Plutonomy

August 6, 2010 3:11 PM

Some say the USA is a Plutonomy-an economy dependent on the spending and investing of the wealthy. In a further sign, the top 5% of Americans by income now account for 37% of all consumer outlays (the bottom 80% by contrast share about the same). Consumer spending accounts for roughly two-thirds of U.S. gross domestic product. In a possibly worrisome sign, the wealthy are cutting back on spending.
posted by stbalbach (83 comments total)

All economies are plutonomies, dependent on the spending and investing of the wealthy. In "socialism", the wealthy are the government. In a free economy, the wealthy are people who've come by their wealth more or less honestly by providing or being associated with someone or something that has provided goods or services that people want and are willing to pay for. Either way, it's all "trickle down". Only with socialism, the trickle eventually stops.
posted by Faze at 3:18 PM on August 6, 2010 [5 favorites]

BAHAHAHA GOOD ONE FAZE
posted by Kirk Grim at 3:20 PM on August 6, 2010 [71 favorites]

Just for reference, top 5% means a household income of about $150,000 - $160,000 or above. I think most people would guess that you'd need to be earning significantly more than that to be in the top 5% in the US.
posted by mr_roboto at 3:22 PM on August 6, 2010 [5 favorites]

The Forbes article disagrees on the particulars, mr_roboto: "Economists say overall consumer spending has slowed mainly because the richest 5 percent of Americans - those earning at least $207,000 - are buying less."

The overall point stands, but $207,000 per year is a fair bit more than $160,000.
posted by jedicus at 3:27 PM on August 6, 2010

$207,000 per year is a fair bit more than $160,000.

It us in the top %.01 that's about how much I find when I check my sofa for quarters for the laundromat.
posted by wcfields at 3:35 PM on August 6, 2010 [1 favorite]

Jesus Christ Faze, stop being dumb on my internets.

There's very specific reasons why trickle-down doesn't work and specific psychological reasons why people think it does work.

I think the Old West Narrative is partly to blame: gold is discovered in some desolate corner of nowhere, miners get rich, a whole economy springs up around them. Saloons, stables, churches, whorehouses -- a whole ecosystem develops to accommodate the spending of miners and cowboys. It makes sense to say that a rising tide raises all boats in this situation (until the gold runs out anyway).

But opening up a Neiman-Marcus doesn't have the same effect on the economy. It creates a few jobs, and those jobs create a few more (usually lower class) jobs, but the wealth gets homeopathically diluted every level further down the chain it travels.
posted by Azazel Fel at 3:36 PM on August 6, 2010 [29 favorites]

Well, if the New York Times is any indication of mainstream thought on this, plutonomy is an unspoken assumption. In their recent primer on how to prepare for a change of Social Security eligibility to age 70, the example couple starts out making $120K at age 30, $175K at age 55. Easily in the top 5% of households. Probably more like top 2-3%. As if the other 95% doesn't even exist, or more importantly, depend much more on Social Security income.

(Before you say "but that's New York state": census figures show the NY state median household income isn't all that different from the national.)

If the country's paper of record doesn't even consider the bottom 95%, I'd say that's one pretty heavy indication of plutonomy.
posted by anarch at 3:36 PM on August 6, 2010 [22 favorites]

All economies are plutonomies, dependent on the spending and investing of the wealthy. In "socialism", the wealthy are the government. In a free economy, the wealthy are people who've come by their wealth more or less honestly by providing or being associated with someone or something that has provided goods or services that people want and are willing to pay for. Either way, it's all "trickle down". Only with socialism, the trickle eventually stops.

Horseshit.

IANAS (I am not a socialist), but socialism (and the occasional enlightened democracy) gives a rat's ass about the average person, in your 'free' economy, the wealthy won't give a rat's ass about anything without getting a receipt and a tax credit for it.

Trickle-down works when there's a firehose spraying us and everyone is getting wet, but once the flow is cut down, the rich suddenly get good at catching every drop and plugging any leaks.
posted by Artful Codger at 3:49 PM on August 6, 2010 [9 favorites]

/Buries Faze without arguing. Collects his Conservatoken.
posted by CitoyenK at 4:02 PM on August 6, 2010 [5 favorites]

Trickle-down works

citation?
posted by hippybear at 4:09 PM on August 6, 2010 [7 favorites]

In a free economy, the wealthy are people who've come by their wealth more or less honestly by providing or being associated with someone or something that has provided goods or services that people want and are willing to pay for.

