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Bubble Up vs Trickle Down Economics

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Bubble Up and Trickle Down Economics: What Are They?

Trickle down economics is the theory that if you allow more money to flow to the upper income class, people of this class will invest in business and spend more money, and the resulting overflow will trickle down to the lower income class, benefiting them as well.

Bubble up economics is the theory that if you allow more money to flow to the lower income class, people of this class will spend more money that will eventually rise up to the Upper income class, benefiting them as well.

The question posed here is which model is better for the economy as a whole? But the U.S. is a capitalist, free market system, isn't It? Doesn't the market decide who gets what, not the government?

The U.S. is far from a purely capitalist, free market society. There are numerous laws and tax codes that favor individuals differently, usually benefiting either the upper or lower income classes more. The market dictates much but certainly not all of "who gets what."

Our tax laws, of course, are the easiest example, with different tax rates applied to different income levels. But there are numerous other types of laws that benefit either the lower or upper income classes more, and stray from a purely free market or capitalist system model.

Laws that benefit the lower income class:

  • Anti-blacklisting laws
  • Protections for unions
  • Child labor laws
  • Racial, age, and gender discrimination prohibitions
  • Employee rights laws
  • Political donation restrictions (so that the wealthy can't steal elections)
  • Minimum wage laws

Laws that benefit the Upper income class:

  • Land and mineral ownership rights
  • Capital gains benefits
  • Corporate loopholes
  • PATRIOT Act restrictions that limit off-shore dealings for individuals but not for business
  • Lobbying permissions (so that the wealthy can influence new laws)

Still think we're a capitalist, free market system? This is how it would look if we were:

There are many strictly non-free market regulations that benefit one income class more than another. A "truly" free market society would have no restrictions, with businesses and individuals being able to do whatever they want:

1. Business hiring. Companies could hire children, at poverty level wages, to work in coal mines because they're smaller in stature and cheap. This was the case for a long time until laws restricting underage employment were made, as well as minimum wage laws.

An employee who causes trouble (asks for a raise or complains about unsafe work conditions) could be fired and other companies in the area notified that the individual is a "troublemaker," effectively ruining that employee's options for ever finding work. Anti-blacklisting laws came out of this practice.

2. Mineral resource rights. Someone finding a rich gold or oil reserve on their land could keep every penny of wealth from that land. Currently the resource is treated as a public asset and taxed at a much higher rate.

3. Political donations. An individual or company could give as much money as they wanted to a candidate, essentially ensuring their victory. We currently have many restrictions on how much an individual or business can donate.

Lobbyists could give money to politicians freely to "encourage" laws that favor the lobbyist are passed. There are restrictions here, but lobbyists certainly yield a lot of sway.

The list is really endless, and these are just some obvious examples.

Since we really aren't a truly free market system, how should we decide who gets more? Which economic model is better for the economy? The question is, if you're not going to insist that we should live in a purely free market system, how would you weight taxes and financial benefits to achieve the strongest and healthiest society as a whole: towards the lower or upper income class. What happens when we favor one class over the other? Here is a proposition of how each class might spend their extra money:

1. Vacation spending

  • Lower: More likely on a destination closer to home, benefiting the U.S. economy more.
  • Upper: More likely abroad, benefiting foreign economies more.

2. Investing

  • Lower: U.S. products (bank savings, mutual funds)
  • Upper: Foreign products (off-shore high risk/return ventures)

3. Running a business

  • Lower: Create or expand a small business (certainly inside the U.S.)
  • Upper: Move part or all of their business structure off-shore

4. Automobile

  • Lower: A family vehicle, economical, average performance, U.S.-made
  • Upper: A high end vehicle, gas-guzzler, sexy, foreign-made

5. Discretionary

  • Lower: More likely to spend on education, career advancement
  • Upper: More likely to buy luxury items, boats, jewelry

6. Education

  • Lower: Adults more likely to pursue career advancement; children more able to afford college
  • Upper: Already understands the benefits of higher education, can afford it, so probably no additional money would be spent here

7. Home purchase

  • Lower: Certainly a U.S. home, maybe a first
  • Upper: More likely a second home, possibly a foreign getaway

8. Stability:

  • Lower: Additional financial resources might mean a stay at home parent, more time with the family, relief from stress.
  • Upper: Can already afford a stay at home parent, time with the family, relief from stress.

