1.7. Trickle-Down Economics is a Global Scam

Milton Friedman should be included amongst Hitler, Stalin, and the Koch brothers in the list of the most evil people of the 20th century. It was Friedman who popularised the concept of trickle-down economics, providing an academic excuse for oppressive domestic and foreign policies worldwide. Wherever these policies have been introduced in the world, without exception we see the typical fingerprints of oppressive dictatorships take hold, with quality of life reduced, the widening of the wealth gap, and the increase in violence by the authorities against the people.

 

What is trickle-down economics?

The theory can be simplified into a two-pronged approach. Firstly, we give all the money to the wealthiest (and by “wealthiest” we include the large multinationals) who will use their wealth to build up their businesses, thereby creating jobs and improving the lives of all around them. Secondly, we remove all government regulations from the wealthiest and let the “magic” of the free market take shape. Under this model, consumer demand will magically prevent monopolies, enforce safety regulations upon workers and consumers, and prevent prices from rising too high. Market forces, so the theory goes, will move towards and equilibrium that benefits everybody and making the country and its people more prosperous.

 

What’s the problem?

The problem is that the theory is patently absurd. What happens in reality is exactly what you might expect to happen when all of the wealth is given to a small group of people and corporations with no restraint. They will use their wealth to extract more wealth from the population, and without regulations or an active government to prevent them, the population will have little choice but to bow to the wealthy. Workers’ rights are demolished, unemployment soars, public infrastructure is dismantled, and local economies are crushed.

 

Consider the following analogy. Let’s pretend that you have a quantity of money to spend on your community and your goal is to stimulate the economy of your community by as much as possible. You have two choices on how to spend it: give the money to the wealthiest or the poorest in your community.

What would happen if you gave it to the wealthiest? Without any incentive to spend it in their local economy they would either put it in their back pocket or spend it in a foreign economy. Either way, it will have zero impact on your economy.

What would happen if you gave it to the poorest? They would spend it immediately in their local economy on goods and services that they urgently need. The local shops would then spend that money on local goods and services that they need, and the recipients would do the same, and so on. So there is a multiplication effect as your initial quantity ends up having the spending power of several times its original value.

This is what economic theory calls the velocity of money. It is a measurement of how often a single unit of currency is spent to buy goods and services.

 

The bottom line is that if you want to stimulate an economy you should give as much to the poorest as you possibly can. Trickle-down economics requires the exact opposite.

Global application

In her landmark book “The Shock Doctrine“, Naomi Klein describes a number of situations where the US has forcefully imposed trickle-down economics on foreign governments worldwide. From Chile and El Salvador to Indonesia and the Congo, more recently in Iraq and Libya, and most recently in Syria and Yemen, we see the deconstruction of government infrastructure leading to death, suffering, destruction, and oppression. Those countries never prosper under this system, despite some being under the boot of trickle-down economics for decades. We saw it in action in the US and the UK through the 1980s, as Reagan and Thatcher crushed unions, destroyed worker’s rights and privatised vital services, and also in Australia, which has seen an erosion of worker’s rights (most recently with the Turnbull governments attempts to cut penalty rates for working on weekends and giving corporate tax cuts) and the continual privatisation of prisons, public transport, and utilities.

 

The corporate person is a sociopath

US law states that corporations are people, endowed with the same rights as any citizen. US Law also states that it is the fiduciary responsibility of all corporations to maximize their profit. They are not required to act in the interests of consumers or even their employees; and some have even been punished for doing so. For them it boils down to a simple cost-benefit analysis. If a corporation performs an action that kills people, but it makes more money then it would lose in court costs and payouts, then the corporation will willfully kill people.

 

As an example, consider the usage of asbestos by the construction and power companies in Australia. Timothy Hall lays this out in his book “The Ugly Face of Australian Business” (Chapter 3). The damaging effects of asbestosis had been known for at least 2000 years and documented in detail throughout the early 20th century, and yet the power companies, the Department of Mines, and asbestos distributers engaged in a cover-up of its effects on the public and their workers. The decision was based on an assessment of how much money they were making vs how much they would eventually pay out in court cases, and the government was threatened with the loss of hundreds of jobs if the mines were closed down. The companies even put aside funding to pay for those eventual court cases, which by the way have since been reduced; in 2015 James Hardie (the company responsible for the asbestos epidemic) cut asbestos compensation payouts by 44% with the blessing of the NSW government. There will be further discussion of similar examples in an upcoming supplemental blog.