More or less honestly? Are you arguing that 1) the free economy (whatever you mean by that) is more just than the socialist economy (whatever that is) on the grounds that free economies acquire property in a more moral way, or are you arguing that 2) the free economy (whatever you mean by that) results in a more optimal distribution of wealth (whatever that might mean) than the socialist economy? Or both?
posted by Marty Marx at 4:28 PM on August 6, 2010 [1 favorite]

If the country's paper of record doesn't even consider the bottom 95%, I'd say that's one pretty heavy indication of plutonomy.

It reminds me of the op-ed that finally convinced me to stop reading MacLeans about 5 years back (MacLeans is a very widely distributed weekly [weakly?] newsmag in Canada). The POV was that a million dollars isn't a lot of money anymore, because all that meant was a detached home and an SUV and putting your kids through school and yaddayaddayadda. I found it very revealing. Of... the editorial staff's lifestyle and income. Good to know I'll never own a home or put my kids through school, though.
posted by Kirk Grim at 4:31 PM on August 6, 2010 [6 favorites]

I've always wondered about the "trickle-down" metaphor. It seems to be based on the idea that the wealthy are "above" the poor, which is certainly the usual way of thinking about them. But when you're talking about trickling, well, the points where large quantities of water accumulate are the places where it trickles to, not the places it trickles from, right?

Basically, trickle-down economics is based on the idea that best thing to do in times of drought is to empty your reservoirs into the ocean.
posted by baf at 4:31 PM on August 6, 2010 [27 favorites]

Well, if the New York Times is any indication

Maybe they want to convince their advertisers that they have wealthy readers.
posted by Obscure Reference at 4:33 PM on August 6, 2010

The wealthy are cutting back on spending because:

1. Much of their spending is discretionary anyway, so they have the freedom to choose to spend or not.

2. They're probably sensing that prices may be falling soon, possibly because of deflationary indicators that are surprisingly strong.

There's also a possible self-fulfilling-prophecy thing at play, in that their reluctance may bring about the economic conditions that (post-hoc) justify that reluctance.

And for the Faze derail, let me just say that there is some trickle-down effect always in play in a healthy economy. However, the supply-side evangelists forget that trickle-up is even more important. You need lots of low end demand, and low end buying ability, in order to fuel, fund, and perform the grunt work of the capitalist machine. The "self-made man" of the American Dream is nothing without customers.
posted by yesster at 4:37 PM on August 6, 2010 [8 favorites]

Let's stop calling it trickle-down and give it the proper name, i.e. "what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows" (Galbraith).

That said, I'd agree that all economies are based on the circulation of wealth, and all modern economies, for whatever reasons, feature Pareto distributions or worse; ergo, all modern economies *should* mostly be based on stockpiled wealth getting cut loose and circulated.

Which is sort of what Faze said, but with wildly different implications, I think.
posted by Monsieur Caution at 4:59 PM on August 6, 2010 [8 favorites]

We told them the wealth would trickle down!
posted by Devils Rancher at 5:06 PM on August 6, 2010 [8 favorites]

Money?

Money.

posted by The Whelk at 5:17 PM on August 6, 2010 [1 favorite]

Should it be any surprise that a plutocracy is a plutonomy?
posted by Jimmy Havok at 6:01 PM on August 6, 2010 [3 favorites]

When I was young and stupid I got involved in Amway. It was hypnotic, I needed friends, there was buying of tapes and shouting in parking lots, but ... ahem, that's not what I came here to say.

I started having doubts about it after a while because the math just didn't add up. How many people really became successful? Was it really just a matter of time, patience, and being a total douche to one's relatives and neighbours and voila, you'd make direct and then go emerald and be rolling in Ferraris?

At the time I had an Atari ST on loan from a friend, and I wrote a program to figure it out.

I said, in my program, every pixel on this screen is a person. They all start as non-Amway members. Ducks. The screen is black with ducks.

Then one duck becomes an Amway distributor. I had all the math for this in place. Every distributor needed a certain amount of ducks in order to meet the requirements for being a distributor.

Once a distributor had a certain number of ducks assigned to it, the program looked for more available ducks to see if it could place another distributor. And, according to the rules of Amway, that distributor had to use one of the previously created distributors as an upline.

Once a distributor had enough of its own distributors, it became a "direct". It was hierarchical, see? Ducks -> distributors -> direct.

So as the program ran, the sea of black ducks would change colour as distributors would hook up their ducks, and then distributors would hook up their downline distributors, and so on.

After direct, which I think was the "you can't quit your job, but you're making nice side money" level, there was I think Emerald, which was full time Amway, and then Diamond or something. It's all vague and for fuck's sake please don't remind me.

Anyway, the program ran and the sea of ducks changed colour, and distributors went direct, and then emerald and diamond and whatever, all according to reasonably optimistic rules as described by the Amway sales guides.

And when the program finished running, when it said, "hey, there's no more unassigned ducks" which means basically there is no way any of the Amway distributors on the screen could ever improve their position, I looked at the screen, and I had a revelation.