As you can see, when the lower income class spends money, it helps the U.S. economy more. As this list suggests, putting money into the lower income class gets that money working through the U.S. rather than foreign economies. It favors U.S. products and business, and provides for a healthier and more productive lower class.

Additional economic benefits accrue when the lower income class gets more. I would argue that when you shift money to lower income individuals, it will eventually end up in the hands of the upper class anyway, with these additional advantages:

1. Benefits every part of the U.S. economy. The money will cycle once through the economy before it gets to the upper class. On products and education, every part of the U.S. economy gets to "touch" this money before it makes its way into the upper class. This will benefit local businesses, liquidity, incentive for education and career advancement.

2. Incentive to invest in the U.S. The upper class will have more incentive to invest in U.S. businesses and the U.S. economy rather than abroad, since there's more money in the U.S. now to acquire. This provides additional stimulus to the U.S. economy rather than for some other emerging economy.

3. It adds to the U.S. tax base. Larger corporations often pay far less in taxes than the individual or small business, through corporate loopholes and shifting of businesses offshore. Money in the hands of the lower income class adds directly to products and businesses that increase the U.S. tax base. A higher tax base gives government more to improve infrastructure (transportation, health, schools), grants and loans for education and small business, and disaster relief.

Feed the roots and the tree will grow strong. Plant in the desert and the tree will die.

Allowing more money to flow to the lower income class, through tax breaks and incentives, benefits the U.S. as a whole far more than flowing money to the upper income class.

Of course the extra income will eventually end up in the hands of the wealthy anyway — that's where it goes. But at least the wealthy will have to earn it, investing more in the U.S. economy to eventually acquire it. The less wealthy will get to hold it for a while at least and develop a taste for it that might encourage them to acquire even more, spurring employment productivity, small business, and education.

The notion here is certainly not that people in the upper income class are undeserving. In some cases these people inherited their wealth. But in many cases, if not most, they got there as a result of extra effort, extra talent, and/or extra luck. Any or all of these go into becoming successful and are entirely worthy traits.

Yet, it would be healthier for society as a whole to even out the distribution between the haves and the have-nots — not in a Robin Hood sort of way, but in leveling out the playing field. This can be done with adjusted tax rates, investment in public schools, and cheaper and more available college and business loans.

"Bubble up" far outweighs "trickle down" in benefits to the U.S. economy. The U.S. started as a government "by the people for the people." Maybe it's time to really believe it.

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About Jon Fernandez

  • Arch Conservative

    You are correct in that we are in now way a free marketsystem though. Big government and big, international business and banking are in bed with one another and their interests are the same.

    if you aint in that elite country club your life, livlihood and general welfare has no value to those who are.

    Compared to so many in the world the average American has it pretty damned good. There are parts of the world where children are born into poverty and misery and this is all they will ever know of life. But here in America most of us in addition to the necessities, enjoy many creature comfoirts such as ipods and big screen tv’s. We’ve been inculcated into believing that material possessions and wealth are the only things that matter. We view them as the sole purpose in life. Most of us are greedy. We overextend ourselevs on credit cards because of this greed. We buy homes and cars whose primary function is to serve as a status symbol that we may display to others.

    It is our comfortable lifestyles and mind numbing pop culturte and media that has put so many Americans to sleep. We are for the most part completely complacent while politicians and corporate jackals rob us blind. Those who do become engaged for the most part fail to avoid the pitfall of the broken corrupt two party paradigm. Too many of us fight the futile battles of left vs. right, dem vs rep. etc etc While we’re doing this it’s the power elites on both sides of these battles that are actually a unified entity who merely pay lipservice to the contrary, that are cornholing more each and every day. Those who try to tell the truth are labeled as fringe or nuts. Evidence of this can be seen inthe way that Ron Paul is treated. He speaks the truth and as a reward is ridculed by the corporate media and those in his own political party as well as many ignorant citizens. What have we become as a nation when we first seek to riducule and deny the truth and those that speak it because we either don’t want to hear it or are to ignorant to recognize it?

