Friday, November 27, 2009

Trickle Up Economics

Since the 1980s, conservative forces have argued that wealth "Trickles down" from wealthy people to poorer ones, that because wealthy people and companies are the ones that hire, that any economic action that favors the wealthy will benefit the economy as a whole.
I think the opposite is true: whatever action favors the most impoverished will create more opportunities for the wealthy to earn more money. As an example, let me imagine that two imaginary people, one a indebted janitor, the other, the CEO of the company that the first one works for. Let us say that each one is suddenly granted $1000 by a mysterious shadowy conspiracy of good fortune. (A man wearing dark glasses and a ridiculous hat hands them the money, tells them to "enjoy yourself with this" and then runs away.)
Our janitor will probably first pay off his credit card debt, benefiting the credit card company, then maybe some extra cigarettes, because he smokes, benefiting the tobacco company. Then he'll buy more groceries, because he might have some gruel to sustain himself, but he'd much rather have a risotto instead. (His gruel is kind of boring.) After that, he might either watch a movie (benefiting the theater and the Hollywood studio that made it), or perhaps save it (allowing a bank to lend it out, multiplying its effect further.) At least six companies have additional revenue from this. The janitor also, for a short time, feels his life is more enjoyable. If he is smart, he will invest in things that help him to get more money from this, like interest, or education (allowing him to become an accountant instead, and earn more money).
Our CEO, on the other hand, can maybe buy stocks, or make one payment on a new house or boat. What he wants costs way more than $1000. Most likely, he will buy a few more shares in his company to further cement his power. He doesn't hire anybody, because he already has all the maids, butlers, and gardeners he needs or wants. The company doesn't hire anybody -- it's not their money. The company sees no money from the sale of the stock, and hasn't since it was first issued. The broker liked that, because he got commission, and the seller likes that he got money instead of the shares that he no longer wanted. (Although the stock probably would have been bought by somebody in any case.)
Sure, the economy is now essentially worldwide, and both people are likely to see those dollars return to them at some point, even if the CEO buys a yacht from a foreign company. That company has to pay workers, and at some point they'll probably want something American, like jeans, or a movie, or a copy of Windows.
I still think that the janitor's money scenario provides the most worldwide benefit. More people receive the money, the janitor gets more enjoyment from it, and more cycles can begin from it.

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