eli5: Trickle up economy
In: Economics
“Trickle down” economics was theorized to work by giving wealthy individuals tax breaks, who would then invest their wealth into new businesses and companies, creating new jobs and more wealth. In this method, wealth would be given to the top and would “trickle down” to the average person.
“Trickle up” economics, as a reversal of that mindset, proposed focusing tax breaks and benefits on the average person. The average person would then spend more money on goods and services. The businesses that provided these goods and services would then earn more money for their owners. Therefore, wealth being provided to the bottom would “trickle upwards” through various businesses to the pockets of the wealthy.
Both ideas propose that their methodology is the best way to improve everyone’s lives, only differing in the method.
It’s simple. So “Trickle down”–the common conservative tactic since Reagan, want to end up giving money to the working class. To do that, they say give the money to the wealthy. They will in turn spend money to generate economic activity. Slowly, pennies out of every dollar will go to the working class. It has never once worked out like that in human history.
“Trickle up” says if you want to get money to the working class, just, you know…*give it to them directly*. This increased spending power across hundreds of millions of citizens should increase economic activity across the board, and generate a strong economy.
Trickle up/down economics is really easy to understand if you take a look at how people spend money.
The traditional idea of trickle down economics was that if you gave rich people money they would use it on big investments and projects that would make lots of jobs and spread the money around. Instead what they tend to do is put it in their bank account, because rich people never spend money if they can possibly avoid it. That’s WHY they’re rich. Rich people don’t make businesses to create jobs. They create businesses to make money. If you just give them money, they don’t make more businesses – they just keep the money, or find ways to exploit the system to turn that money into more money while bypassing normal business altogether.
Trickle up economics is the opposite. You take the poorest people in your society, the unemployed, disabled, and poor working class, and you try giving them money instead, through social security or a universal basic income. And what happens is they spend it – because they have no choice. They have unfulfilled needs – food, housing, clothing, education, healthcare, all kinds of things that they need – and the problem isn’t that they’re just not spending money, the problem is that they don’t have the money to spend. So if you give them money they don’t hoard it, they spend it immediately.
This has a double effect. Firstly, it helps them directly, reducing their economic cost. A great example of why is to think of someone who has gotten a moderate wound that needs treatment. If they have no money they’ll just suffer at home, and maybe it gets infected, maybe it gets very bad, maybe they end up in hospital, taking up a bed, using expensive medicine, maybe they lose a limb, maybe they die. Or if they can just have it properly treated early with a simple bandage then none of that happens, and the net cost to the economy is much lower.
By reducing the level of poverty in your country you don’t just remove needless suffering, you also reduce expenses in the long term, you make people more productive and you reduce unrest – those same people might be out there protesting, rioting, even rebelling if things get bad enough. But now they’ve got their basic needs met they’re happy enough and won’t do any of those things, because most people want a full belly and a secure roof and a peaceful life more than anything else.
Secondly, the money they spend doesn’t vaporise, it is given upwards. They spend it at stores, on goods and services provided by people higher in the socioeconomic heirarchy, which means essentially that business owners get more money, they hire more workers, they buy more products, so their suppliers make more money, they hire more people, they expand, and all that extra money eventually comes back around in taxation which then gets sent back down to the poor people at the bottom, like rain watering a tree, and the whole system cycles and self-perpetuates.
Those at the bottom economically have the most pent up demand for goods and services and the most debt preventing them from spending more, so they’re going to spend any additional dollars they receive. That means more demand and revenue for businesses, meaning more money to expand and more profits.
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