    Prior to the creation of the federal reserve in 1913 we were the largest creditor nation in the world. less than 100 years later with the advent of the Fed, the UN, and credit cards among other things we are no the largest debtor nation in the world.

    Forgive me for not addressing the points of your article directly Jon but I find the socioeconomic much more interesting than the purely econimc which can be rather dry and boring.

    The way I see it America has two choices. We can continue to remain complacent and allow the politicians and globalists to sell us down the river until we are nothing but a broken down third world wasteland of misery or we can awaken, turn off the TV, and engage, en masse, in a full on socioeconomic revolution. As with pretty much all things in life, the choice to do the best thing is the choice to do that which is most difficult.

  • http://delibernation.com Silas Kain

    Arch, your last paragraph sums it up. We both agree 100%. Now, there’s a start. Think we can facilitate more dialogue or is this a pipe dream?

  • http://www.republicofdave.com Dave Nalle

    Forgive me for not addressing the points of your article directly Jon but I find the socioeconomic much more interesting than the purely econimc which can be rather dry and boring.

    If you actually read the article you’d find it full of amusing and somewhat delusional views of economics. I’ve rarely seen so many biased statements putting a political spin on economic issues in one place at one time.

    Dave

  • Arch Conservative

    I don’t know if we’re beyond the point of no return Silas. Our inane, puerile, pop culture has successfully deadened the critical thinking of so many.

    The fed government has wasted a few trillion dollars in the past year and a half but who cares when the new season of American Idol is going to start in a few weeks.

  • Baronius

    Jon, I think you’re missing an important point – maybe the most important point – of trickle-down economics. It’s not about letting the rich spend money, it’s about letting them invest money. A greater percentage of the rich’s income goes into savings, which leads to potentially job-creating business investment.

    You also raise the specter of the wealthy spending money overseas. Spending, I don’t care about. (I don’t care who has how many houses, either, but that’s a side point.) What about their investments? Will they be in the US or abroad? There are economic benefits to the US to both, but let’s stick with your premise that domestic spending and investment are preferable. So, how can the US increase the rate of domestic investment? By lowering the tax rates on investment income – which is the primary policy recommendation of trickle-down economics.

    It’s worth noting that projects like the Grameen Bank use the same principle in microfinancing, getting those with extra money to invest in business opportunities for the poor. No one would argue that microfinancing is all about the wealthy, though. Microfinancing works in places that lack the financial markets that facilitate investment. In the US, we have those structures, so the best way to stimulate investment is to cut taxes on it.

  • Glenn Contrarian

    I’ve referred to the Philippines before as a Republican paradise. Why? Because in that country there are very, very few protections for the lower class, and the upper class is largely unrestricted…and agitating for social reforms such as the formation of unions can get one ‘salvaged’, which is the local lingo for getting killed.

    Thing is, this is fairly NORMAL in third-world countries…whereas there is NO example, not a single one, of ANY first-world country maintaining a high standard of living while having as few restrictions as the Republicans and libertarians want.

    On the other side of the coin, every single one of the countries with a high standard of living maintain a social safety net for the less fortunate…and generally speaking, the stronger that safety net, the higher the standard of living of that country as a whole.

    Of course the BC conservatives don’t want to hear how their theories work out in the REAL world. They only want to pretend their fantasies of a Ayn-Randian paradise…and as with communism, libertarianism sounds wonderful in theory, but in the REAL world it DOES NOT WORK.

    Why? Again, just like with communism, while the theory might work for some people, for the vast majority of humanity, it is simply incompatible with human nature.

  • Arch Conservative

    Glenn….have you ever considered the idea that some people just don’t deserve sympathy and compassion?

    How many of us know someone that drives around in a very expensive car or perhaps makes large unnecessary purchases on credit cards and the complains about how tight money is?

