Things were once so much simpler. Economists worried primarily about inflation and unemployment, and left to the market and politicians to wrangle over such items as interest rates, the level of the stock market, and the relative fairness of the economic system. 

 

I’m afraid we can ill-afford to leave income distribution to the political system any longer. The livelihood of our citizens has become a political football of competing tax policies and has contributed to Congressional gridlock and political warfare. 

 

In defense of economists, the focus for the longest time was on the maximization of the size of the economic pie. This pie, measured by the Gross Domestic Product, or perhaps the Gross Domestic Product per capita, implicitly assumed that all wealth was created equal. To transfer wealth among individuals made some happier and others less happy. 

 

Already I’m sure you see flaws in this ideologically agnostic approach, perhaps for no other reason than an inability of the political system to fairly and productively oversee economic equity. Economists increasingly realize the folly of its assumption that winners in an alternative division of the economic pie somehow offset the losers. That’s not even to question the absurd assumption that the well-being of members of society hinges primarily on income and its division, and not on the myriad other aspects of life that give us joy. For instance, we could all work an additional day a week and perhaps increase GDP by 20%. But we may end up less happy rather than more. 

 

Such a jolt to economic assumptions aside, there’s real evidence that demonstrates not only that the fairness in the division of the economic pie matters, but that our public policy often gets it very wrong. 

 

Recall the now-debunked Reaganomics theory of trickle-down economics. The idea was that if we allowed the rich to retain more wealth, their increased spending would generate consumption, demand, and income for the rest of us. Then, our spending would trickle down to others as well. The rising tide lifted the yachts of the wealthy, and our rowboats too. 

 

The bud of a theory, in the wrong hands, can be a dangerous thing. The realization that the spending of one creates income for another, which enables another round of spending and income, and so on, was the basis of John Maynard Keynes’ multiplier effect. Like a ball picking up snow as it rolls down the hill, the ultimate increase in spending is much larger than the first round that initiated it. 

 

After a round or two, spending is more mundane and generic. The ultimate size of the snowball is highly dependent on its initial push. The greater the first round of spending, the greater will be the multiplier and the wealth it can create. 

 

It is here that all wealth, income, and spending is not created equal. If you endow people with additional income, some will reinject that income into the economy more efficiently than others. If we can understand that, we can tailor economic policy to get the utmost bang for the buck from income redistributions. 

 

Today’s graph shows just that. You give someone a thousand dollars, and her propensity to spend (Keynes’ term, not mine) depends on their income in the first place. Those of low income spend almost all of it, and those of high income spend almost none of it. The snowball effect for income endowed on lower wealth individuals makes a two or three times larger snowball ultimately than that same income given to a high wealth individual. 

 

Another way to look at this is through some economic alchemy. If we take some income away from someone (the rich) who is not spending that income anyway, and give it to someone (the poor) who spends everything they receive, then a small snowball may be lost, but a big one is created. The economic pie can grow simply through redistribution of income. 

 

Taking this argument to its logical conclusion, the benefits of redistribution peter out once income is equalized for all, at least when that marginal propensity to spend declines constantly with increased income. 

 

Some who object to such a prophecy on ideological grounds can certainly throw some slings and arrows. They may argue that while the wealthy perhaps don’t spend, they do invest in the stock market that creates paper wealth for others. If those others spend, then perhaps their ideology is perpetuated. However, the vast majority who benefit from such asset bubbles are also wealthy, with low spending rates. And, asset bubbles rarely result in more homes and factories being built, and expanded production and consumption. Often paper wealth stays just there - on paper. 

 

There is also scant evidence for the claim that the wealthy exuberantly devote their time to the creation of new jobs. In today’s economy, the creation of immense wealth arises from little job creation, or even the ruthless pursuit of automation. Look at Facebook, Google, Apple, and the automation and use of Artificial Intelligence by Tesla. Today, now that our basic needs are so inexpensively met, much of the growth in the economy arises from information and automation, not industrialization and job creation. New wealth is increasingly concentrated among the wealth holders. 

 

This has the effect of reversing the growth of the economic pie. Those with low income are increasingly deprived of their income as it is instead directed to savings and economies for those with high income. This trickle-up effect ends up frustrating growth. 

 

We see it in our anemic growth figures. More and more stuff is getting produced, and yet the once 4% or 3% growth we had come to expect is now 1% or 2%. At the same time, the rich are getting richer and the poor poorer. Clearly, trickle-up economics is having devastating effects on the once-sacred truism that our children will be wealthier than we are. Historically unprecedented tax reductions for the rich have also left us with equally historic federal deficits and debt, which too must be paid off someday by those who remain taxed. This will even further frustrate growth as those who would otherwise spend most of their income must instead continue to fund past tax breaks to the wealthy. Meanwhile, increased savings by the wealthiest heightens speculative bubbles in the stock and housing markets. 

 

To redress the trickle-up effect, we can give steam to what appears to some to be a self-serving argument. It indeed makes sense to tax the rich more and redistribute that income to those who will actually spend it all. In fact, some wealthy individuals such as Warren Buffet even intuit that such policies may even be good for them too. Indeed, such a rising tide can lift all boats. 

 

Henry Ford got the interconnectedness. He offered his workers a premium wage so his employees could afford to buy the cars they made. I doubt his common sense will change any minds at all as Congress deliberates new tax and spending policies. They cannot remove themselves from the artificial and oversimplified divisions politics creates. But we can.