Trickle Up Economics

By Jack Peat 

“Give it to the people at the bottom and the people at the top will have it before night. But at least it will have passed through the poor fellow’s hands.” Will Rogers

Good capitalism is the ability to promote incentives and opportunity in equal measure. Sway too far one way and the potential of human capital is stifled, sway too far in the other direction and the willingness to realise this potential also goes amiss. Of late, bad capitalism has manifested itself in incentives over opportunities, and has become a parasitic drag on our economic growth as a result.

A recent IMF study has caused quite a stir in the western world, finding inequality can sabotage a market economy and can be a hindrance on economic growth. The findings point to the fact that, particularly in the US, things like food stamps, universal health care and perhaps a few other basic human rights might actually be a good idea. Not that we can now all go home feeling a little better about ourselves at night, but it actually makes economic sense.

Analysis by the rating agency Standard & Poor lends its weight to the argument. Despite market economies requiring a degree of inequality to function, the research revealed that the widening gap between the wealthiest Americans and everyone else has made the economy more prone to boom-bust cycles and has slowed the recovery from the recession.

The report noted that “a lifeboat carrying a few, surrounded by many treading water, risks capsizing”. In other words, the drive to comfort the comforted and afflict the afflicted, as Paul Krugman wrote in the International New York Times, has caused economic conditions that are bound to fluctuate because wealth is stuck in a slow downward trickle rather than a steady upward flow.

But this certainly isn’t a problem that is unique to the US, however well they might do at showcasing it. Figures from the Office for National Statistics revealed in May that Britain’s richest one per cent have accumulated as much wealth as the poorest 55 per cent of the population put together, with vast regional differences evident in what Oxfam’s Rachael Orr called a “shocking chapter in a tale of two Britains”.

This is hardly surprising given that the Prime Minister, Chancellor of the Exchequer and Mayor of London have implemented a raft of ‘wealth first, Brits second’ policies guided under the misled assumption that wealth will trickle down. As the welfare state is dismantled and the poor pay for the mistakes of the rich with debilitating bouts of austerity the state remains fixated on how we can accommodate more one percenters.

The IMF and S&P reports present politicians with a chance to act on inequality based on prudent economic factors. Rather than place spikes on doorsteps to prevent the homeless from getting shelter or squandering millions of pounds on water cannons to prevent the next London riots we could consider the impact trickle up economics could have on everyone, rather than the few. If “income distribution is robustly associated with higher and more durable growth”, why not consider passing a bit of wealth through the poor fellow’s hands?  Trickle up will benefit us all.

“Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all.” John Keynes