    I work in IT services and deal with a client that helps women who are addicted to drugs, may have been battered or have other problems get their lives back together. I have overheard many of the bleeding heart liberal counselors discussing how some of these women, once they get on the state government assistance gravy train refuse to get a job or take any responsibility for themselves. They just want to stay a victim because they get a check for being one without having to do anything to earn that check.

    How much of my tax dollars and yours must we give people like that to make you happy Glenn?

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “Glenn….have you ever considered the idea that some people just don’t deserve sympathy and compassion?”

    Would God say that, Archie?

  • Cannonshop

    The problem with your theory really comes down to application. YES, we need laws to govern commerce. They need to be enforced, and they need to be Enforceable. YES, we need a ‘social safety net’, but it can’t be everybody, it’s GOT to focus only on those who truly can not do for themselves. (and yes, there IS a difference between “Can Not” and “Will Not”.)

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    So what shall we do with the rest? Send them to Labor Camps, Soviet style, for the purpose of re-educating them on the virtues of good citizenship and social productivity?

  • Cannonshop

    10: No, Roger, you let them learn the hard way, on their own. It’s like reforming a drunk or a junkie-you can enable them for years in ‘treatment’ that doesn’t treat them, you can warehouse them in hospitals and prisons and they don’t learn their lesson, you can prop them up on SSI and you’ll be paying them for eternity…

    Or, you can let them experience hunger, and jonesing, and shitty conditions until they’re ready to help themselves.

    I have no problem giving someone a hand up, I have a BIG problem giving them a hand-out.

    Freedom doesn’t just mean free to succeed, to be free to succeed, you have to be free to fail-and that includes being free to suffer the consequences of your failure.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Well, let’s re-institute then the poorhouses from the Dickensian times.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    And while we’re at it, debtor prisons, too.

  • http://drdreadful.blogspot.com Dr Dreadful

    Cannon, are you saying that addict rehab programs never work?

    Because if not, you’d better abandon it as an analogy.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “Suffering is good for the soul,” Cannon, as the saying goes. But it’s an adage I’m quite ready to adopt to my own life and situation.

    I’d say it’s another thing entirely when we’re trying to impose some such schema, for better or worse, on others.

    It’s like playing God, IMHO. And I’m not quite ready to step into Her shoes.

  • FitzBoodle

    Capitalist theory asserts that power resides in the hands of the owners of capital, i.e., land, factories, tools, etc. Others should have no power because they have no vested interest.

    Capitalism is antagonistic to “Free Markets”, as every capitalist seeks to expand by driving his competitor out of business or buying him out. Capitalism is about growthsupported by power.

    The violent antagonism between Capitalism and “Free markets” is the cause of the distress that AC and other rightists feel about the absence of free markets in capitalistic society.

    Capitalists don’t want to compete, they want to dominate.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Quoted for truth. What may have been once humble beginnings necessarily turns into a monster.

  • Cannonshop

    #14, no doc, I’m saying they only work when the Addict is ready to quit, and not before then. You can’t “Make” someone get better, all that happens when you try, is they go back to the habit. The’ve got to be ready to at least Listen first.

    I’m speaking as someone who can’t ever take a drink of alcohol again. If I do, I’ll be addicted again.

    Instead, I drink a lot of coffee and sometimes go to AA meetings if my resolve wavers-but it’s worked so far because I make it work.

  • Cannonshop

    #15, Roger, I think it’s a peach if you want to try and help someone who refuses to help themselves-as long as you’re doing it with your own funds, your own time, your own resources. Hell, I might even be talked into helping you-if only because there is always the possibility of being wrong.

    I resent being forced to do so. Intensely, and find it to be MORE immoral to force others to do what I wish done, but don’t want to do myself.

    Get the picture? It is WRONG to force other people to pay the bill for your hopes and dreams.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    I ain’t talking about what you are ready to do, Cannon. That’s not really my concern. But the point is, you are a part of a larger community. And whether you agree with the community decision to help all those who need help – whatever that entails – or don’t agree, it’s your business. So until you change the MO or manage you have your way, you’re kind of stuck, aren’t you. Of course, you can always leave.

