Why Not Try “Bubble Up”?

Thomas Picketty is a French economist who recently took the economics world by storm.  He demonstrated that, in a modern, “free-market” economy, growing inequality is inevitable, unless we do something deliberately to counteract it.

Picketty shows that, over hundreds of years and in technologically advanced economies in particular, the return on capital will always rise faster than the growth rate in the economy as a whole.  The rich, in other words, will inevitably get richer, while the rest of us get comparatively poorer – and sometimes absolutely poorer as well.

It was only in exceptional times – for instance, in the period immediately after the Second World War – that we were able to buck this otherwise inexorable trend, and that was only because we elected governments that were inspired by post-war optimism to make a fresh start – to try consciously to create better and fairer societies, and to include everyone in what was hoped would be better times.

But, in New Zealand and the UK and in most of the western world, the long-term trend is now back.  The gap between rich and poor is widening again, and more rapidly, and – in the absence of governments willing to do much about it – it will go on getting worse.

We are constantly urged by the wealthy, and by politicians representing their interests, to accept that it is good for all of us that the rich should go on getting richer.  Wealth at the top will, we are told, “trickle down” to benefit the rest of us.  This, it is argued, is the mainspring of economic growth; if we interfere, then the economy as a whole will slow down and we will all be worse off.

The “trickle down” theory enjoyed a considerable vogue for a time, and it has certainly been given an extended trial period.  But the results have confirmed the doubts of the sceptics.  Gravity, as an economic driver, doesn’t seem to have worked too well.

Not only have the poorer sectors of society continued to miss out on the prosperity enjoyed by the better-off, but the economies which have most assiduously applied the theory have done worse in economic terms than those (in Scandinavian countries, for example) which have consciously tried to maintain a reasonable degree of wealth and income equality.

The reasons for this are not hard to find.  If most new wealth ends up in the hands of those who are already wealthy, (which is exactly what has happened in much of the post-war world), it is odds on that much of it will be hoarded or used to produce an unearned income or spent on conspicuous and non-productive consumption.

To the extent that it goes into productive investment, it will be spent on new capital equipment, which does little for the jobs and wage rates on which the poor depend but simply extends the income-maximising advantage enjoyed by the wealthy.

It has always seemed to me that the metaphor that envisages money as a liquid that “flows” or “trickles” downwards is a misconception of what really happens.  Rather than hoping to see money automatically “trickle down” from the wealthy, in the vain hope that it will somehow reach those who need it, it is surely better to direct money quite consciously into the hands of the poor where it can do most good and so that it can “bubble up”.

It will then benefit us all since we can be very confident that every dollar in the hands of those with little money to spare will be spent and will do much to alleviate poverty.  Every cent will then bubble up through the whole economy, like yeast in dough, passing through one set of hands after another, the increased purchasing power and demand providing higher incomes to tradesmen, small shopkeepers and businesses, and in turn leading, as the great John Maynard Keynes argued, to increased economic activity and to more employment and investment.

We pay a heavy price for failed “trickle down” policies – not only a poorer economy, but a weaker and less integrated society as well.  Why not give “bubble up” a chance to build a stronger economy and a healthier and happier society?

Bryan Gould

4 February 2017

 

9 Responses to “Why Not Try “Bubble Up”?”

  1. Mark Watkins says:

    Refreshing article. Yes, the current system needs to change and be re-balanced as you say. So I believe your fair way forward would be effective in addressing all the main issues you give in your insightful post.

  2. Bryan Gould says:

    Thanks Mark. Kind regards, Bryan

  3. Jeremy Callaghan says:

    This approach just seems like common sense to me. After all, poorer people are almost by definition going to spend the money they get rather than squirrel it away in Swiss banks or super yachts so there will be a stimulus to the economy that will benefit all. Of course, the trick will be how to direct money into the hands of those who need it while at the same time maintaining the coherence of societies which may not be perfect but are many times better than most of the alternatives that history has thrown up. I wonder to what extent the proposed universal income benefit (which has been and is being trialled) can play a part in all of this? Regards Jeremy

    • Bryan Gould says:

      Jeremy, I think we will need to move to a universal basic income, sooner rather than later, since technological development makes it likely that selling one’s (unskilled) labour will not produce an adequate income or share of wealth. Citizenship – membership of society – should be enough to qualify one for a basic income. Kind regards, Bryan

  4. Patricia says:

    If you want a good example of an UBI look no further than our very own Universal Superannuation. If that was given to all over the age of 16 this country would flourish. There would be no poverty and people could take chances knowing that their immediate needs were covered. And if anybody asks the John Key question “where is the money going to come from” just start thinking.

  5. Bryan Gould says:

    Patricia, this is the kind of thinking we need. Kind regards, Bryan

  6. John G says:

    Indeed. And the best way to put money into the hands of those in need is full employment policy and a government jobs guarantee.

  7. Bryan Gould says:

    Totally agree, John. Knd regards, Bryan

  8. Chris Leitch says:

    So let’s address the “Where’s the money going to come from” question to pay for UBI or Universal Superannuation or a Citizens Dividend. The government after the depression of the 30’s used our own government owned central bank – the Reserve Bank – to provide the funds to build infrastructure, houses, and support the Dairy Board and other producer boards. The bank didn’t borrow the money, it created it in the same way that commercial banks do today. Those banks don’t lend depositors funds, they create new money when they make loans (the Bank of England says so, as does the Reserve Bank itself). Currently the Govt pays $12 million per day ($4.6 billion per year) in interest on created money borrowed from the overseas owned commercial banks. There’s a good start! It’s time for some Social Credit economics.

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