 

If a corporation is a person then it is a sociopath. It will never act in the interests of the people around it unless there is a financial or legal incentive to do so. The role of government is to provide that incentive with, for example, the prosecution of its executives for criminal activity.

 

The privatisation myth

One of the favourite scams pushed by right wing political groups is the benefit of privitisation. The idea is that if we put public services in the hands of private groups then it will benefit the public in two ways:

  1. The service will be better because private business always does a better job than the government;
  2. The financial burden is passed from the taxpayer to the private industry, thereby freeing up the treasury for other things.

 

This, like all the myths sold to us to prop up the “free” market, is fiction.

  1. The service cannot be better when passed into the private sector because the top priority shifts from providing the service to making a profit. When resources are diverted away from providing a service to doing all of the things tied in with the public sector (extracting profits, marketing, etc) those resources are no longer available for the service. This necessarily degrades the quality of the service.
  2. The financial burden to the taxpayer increases when a service is privatised. There are obvious and less obvious reasons for this. Among the obvious reasons is that the service that was originally provided by the government is an essential one; that’s why it was in the hands of the government in the first place. This means that the service must be provided to the public regardless of whether the private sector meets its obligations or not. The buses must run even if the private bus company fails, the water must flow even if the water company fails to maintain the utility correctly. Rather than doing the obvious, which is for the government to reclaim the service again when the private sector fails, it continues to throw more taxpayer dollars at the private sector, which continues to badly run the service, and so on.

Additionally, many privatised corporations have contracts that oblige the government to pay the sector a full fee, even when the service is not provided. Take, for example, the private prison industry. Private prison contractors (prisons are ironically called “correctional facilities” in the US and Australia) often have contracts with the government called “lockup quotas”. This means that if the prison is not at a certain percentage of occupancy then the government must pay the contractor as if it was at that occupancy. It has been found that around 65% of the private prisons in the US have such lockup quotas in their contracts with the government with guarantees of anywhere from 70% to 100% occupancy (the most common was 90%). In other words, if a private prison was not 90% full then the government would be obliged pay the corporation as if it was 90% full. This has two perverse consequences. Firstly, the private sector is paid for a service that it is not providing, thereby adding unnecessary burden to the taxpayer. Secondly, it creates an incentive for the government to imprison more people to ensure that the prisons remain full and they are not wasting money.

There are more covert costs to the taxpayer as well. Two of the inevitable consequences of privitisation are layoffs and salary/benefit cuts. This passes the burden onto the taxpayer in the form of unemployment benefits, healthcare costs, litigation, etc. Additionally, private business are very rarely from the local area, meaning that they are managed and resourced from outside the local community, creating a drain from the local economy.

 

Privitisation is a dangerous myth designed to drain resources from ordinary taxpayers to the exclusive benefit of corporations and the wealthiest. It should be resisted at all times.

 

The explosion of wealth inequality

The real goal of trickle-down economics is the redistribution of wealth towards the wealthiest; to socialise the risk while privitising the profit as Noam Chomsky puts it. To this end it has been remarkably successful: Oxfam published figures last month showing that just 42 people now own the same wealth as the bottom 50% of the world population combined. In the US it is even worse: just three people (Bill Gates, Jeff Bezos, Warren Buffett) have the same wealth as the bottom 165 million Americans combined. Wealth inequality has exploded since the late 1970s, primarily as a result of two changes in the US: two supreme court rulings allowing politicians to be bribed, and the expanded enforcement of trickle-down economics globally. The size of the wealth gap today cannot be overstated and the role of the establishment is to continue to expand it. For the rich, there is no such thing as “enough money”. This will be explored in much more detail in a series of postings later in the year.

 

 

The most destructive scam in modern history

The bottom line is that the only thing large enough to fight the wealthy is a government. If you remove the government, you remove the ability to prevent the wealthy from doing whatever they wish to you and your society. The real purpose of trickle-down economics is, quite simply, to ensure a continual distribution of wealth to the wealthy from everyone else. Those who are smart enough to understand economics understand this and continue to perpetuate the most destructive scam in modern history.

 

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