    Mind you, I’m not addressing now how you ought to think and feel about your countrymen (soon to become an obsolete term, for sure.) That’s not up to me to say. I’m only addressing the pragmatics, the fact that you are happen to live in a society you’re increasingly coming to despise.

    So what can I say?

  • Cannonshop

    #20, Roger, as I expressed earlier-I have no beef with helping people who actually NEED it. I have a problem with being forced to help those who simply WANT it.

    Examples:
    Need: People with actual disabilities, including mental disabilities (Low intelligence), Children, the elderly, the unemployed who’re actively seeking work. I’ve got no problem with giving these folks help.

    Want: People who refuse to work, Artists who don’t do art that sells, Healthy people with no disabiities that aren’t actively seeking work or starting businesses of their own, Drug addicts who aren’t serious about quitting, CEO’s who bankrupt their corporations through fraudulent, criminal, or merely stupid actions.
    /examples.

    See? NEED help. sure, I’ve got no problem with helping people who NEED it. I have problems when I’m compelled to provide a living to people who merely WANT it.

  • Cannonshop

    Short form, “Those that will not give, should not recieve.”

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Well, Cannon, should I say I empathize with you? Such is the government you’re under, and so am I.

    But besides the obvious, I think it’s rather uncanny to speak of people who merely want rather than need. Do you have any specific examples in mind? Your family, neighbors, friends? Anyone you know personally.

    It’s rather callous and highly presumptive to speak of “people” in such general terms, apart from any specific instances. My intellectual integrity wouldn’t allow me.

    But then again, forgive me because I have no right to speak for anyone but myself. So in that spirit, I concede.

    Happy New Year.

  • Cannonshop

    #23 Yes, I have relatives that I wouldn’t piss on if they were on fire, as a matter of fact-because they sponge off of the system and consider it their god-given right to force other people to pay for their lifestyles.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Well, I’m sorry to hear that. Which is why, no doubt, it’s also so personal to you. But you do know, of course, there’s a danger there from generalizing to any chunk of the population. A natural predisposition, by all means, but perhaps you should try to resist it.

  • Arch Conservative

    Would God say that, Archie?

    Probably not but then god isn’t competing with those people for finite resources …and do you really think it’s appropriate to hold me to the same standard as God?

    I mean I know how charming I can be, but I think you’re taking it a little too far.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Well, just add a drop of love to your natural charm and who knows – it may turn out to be a heck of a cocktail.

  • Jon Fernandez

    Arch, I agree with much of what you say. Is there a malaise in people that have enough material goods that they become numb to the bigger picture – certainly. Is there an attempt of the super-haves to perpetuate the system that got them there – certainly. But I wonder that there are more forces at work than just that. The fact that there is a Ron Paul in office – and that he’s still elected and actually gaining credibility – is encouraging that the battle isn’t over and may very well be fully underway. I think the human spirit is always neglected in these discussions, and that people in a mostly invisible way are changing the face of the world, and aren’t as cowed or unaware as it might seem.

    Which is why I even bring up an article like this. I’ve noticed that there’s a real “proof is in the pudding” kind of mentality related to what it means to have and to have not. If you’re poor, that is proof in itself that you are a failure in some way, and a dollar spent on you is a dollar wasted. If you are rich, that is proof in itself that you have something special, and money given to you is money well spent. I would suggest that there are just as many hard working over achievers at each end, as there are under achievers at both ends. Go to a country club or a ghetto, and I wonder that you will find as much talent as you will find sloth in both arenas.

    So if there’s equal talent at both spectrums, then where does a society invest to achieve a better return – the haves or have nots? Think what an extra $1000 in the hands of a poor mom trying to raise her children would do. What would an extra $1000 given to someone who already has plenty accomplish?

