minority (shareholders) sometimes to the benefit of the majority (workers) and sometimes to the detriment of workers. In a recession, because the interest of the shareholders is primary, they will always have by far the greater benefit than the workers. So when profit margins shrink, policies are enacted to eliminate operational cost, which in most corporations starts with the employee base.  This can be done through worker layoffs, or outsourcing both of which cost more American’s jobs.  

 So the interest of the American worker is beaten by the interest of the shareholder. This means that the minority interest overcomes the majority interest in a heavily corporate based economy. This is the opposite of democracy where the majority have the most say through the political process. This is also why there is always tension between capitalism and democracy.  Corporatism as a branch of capitalism is designed to give a consistent advantage to those with capital.  So over time wealth continues to accrue in the hands of those who have it, and it becomes a challenge to accrue into the hands that don’t have it.  This leads to an ever increasing wealth gap without some form of government intervention.

The trickle-down economic theory makes an assumption that as the wealthy get wealthier than they will put money back into the economy by creating businesses and therefore jobs.  But what if the wealthy don’t? What if the wealthy simply sit on this wealth, or invest this wealth in overseas markets?   What if corporations pursue overseas markets, and use their increase in corporate wealth to build plants, and hire employees in overseas markets?  Then the trickle-down theory fails the majority of Americans.  That is how you can have high corporate profits and an increase in top levels of wealth for many Americans and a high unemployment rate in distressed economies. This is what we see occurring today.

 Anyone who takes a “fair and balanced” approach recognizes that the trickle-down theory is a flawed theory.  The far right conservatives that advocate a pure free market without government intervention based upon this idea will create a lopsided balance that could damage the middle class and consistently keep the poor. A strong blended economy that promotes a market based economy where people can acquire wealth and also intelligent and necessary government intervention is what is needed to get the economy going now, and create balance between the employee and the owners in the future.

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