Trickle down is, perhaps, the greatest of the lies perpetuated by economists. At its heart is the claim that when states conduit currency into the bank accounts of the very rich, it will – through investment and growth – make its way into the pockets of everyone else. So, for the best part of four decades, government policy across the western world has been geared to shovelling as much new currency as possible into the hands of the already wealthy.
The idea of trickle down – for those who were not just cynically exploiting it as a cover for socially-destructive avarice – was based on observations made during the early period of industrialisation in Britain and the far more spectacular period of US-led global expansion between 1953 and 1973. Those two decades, in particular, form the basis of most mainstream economic and political thought today. However, as they recede into distant memory, it is becoming increasingly clear that they were an anomaly. The natural tendency of capitalism is not to invest in productive capacity and expansionary growth. Rather, its natural state is seen in periods of asset speculation that result in stagnation and fragmentation; such as those in the late nineteenth century, the 1930s and in today’s long decline.
Since the crisis of 2008, governments have used quantitative easing and very low interest rates as a means of channelling new currency into the hands of the already wealthy in the mistaken belief that they, in turn, would use it to invest in the new business activity, new jobs and increased consumer spending that would eventually kick-start a new round of growth. It didn’t happen. Instead, we have lived through a decade of massive asset inflation coupled to the worst wage and productivity stagnation in the last 150 years.
If you are one of the fortunate few to derive your income from wealth rather than work, the past decade has been party time. Assets of all classes – property, financial investments, land, fine art, collectables, etc. – have risen in price far faster than the rate of inflation. If, on the other hand, your income is derived for work or – god help you – what remains of a fast disintegrating social security system, then you have experienced a decade of stagnation at best; and most likely one of falling living standards. This is the reality of trickle-down economics – the rich get richer and the poor get poorer.
Today, however, a tiny sliver of all of the new currency that has been gifted to the wealthy may finally be doing what the economists and politicians promised us the policy was supposed to achieve. The wage growth that the trillions of dollars, euros, pounds and yen of QE were supposed to trigger appears to be happening. As the Bank of England’s Monetary Policy Committee observed last week:
“The firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates…
“The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”
In the USA, the Federal Reserve Bank was more succinct. As Donna Borak at CNN Money reported in January:
“New York Federal Reserve President William Dudley is worried new tax cuts could risk overheating the U.S. economy in the next few years…
“If the economy grows too fast, he said the Fed will have to raise interest rates faster than expected. That could make borrowing money more expensive.”
Economic pronouncements of this kind are deliberately dressed up in esoteric language to give the little people the impression that they are too stupid to understand the complexity of economic policy. But we can translate what the central banks are saying to us into a much simpler statement:
Now that your wages are rising, inflation is threatening our wealth. So we are going to make enough of you unemployed that wages will fall again.
That is what central bank interest rate policy is designed to do. Cutting rates means making currency cheaper to borrow; allowing more spending and thus a small increase in employment and wages. Raising interest rates does the opposite. Currency becomes more expensive; companies and households stop borrowing and spend less; demand drops, jobs are cut and wages go down.
The problem is that after 40 years (almost an entire adult lifespan) of this nonsense, people see it as natural and inevitable rather than political. Inflation, we are told, is the number one evil against which all else – employment, social security, public services, living standards and even life expectancy – must be sacrificed. And yet hardly anyone alive today can remember high inflation; let alone the entirely artificial (i.e. it was a deliberate policy) hyper-inflation in Germany in 1923/4.
The assumption that everyone loses from inflation is wrong. Someone buying a house in Britain during the 1960s or 1970s did exceptionally well out of rising inflation. This is because mortgages are paid back in absolute rather than relative amounts. That is, if someone had bought a house for £5,000 (yes, you could buy them that cheaply in the 1970s) despite double-digit inflation across the decade, the amount they had to pay back remained £5,000. Crucially, wages were increasing over the period too. So in relative terms (i.e., the proportion of wages need to repay the loan) was shrinking both because of the fall in the value of the currency and the rise in income.
There were losers, of course. Savers and people on fixed incomes did badly (although this might have been mitigated by increases in social security payments and tax reductions). However, the real losers were the very wealthy; whose incomes were derived from a return on assets. By the mid-1970s, their losses were such that they began to mount a concerted political campaign to overturn the post-war policy focus on full-employment (which was seen as essential to preventing a resurgence of the political extremism of the 1930s) and to replace it with a focus on low-inflation. The result was the election of Margaret Thatcher and Ronald Reagan, and the unleashing of Neoliberalism.
Just as, by the late-1970s, the inflationary wage-price spiral had become so extremely weighted in favour of working people that it was undermining our social and political structures; so Neoliberalism has now gone to the other extreme. As Rob Macquarie at Positive Money points out:
“The latest ONS Wealth and Assets Survey, released last Thursday, once again showed the sheer extent of wealth inequality in the UK. A comparison of percentile figures with those from the previous wave suggests households in the wealthiest 10% gained on average nearly 700 times as much as the poorest 10% between 2012-2014 and 2014-2016.”
Against this backdrop, all averages (wages, living standards, etc.) no longer make sense. Instead, we have developed two distinct economies – the asset bubble economy of the very wealthy, pumped up by QE and low interest rates; and the imploding “real economy” in which borrowing and spending have collapsed, businesses are closing, jobs are being decimated and wages have collapsed. It is against this backdrop that the central bankers talk about an “over-heating economy.”
If we are to have an economy within which even the slightest improvement in wages and employment prospects is savagely beaten down with higher interest rates and more austerity, then we can hardly blame the people on the receiving end when they embrace change even when it is extreme. As Polish economist Michal Kalecki, writing in 1943 observed:
“One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.
“The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of ‘sound finance’, which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.
“The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, ‘discipline in the factories’ and ‘political stability’ under full employment are maintained by the ‘new order’, which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.”
History does not repeat, although it often echoes. It is highly unlikely that we are about to witness a repeat of the Nazis (which tends to be everyone’s default when discussing fascism). It is, however, worth remembering that Italian fascism under Mussolini maintained itself in power for more than two decades; and might have remained for a lot longer were it not for the decision to invade France in June 1940 in the mistaken belief that the war was about to end. That is, while continuing with the politics of trickle down is not about to result in brown-shirted paramilitaries tearing down our democratic institutions; we are sleepwalking toward alternatives that will likely still be extreme and brutal. In Brexit and Trump, we see the first rumbling of this. The people at the bottom of the heap have served notice on the elite that enough is enough. From now on we are going to vote for anything – left or right – that promises to disrupt, undermine and ultimately tear down the Neoliberal trickle-down fiction. And the longer this goes on, the more extreme the alternatives that we are prepared to countenance are likely to become.
As you made it to the end…
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