    As has been mentioned, all of this is conjecture and not backed up with any kind of study or statistics. But I’m not afraid of common sense. All you need to do is look around and see that things are different now and it isn’t working. There are certainly more dual income households nowadays than in my parent’s generation. Is there any way this is better for the children growing up through this and entering the work force? Drug use is up. Violent crimes are up. The gap between the rich and the poor has never been more precipitous. Isn’t that always when revolution occurs or needs to occur?

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    “If you’re poor, that is proof in itself that you are a failure in some way, and a dollar spent on you is a dollar wasted. If you are rich, that is proof in itself that you have something special, and money given to you is money well spent.”

    Right, these are our stereotypes and they’re hard to break, especially for a person who himself is struggling and trying to make their ends meet. So the natural question that occurs to them: If I can do it, why not “they”?

  • Arch Conservative

    Well the one things that irritates me is that so many seem to think that society is a failure if not everyone has a happy successful life without need.

    That’s horseshit.

    Not that there aren’t societal impediments to many that keep them from getting ahead but on the flip side there will always be those who are smart, persistent and possess foresight. Conversely there will always be those that are lazy, stupid, apathetic and never thinking of tomorrow.

    I don’t see how it is encumbent upon those who do not fall into the latter group to take care of those who do.

    What I object to is when those with money and/or power take advantage of anyone they can for the sake of more money and power or just because they can. I guess I just don’t believe that being professionally/financially successful and being moral are necessarily mutually exclusive concepts.

    The other thing I think we can all agree on is how irritiating it is to see someone born into money who some hoe thinks that they earned it themself and treats others like dirt.

    I think Ann Richards summe dup this type of person when describing George W. Bush…..

    “he was born on third base but thought he hit a triple.”

  • http://drdreadful.blogspot.com Dr Dreadful

    Yes, Arch, but who gets to decide who is lazy, stupid and apathetic and who is being kept down by misfortune or other circumstances?

  • Glenn Contrarian

    I notice that the conservatives were able to provide NOT A SINGLE EXAMPLE of a modern country with a high standard of living that conforms to libertarian/conservative dogma.

    Not one.

    Whereas I can provide LOTS of examples of countries that DO abide by such principles – all of them third-world countries.

    OR I can provide LOTS of examples of countries that have wide-ranging social nets of the type that conservatives despise…and most of them are first-world countries with high standards of living.

    See, that’s the choice – fantasy, or REAL WORLD. Ayn Rand and the libertarians and conservatives who follow her philosophy are living in a fantasyland. The rest of us know better, and live in the real world.

  • Cannonshop

    #32 Because, Glenn, there aren’t any countries that conform to a Libertarian structure-just as there are no true anarchies, nor idealistic-pictures of Communism where the workers live in an egalitarian paradise.

    It doesn’t EXIST. The Phillipines is a corrupt state in a condition of civil war-it used to be a corrupt dictatorship in the middle of a civil war, and before that, it was a colonial holding of the U.S., and before that, of Spain. They’re a bad example, just like every other left-or-right dictatorship out there with an active black market and political extremists toting guns and using explosives on the one side, and secret police and death squads on the other.

    There are no “Libertarian” states, but there ARE Tyrannies, whether benign (Red China) or Malevolent (Iran, Iraq under Saddam, Panama under Noriega, Afghanistan under Taliban rule, Cambodia under Pol Pot, the Phillipines under Marcos…)

    But…

    The closer a nation is to Liberty, the further it is from Tyranny. Statists (Such as yourself) prefer Tyranny to Liberty-either because you want to be taken care of, or because you feel you’re qualified to rule someone else’s life, it doesn’t matter in the end. Every Tyrant that has ever misgoverned has said, in effect (longer or shorter speeches) “I’m doing it to you for your own good”, and I’d wager most of them MEANT IT. Doesn’t make the statement true, but it’s the universal balm when you make your fellow man a slave of the state.

  • Jon Fernandez

    Give regular people more money and watch investment come into the U.S. rather than leaving it.

  • John Wilson

    Bubble up works best because the poorest people need to actually spend money. Their Marginal Propensity To Spend is high, so their economic multiplier is high. The extra dollar circulates many times. By contrast, the rich are able to set money aside in savings which renders it ineffective.