Trickle Up And Trickle Down Does Not Lift All Ships

by: Steven Hansen

Summary

One political party believes in trickle up, the other loves trickle down.

You would seem to think we should have seen by now some EVIDENCE any type of trickle works.

But there is strong evidence that the middle class is shrinking.

Much has been said about trickle up and trickle down economics. It seems like a litmus test to divide the political parties. Is there any evidence that any variation of the trickle theme works?

Since 1980, the USA has had 17 years of Democratic Presidents and 20 years of Republican Presidents. And Congress (which holds the purse strings) was almost equally divided between control by Democrats, control by Republicans, and split control.

The basic problem with any of the trickle themes:

Trickle up tries to put more money in the lowest strata of households. I am hard pressed to think of a theory that believes putting money into hands where the purpose is survival (food, shelter, clothing) energizes the economy. This is a social engineering belief that is important and beneficial to society - but does little for the economy and is likely contributing to increasing the divide between the wealthy and the poor (as it is not lifting the lower strata into the middle).

Trickle down tries to put more money into the upper strata of households. The belief is that this segment is responsible for the majority of investing. It would then follow that the more investments - the more jobs would follow. As seen since the Great Recession, there are periods where there are few places to invest. And also since the Great Recession, jobs growth was primarily in the lowest wage segments.

The historical engine of the post WWII American economy has been the middle class which has income above the survival level which buys non-essentials and invests. This is the largest economic group - and it is not only getting smaller with their income stagnant.

GDP growth is not helping median incomes

Using GDP per capita and median household incomes, it seems that income distribution since 1980 did reasonably until the second half of President Clinton's term (until then, median income's relationship to GDP growth remained fairly close).

Click to enlarge

Note that the uptick in 2015 for median real family income (end of blue line in 2015) has been largely mitigated as median incomes have fallen in 2016.

Since the mid-1990s median incomes stopped growing whilst GDP continued its growth. One can only conclude that GDP growth was not fueling the middle class. From Pew Research:

The middle class is shrinking at the rate above 2% per decade. Being cynical, will the middle class bottom threshold be lowered to keep the group size from shrinking.

But the bigger question is who is profiting from GDP growth? It is not the poor or the middle looking at income levels. Is is just a coincidence that the greatest divergence between median income and GDP occurred as NAFTA kicked in?

And the solution is...

I am a pragmatist. I am the kind of person that cannot be a politician because I have no set beliefs. I support what is demonstrated will work. I am willing to experiment with concepts I think are wrong.

Wealth redistribution and trickling have not been successful in stopping the erosion of the middle class - and possibly one can argue may have contributed to an expanding poorer group. I know if Professor Paul Krugman was reading this, he would be shouting that the failure of trickle up is that we did not do enough of it. But that misses the point that the middle is shrinking - and trickle up is not aimed at the middle, but is aimed at moving the poor into the middle.

I am not blowing smoke saying "only I have the answer." To have an answer, you need proof. There is no evidence anyone has an answer to the economic degeneration and growing income/wealth distribution in America.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.