27 June 2011

Don’t Pee on Me and Tell Me It’s Raining: Why Trickle-Down Economics Doesn’t Work.

The concept of trickle-down economics has been around for years.  Its precepts are usually trotted out whenever a government is announcing huge tax-cuts to big business and the rich.  The basic idea is that companies who have more profit will spend that profit increasing the business, thereby creating jobs and improving the economy.  It works like this:

Mom and Pop own a store, which they work themselves, struggling to survive.  After a few years, profits are up, and they hire some help, creating a job.  After a few more successful years, they now have a staff of 4 (not counting themselves) and add a deli counter.  A few more years of growth, the store has become a neighbourhood supermarket employing 20. 

But now they are in a new tax bracket, which means that they cannot add the bakery this year.  In fact, it takes them 5 years to save enough to add the bakery.  The pro-tax-break people suggest that if business taxes were lower, that bakery could be added now, creating another 5 jobs.  And next year, the butcher shop.  Then the gift store.  And so on.  More profit means more money for growth and more money in the community.  After all, Mom and Pop don't want to work so hard if they can hire others.  They want to give little Tommy a summer job so he can go to university.  They like being an essential part of their community.  If they have lots of ready cash, why Mom and Pop would have the biggest store in town, employ hundreds, and stimulate the local economy!

That’s the argument.  And, as far as that argument goes, it is more or less correct.  People like to be a part of their community, want to be successful, and will turn profit into growth.  At least, Mom and Pop will.

The same is not necessarily true for big business.

Let’s say Mom and Pop have had a great business life.  They now own ten stores employing a thousand people.  Managers have been hired, so Mom and Pop don't have to work so hard.  Still, life is getting on and Mom and Pop would like to enjoy what's left of it.  So they sell their business to a national grocery Chain and move to Cottage Country.

Then the same old story continues: Chain 'consolidates' their operations by closing five of the stores and letting go 500 people, arguing that this improves their business.  Chain argues that the area really only needs five stores anyway and in reducing waste, they can provide better service.  Profits are put towards building a new, bigger store, with a restaurant and gym.  Within a few years, Mom and Pop's ten stores have become a single big-box retailer.  1000 Employees have become 150.  The promised restaurant and gym are delivered by renting space to other existing chains.  Profits are high but Tommy can't get a job.

We have seen this time and again.  The proponents of trickle-down theory use Mom and Pop to justify the plan and their logic is sound, but the effects don't ever appear to meet expectations.  Opponents to the theory never seem to be able to explain why things don't work out; at least, not in the same simple terms used by proponents.

That reason, however, really is very simple: community.

Mom and Pop, no matter how mercenary they may be, still live in the community.  They see the direct impact that their business has, both in serving the customer and in employing staff.  Mom and Pop know that closing a store will have a direct negative impact on their community.  So unless there is a really good, profitable reason for doing so, their business will remain stable or expand.  The profits Mom and Pop earn will either go back into their operations or into their own pockets - trickling back down with their personal purchases of cars, houses, and so on.  Either way, the money stays in the community.

Chain does not belong to the community.  Chain is a publicly traded company.  Its headquarters are far away, the owners are all over the world.  Investors expect to get paid.  Profits are not just for growth, they also pay the shareholders.  The people in charge do not see their impact on the community because they are not in the community.  And neither is the money.

Once ownership passes away from people living in the community, there can no longer be community responsibility.  Owners and shareholders demand ever-increasing profits.  Local services and employment are only considerations if they have an impact on profit.  Money which would have trickled down from Mom and Pop's wallets is now sent to far-away lands, to trickle into somebody else's economy.  Once the community store stops achieving high-profits, Chain will put it on the auction block and not look back.  Chain is out to make money, not friends, no matter how many charity funds it has established.

And that is why trickle-down economics does not work.  A large corporate entity has no morals, no ethics, no responsibility, and no sense of community.  It cannot have those things because it is not a person.

One thing we know works is regulation.  Regulation forces corporations to at least act like they care.  For example, if government offers tax-creaks to companies which contribute to local charities, then by-golly, companies start building playgrounds, buying medical equipment, and writing cheques.  Remove those tax incentives and watch the swing-sets rust.  That is an indisputable fact: corporations only behave responsibly when it serves their interest.

Unlimited growth is not in their interest.  Mom and Pop will roll-over their profits in a quest to become bigger and better and more important.  They get visceral pleasure from being important to their community.  Corporations do not get that pleasure.  They only get profit.  The bigger the company, the less likely it is to expand further, and corporations are massive companies.  They don't want another 1% of the local market if it means losing 2% profit for the next year; 2% less money for their shareholders.  Expecting a corporation to behave like a person is like expecting a rock to fly: pretty silly.  Yet this myth is what we are constantly sold by the proponents of trickle-down economics.

Since they can only adequately prove trickle-down theory as applied to mid-size and smaller companies owned by individuals, then logic dictates that the tax breaks should go to those companies in order to stimulate growth.  As we can show that big business only acts with community responsibility when regulated, then any tax breaks applied to corporations should reward for community action.  Rather than giving tax cuts in the hope that big business will create jobs, why not give breaks for the jobs they create?  Give breaks for charity, employee profit-sharing, money spent within the community.  Apply tax penalties on funds transferred out to corporate head-quarters.  Reward good behaviour; penalize bad; just as you would teach a child to become a good person.  Giving rewards and expecting the corporation to figure it out on its own is no way raise a good corporate citizen.


  1. I worked for a family owned company, but it was too big to sell to another single owner when the family was ready to leave the business. They sold to a National Company. The upper management knew our value. We kicked their ass and took their lunch in the markets we were in, but their middle management was given a different edict. They turned our quality product and excellent service into a mediocre product, with a higher price point, took away all of our in field service, and did everything possible to ruin our in house customer service. I watched a great company be consumed by the "Borg". It was truly tragic and there was nothing we could do about it.

  2. I'm not so sure the super rich Ma and Pa are going to be putting as much into the community as you think. I would guess that a lot of their money would go into the stock market, and what was left would be spent on more expensive cars and more expensive houses etc.