Reprinted from medium.com
"Economics, as it has been practiced in the last three decades, has been positively harmful for most people." Economist Ha-Joon Chang
For over thirty years we've treated something as fact which is actually false. Economists we trusted to know better, didn't, and so people have suffered and continue to suffer. This pernicious economic myth is the idea that a rising yacht lifts all tides, or as more popularly described, "trickle-down economics." If we are to start running our economy in a way we could one day describe as notably less insane, we must finally come to see it for what it actually is.An Undead Idea
This belief that it's good economics to give a relatively greater and greater share of the pie to the top of the economic spectrum because the absolute sizes of all remaining shares will grow, has taken some mortal hits in recent years by some major players, most notably even the OECD and IMF. In fact, it has now reached the point that the idea even being left alive at all in the minds of anyone, makes it a good candidate as an extra in The Walking Dead.
Surveying the data, we'll start with Wall Street bonuses versus the economic multiplier effects of higher velocity money, go on to economic growth research in relation to distributional inequality, and end with what we know from global cash transfer evidence and the economic effects of billionaires. Let's burn this undead idea of inequality-driven economic growth with napalm and bury it in concrete shall we?Section 1: Multiplication
After looking at some numbers, Mother Jones back in March 2015 tweeted a memorable chart along with possibly an even more memorable comment.
RT @MotherJones: This is one of the most fucked up charts you will see in the foreseeable future http://t.co/BlHNmufut0 http://t.co/utvG1sq… at http://t.co/BlHNmufut0— Barnie Giltrap (@bgiltrap) January 4, 2016
This chart alone is perhaps enough to warrant a trip to the nearest window to shout out, "I'm mad as hell, and I'm not going to take this anymore!"
Wall Street earned twice as much in year-end bonuses alone as all full-time minimum wage workers combined earned the entire year.
What Mother Jones neglected to mention however is something that goes well beyond "fucked up", and something which did not go unmentioned in a piece by the Institute for Policy Studies after identical news the year prior.
Every extra dollar going into the pockets of low-wage workers, standard economic multiplier models tell us, adds about $1.21 to the national economy. Every extra dollar going into the pockets of a high-income American, by contrast, only adds about 39 cents to the GDP. These pennies add up considerably on $26.7 billion in earnings. If the $26.7 billion Wall Streeters pulled in on bonuses in 2013 had gone to minimum wage workers instead, our GDP would have grown by about $32.3 billion, over triple the $10.4 billion boost expected from the Wall Street bonuses.
Yeah, you just read that right. In 2013, by giving huge bonuses to those on Wall Street instead of low-wage workers, we actively prevented the creation of about $22 billion in additional national wealth. In 2014, we did the same thing, but to an even larger degree, preventing about $23 billion in additional national wealth that would have otherwise been created, had those billions in bonuses been distributed to low-income earners instead.
In 2013 and 2014, by giving huge bonuses to those on Wall Street instead of low-wage workers, we actively prevented the creation of almost $50 billion in new national wealth.
Year after year, we prevent new wealth creation. Why is this the case? What causes such a big difference in wealth creation, such that money at the bottom is over three times more effective at driving economic growth than money at the top?
Well, economists call it the "multiplier effect" whose origins are in what's called the "marginal propensity to consume." It describes how those with little money spend it quickly and those with lots of money don't.Fast Money vs. Slow Money
Simply put, monetary exchanges have a frequency rate"---"-a "velocity""---"-and this velocity is far higher at the bottom than at the top. When you have a lot of money, each individual dollar for the most part just kind of sits around. Sure, it may be put to use eventually, but these dollars are more like gold coins inside Scrooge McDuck's bank vault. Occasionally they get swam in, but they're really just there to be counted and look shiny. Additionally, they can even get sent overseas, to sit around in vaults elsewhere.
Looking at the latest money velocity charts and comparing today's numbers to the historical record, is all one need do to see what happens to the overall rate of market exchanges when we start letting the top accumulate more and more of the total money supply.
The velocity of each dollar in our total money supply is now lower than it's ever been recorded, in all of U.S. history.
We are exchanging the dollars in our money supply more slowly than even during the Great Depression. The result has been an economy growing more and more tilted everyday, such that even Disney itself, a company built on middle class consumption, is actively leaving it behind in an accelerating sprint towards that shrinking population with money to spend in greater and greater amounts.