My revelation was that the screen looked like a starry sky. It was mostly dark, with quite a few faint sparkles of distributors, and just a few directs, and maybe a handful of emeralds, and just one diamond.

And that monitor was 320x200 pixels, which is of course 64K people.

And I looked at that screen, and I looked at the maybe dozen or two dozen bright pixels -- people -- on there who really were successful and socking back some real dough, and I said, "fuck this, it's no different than the real world. In fact, it's probably worse, because all of these distributors are thinking, 'hey it's just a matter of time before I can buy that class 5 motorhome and can sneer at my uncle Fred with a Ferrari in the back' when the math basically says, no, actually, there aren't actually enough people on the planet to make that happen for all these distributors; they're just fed a steady diet of hype and hope and 'You can Live the American Dream' bullshit, so they keep being total douchebags to their relatives and neighbours and finally no one wants to have anything to do with them any more and they at last give up and are left with a closet full of L.O.C. and other shit that works okay but is pretty overpriced at full retail."

And I quit.

I thought of that Amway distributor analysis results screen -- the "starry field" -- when I read the article. Because that's the way it is. That's the way it always is. There's always a few guys at the top driving the motorhomes, and they get everyone else to support them by pushing down a steady diet of fear or hope.

Some days I'm not sure which is better, fear or hope: pessimism or optimism. And then I remember that there's a third choice: quit.

.... it seems I need to be careful with the fermented cranberry juice. I should post the recipe sometime.
posted by seanmpuckett at 6:27 PM on August 6, 2010 [283 favorites]

I found it very revealing. Of... the editorial staff's lifestyle and income.

Here in the US, we used to have very few low-income journalists. We fixed that problem though.
posted by miyabo at 6:35 PM on August 6, 2010 [2 favorites]

a favorite isn't enough, seanmpuckett - that was a brilliant comment
posted by pyramid termite at 7:00 PM on August 6, 2010 [3 favorites]

In a free economy, the wealthy are people who've come by their wealth more or less honestly by providing or being associated with someone or something that has provided goods or services that people want and are willing to pay for.

You honestly believe that? How adorable!
posted by rocket88 at 7:10 PM on August 6, 2010 [14 favorites]

Well, at least we have the Tea Party to ensure that the individual, and not corporations or the wealthy, have control.

Seriously, that's what they believe. The fact that they tend to like what's good for corporations that lobby a lot and wealthy conservatives is purely coincidental.
posted by mccarty.tim at 7:16 PM on August 6, 2010 [5 favorites]

Seanmpuckett, that's an awesome story. Someone should really write a series of simulations similar to that which demonstrate a bunch of different economic models. I try to be an optimistic person (doctor's orders), but I get the feeling it would probably say that upward mobility can't exist for a long time without massive intervention, and every economy has a large swath of poor people to provide cheap labor, with a bunch of rich people manipulating them. Even a highly automated society will still need low-paid workers to do things like bag groceries and cut hair. In short, a plutocracy like it said above.

Power and wealth tend to concentrate, and the best societies tend to fight that. I hate to sound like a damned commie, but it seems like progressive taxation and democracy are needed to prevent plutocracy. It's probably too late for America, since we already allow the plutocrats a lot of power through the free market and lobbying. And we now have people whipped up into a frenzy over "socialism," so any progress at making the government reflect the good of the population will be a hard battle.

tl;dr: Without a sea change in politics, we're going to have a ton of plutocrats.
posted by mccarty.tim at 7:28 PM on August 6, 2010 [3 favorites]

seanmpucket -- thanks for the image of the starry field. I'm not sure if I'm having the urge that I'll describe for all the right reasons, but I'd like to do my small part to get the plutonomites in the cross-hairs by simply opting out. I already do many of the things that I consider to be opt-out decisions like ride a bike to work, shop at the farmers' market and not have a functioning TV, but I'd like to do even more. Like I said, I'm not sure if these desires stem from a wholesome motivation -- I just cringe at the idea of sweating and grinding my way through life as one of the black ducks of the starry field and cringe even more at the notion that my being one of those ducks (always waiting patiently for my chance to really make it) is a small, but necessary, part of the system that feeds the stars their relatively large share of resources.

Am I cutting off my nose to spite my face? I had thought that I might have been, but now that I realize that being able to ride my bike to work is one of the best parts of the job and that I really didn't like TV anyway, I think I've killed two birds with a single frying pan.
posted by Wash Jones at 7:31 PM on August 6, 2010 [2 favorites]

Actually Faze, you're completely wrong when it comes to a nation that issues its own currency.

