Why Trickle Down Economics Doesn’t Work: Diagram


There are some features of our current economic situation which need some attention.

1. As the diagram indicates, the greater the pressure to reduce labor costs the less workers will be paid, and (obviously) the less they can spend.  Since they have less to spend, prices must be commensurate with aggregate demand.  The pressure to keep prices low puts the squeeze on suppliers and manufacturers to restraint wages for labor.  The pressure to reduce wages spirals down until the aggregate demand is so restricted that workers cannot afford to purchase anything other than the bare necessities.

2. The short term focus on quarterly earnings (to keep investors happy) magnifies the pressure to reduce production costs (wages + equipment) and contributes to the overall problem.

3. The economic system as currently practiced puts a premium on lower labor costs, but has fewer restraints on management.  If management can use bankruptcy to lay off workers with seniority, to reduce its pension obligations, and to liquidate corporate assets — while still collecting  their salaries and bonuses — then the merger/acquisitions game will be highly profitable for the investment advisers and executives; but, not for the employees.

4. Higher compensation for investors and executives combined with lower wages for employees creates the Income Inequality Gap.  The more the gap widens the less aggregate demand there will be for goods and services, and the greater the tendency to flirt with the economic death spiral.

5. Bankers worry about inflation; often about wage-push inflation.  When the primary downward pressure is on the employees’ side of the scale this fear is not realistic.

6.  Investors argue that “Gee Whiz, what are we worried about. This is a global economy, and if workers are willing to offer their skills at less cost over seas then what’s wrong with improving the quality of life in foreign lands?”  This is ultimately self defeating. Because…..

7. The widening gulf has a tendency to cause what one economist called a division of jobs into the “lovely” and the “lousy.”  [Reuters]  Highly skilled, highly educated, or highly placed individuals get the few “lovely” jobs while the downward spiral forces the majority into the “lousy” ones.  This serves only to further depress wages and hours, and push the spiral down harder.

This explanation ought to be simple enough for the low-information Crazy Uncle at any holiday gathering?

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