IMF Refutes Trickle Down

The richest 10th of people in the United States control three-quarters of all the wealth. So if you imagine the United States as a room with 10 people in it and $10 worth of stuff, you’d find eight of those dollars in one person’s pocket. Six people would have no money at all.

For over three decades now, the rich have been thriving while the poor and middle class have struggled to inch ahead. In advanced countries, poverty has risen since the 1990s, with the ratio of the earnings of the 90th percentile to those of the 10th percentile growing in most advanced counties, but especially in the U.S. and the U.K., the report noted. As the economic gap has widened, the costs have become increasingly clear: Not only do the have-nots earn less, but they have more health problems, die younger (A rich American male who makes it to 55 has a life expectancy of nearly 90. Poor men who reach 55 generally die 10 years sooner) and exert less influence over political decisions.

The International Monetary Fund has warned that the gap between rich and poor in advanced economies is now at its highest level in decades. The IMF says if the income share increases for the top 20 per cent of households benefits do not “trickle down". The new IMF report also says that a weakening of labour unions, and a resultant relaxation of labour market regulations, is associated with a higher income share for the top 10 per cent of households in some advanced economies. Its finding are that labour market flexibility benefits the rich and reduces the bargaining power of lower-income workers. Unions helped ensure that workers received a reasonable share of economic profits. Without that pressure, those profits have gone to CEOs, executives, and investors.

The new research paper is based on data from 159 advanced and developing economies for the period 1980 to 2012. Nicolas Mombrial, Head of Oxfam International’s office in Washington DC, said: “By releasing this report, the IMF has shown that ‘trickle down’ economics is dead; you cannot rely on the spoils of the extremely wealthy to benefit the rest of us.”

Trickle-down economics not only doesn't work, but it ends up backfiring by actually shrinking a country's GDP and economic growth. The study refutes the idea holds that the economy will flourish if the coffers of corporations and top earners are fattened through capital gains tax cuts and other strategies that benefit the top 1 percent. Those "job creators" will then hire more workers at their factories, provide raises, spend more in stores, and generally share their wealth. In reality, however, that doesn't quite happen, the IMF said. In some countries with extreme inequality, "individuals have an incentive to divert their efforts toward securing favored treatment and protection, resulting in resource misallocation, corruption, and nepotism, with attendant adverse social and economic consequences," the report noted. "In particular, citizens can lose confidence in institutions, eroding social cohesion and confidence in the future."

Last November Thomas Piketty’s Capital in the Twenty-First Century was named the Financial Times and McKinsey’s 2014 Business Book of the Year. The FT described it as “an epic analysis of the roots and consequences of inequality.” It was a controversial book largely because it basically argues that the modern capitalist system is causing rising inequality. But from theconclusions of the  IMF report, Piketty gets all the support he needs.