All entries for Saturday 11 March 2006

March 11, 2006

Response to Twenty Years of the Trickle–down Effect

A few comments this interesting post from John Kahn.

The Myth at the heart of the dominant system – For over two decades, followers of the neo-liberal doctrine prescribed by economists such as Milton Friedman, and practised devoutly by Margaret Thatcher and Ronald Reagan have insisted that there is no need for active and progressive, redistributive measures: wealth will essentially redistribute itself. The idea is that prosperity will gradually ‘trickle down’ from the spending of the rich towards the poor, as money is spent. Yet this central tenet of the dominant economic model of our times is baseless, discredited and elitist.

The myth is a caricature of a reasonable person would say. Neither Friedman nor Thatcher would posit an inevitable drift towards equality of outcome. 'Trickle down' is not a phrase I've heard uttered in my 3 years within the economics department. Academics and textbooks state clearly the desirability of active transfers.

Advocates of tax cuts would say say excessive focus on redistribution isn’t necessarily in the long run interests of those groups deemed vulnerable. Whether or not one sees the profits and income of the wealthy as deserved, they ultimately contribute most to the welfare state in absolute terms. Hostility to wealth reduces incentives to acquire any in the first place and encourages businesses and individuals to go abroad and/or stick their money into elaborately tax shelters. There may be a better balance between welfare spending and the prosperity of businesses but let’s be explicit about what we forego by focusing on the former.

The relentless pursuit of higher profits, tax cuts for the rich, government spending cuts, deregulation, privatisation and competition has been pursued under the theory that such policies will actually benefit the entire population. Yet twenty years of neo-liberal recipes and the ‘trickle-down effect’ have only brought greater inequalities and further injustice. The gap between the rich and poor has increased wherever neo-liberal policies have been applied.

How does this alleged increase in injustice square with the UK’s experience over time? We have an education system guaranteeing universal access to primary and secondary schools, things that one upon a time were reserved for the so called elite. We have the NHS which along with the pharmaceutical industry has raised life expectancy to record levels for men, women and minorities, lowered infant mortality, reduced deaths from cancer and other life threatening ilnesses and is free at the point of use. Yet the welfare of the UK’s poor has fallen over time? I’m not a huge fan of many things our government does but the vision of wholesale exploitation and destitution you put forward makes a mockery of the progress we’ve seen; particularly when a large proportion of the world’s population wouldn’t mind coming to a country where even those classed as poor probably own a car, television and mobile phone.

I personally don’t equate inequality with injustice. I see injustice in barriers to achievement. An income differential of £30k in today’s society is certainly a barrier but I doubt it’s one inherent in every market society. Its importance is exacerbated by an education system that doesn’t perform as well as it’s more independent competitors. Another barrier would be the low thresholds at which low earners begin to pay income tax. Unfortunately there’s no consensus as to what constitutes a barrier that is worthy of correction.

By 2001, the three richest people in the world possessed a fortune greater than the sum of the Gross National Products (GNP) of the forty-eight poorest countries, a quarter of the countries in the world. In more than seventy countries, between 1979 and 2001, average income has actually decreased. Almost three billion people, half the population of the world, live on less than two Euros a day.

Is it because Bill Gates, Warren Buffet and Paul Allen have lots of money that others don’t? As mentioned earlier, you can’t decide a ‘correct’ level of societal liability on the basis of posterior observations of successful businessmen. The majority of new businesses fail. Many do OK. A minority do extremely well. Gates and Buffet are anomalies relative to the full set of businessmen and their existence doesn't indicate a flawed system; just as you couldn’t look at the millions of businesses and businessmen (all potential taxpayers) who've gone bankrupt and conclude that levels of taxation are too high.

The development of China and India thus far hasn’t led to an equal and opposite effect elsewhere. Wealth can be created. There's a huge body of literature stressing the impact of geography, quality of governance, transparency, law, property rights and ethnic/resource based internal conflict. To lay the blame for falling incomes/poverty elsewhere on any single factor is incorrect.

Bear in mind that those who’ve suffered at the hands of the IMF and World Bank loan conditionality approach these organisations because the status quo was yielding problems. It isn’t the case that all was hunky dory until the discredited Washington Consensus nor is it credible that the harm done is the sole reason for poor performance today. Even Joseph Stiglitz, former World Bank chief economist and fierce critic of past policy in this sphere, lays blame not on the inherent folly of the ideas, but on very crude mechanisms of implementation and lack of regard for individual country characteristics. This period in history and countries like Argentina are a cautionary tale. They cannot be used as proof of the folly of economic conventional wisdom without also explaining why the UK, US, France, Germany, Italy, Switzerland, Belgium, Singapore, Hong Kong etc seem to do fairly well.

Ignoring the clear majority of global public opinion, neoliberal globalisation threatens to replace the diverse cultures, landscapes and political systems of the globe with a single McWorld, or monoculture.

Cultural practices and language have never remained static. Greater connectedness has made it easier for those here to experience foreign food, music and film. The same will be true of those abroad. Globalisation increases the availability of aspects of culture previously limited to the more developed world. Lets be frank here; you’re no real evidence to suggest that all countries at all points in time will tend towards the prevailing culture in the UK or US, assuming these cultures can be well defined. It’s an assertion. It’s no less valid for me to state that globalisation will enhance diversity within countries. A branch of McDonalds in Bangalore isn’t successful by pure chance. Its success or lack thereof will be driven by the desires of consumers. Whether or not one thinks it’s desirable for fast food to be popular abroad is frankly irrelevant. It’s what has been chosen by the individuals, so be it.

As an aside, the article lined to within the post, entitled Trickle-Down Economics: Four Reasons Why It Just Doesn't Work is odd. The author arrives at the conclusion that “Bush's top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth”. It considers changes in economic, wage, and income growth together with change in job creation over time as the top rate of tax has fallen. It’s odd because its analysis is supposed to be statistical rather than verbal. If you’re going to do that, you may as well do it properly. No fancy regressions here. No attempt is made to control for, or even consider interest rates, inflation, unemployment, exchange rates, foreign shocks, productivity growth, etc. The author deduces causation on the basis of trends, and rejects causal links on the basis of corellation coefficients. Not to mention the underlying assumption that tax cut advocates mean cutting income tax solely for the rich; as opposed to corporation tax, direct taxes on the poor/middle classes and indirect taxes. The conclusion reached may be correct, but the reasoning doesn’t support it.

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