The fact is that the issuing authority (government) of currency is the only one that can create a net increase in money in the system. You have it backwards -- it is the "free economy" you're talking about that faces the problem.

Surely, one might argue, the government has to borrow money in order to spend it? That's simply not true in a fiat currency system. Fiat currency means that the following restrictions do not exist:
1. A metallic based standard (gold, silver, copper etc)
2. A currency pegged against another currency or a fixed exchange rate.

The United States, thankfully, is a fiat system. In a fiat system the government issues money without having to "borrow" it. The US issues Treasury bills but those are not mechanically necessary to the functioning of the monetary system. There are legal requirements but that's a separate issue. Rather they are basically a guaranteed savings account. The US Government could spend money without issuing Treasuries, and in fact has in the past.

In a fiat system, you can also have private creation of money, but it can never be a net positive increase. Private creation of money is what we have when a privately owned bank makes a loan. The bank makes the loan, and in a fractional-reserve system, the bank is allowed to create loans in excess of the amount of existing deposits. That's not a problem right? Money flows into the system, and things are working great right?

Wrong. In this so called "free economy" that you are talking about, the money created by the private bank also creates a corresponding debt. Therefore, there is no actual net increase in the amount of money in circulation, since someone will eventually have to pay back all the money borrowed, plus interest.

And where will this additional interest come from? Remember, there is a fixed pool of money out there. Well it will come either from bond-free government spending, or from money created by the private banking system. And money created by the private banking system comes with, you guessed it, more interest payments.

What happens when lending stops for some reason? Collapse of the system, when the system is based on credit creation.

And that is exactly what is happening now.

On the other hand, a nation that properly uses the fiat money system recognizes that the commonwealth (that nifty thing called ''government") spends money into existence for socially beneficial purposes. The limit on expenditure are the actual resource limitations, and inflation. Technically I think inflation is really a resource limitation indicator, since inflation is ''too much money chasing too few goods." Proper use of a fiat money system also removes the issues of giant credit busts, similar to the one we have now.
posted by wuwei at 7:43 PM on August 6, 2010 [22 favorites]

Anything specific you planning on doing to opt out, Wash Jones?

Thinking it through, I'm guessing the biggest threat to plutocrats/plutonomics, aside from creating a counter-political movement and leading a revolution, buying some land, or otherwise creating a sovereign nation, would be to become as self-reliant as possible. In short, the ideal anti-plutocrat would be in no way involved with the economic model of the rich.

Instead of working for someone and getting a paycheck, you instead use the natural resources you get on your property (sunlight, nutrients in the Earth, water, oxygen). So, you farm, and hope that your land has enough irrigation to feed you, and that you won't need anything you can't grow or make yourself from the resources on your land. If you're strict, you do not sell anything. If you're less strict, you only sell stuff to people poorer than you, and trade fairly, at risk of becoming a plutocrat yourself if your vegetables sell really well. Of course, this is all under-the-table, so that plutocrats in government don't get anything.

Other options: Dumpster diving. You take advantage of the wasted resources of the rich. You are technically somewhat reliant on them, but you aren't actually influencing them.

Anyway, it seems to me that this sounds like the lifestyle that survivalists follow. Usually, survivalists are more of the right wing flavor. I've heard that political extremes from both sides usually end up with a madman dictator. Perhaps they also end up with many more people living in caves.

In terms of what's more realistic, I think it's better to be educated about how things work, and make sure to vote, both with your dollar and your citizenship. Vote for politicians who reflect your interests and not the plutocrats, and buy products and invest locally or with small, ethical businesses when possible, so that plutocrats don't benefit as much as they would if you went with a more mainstream option. However, that still sucks, since the wealthy have more dollars to vote with, and they can turn those dollars into political votes by paying lobbyists.

I say find a lifestyle that makes you happy within what you can earn at an occupation you're comfortable with, and try and see if you can do it without being a hypocrite politically. Nothing is going to happen without a major event, so living well under the sociopolitical tides is the best revenge.
posted by mccarty.tim at 7:53 PM on August 6, 2010

In a free economy, the wealthy are people who've come by their wealth more or less honestly by providing or being associated with someone or something that has provided goods or services that people want and are willing to pay for.

I agree!
posted by Dr. Send at 8:11 PM on August 6, 2010 [2 favorites]

"Consumer spending accounts for roughly two-thirds of U.S. gross domestic product"

Och, no lad. The statistic is oft-cited and it's wrong. Economist Michael Mandel would like us to get it straight:

"...[it's] a subtle but very important trap. They look at the category of GDP which the BEA calls ‘personal consumption expenditures’ and assume that it means what it sounds like: The money that persons, like you and me, spend on consumption.

But in fact, ‘personal consumption expenditures’ in the U.S. is a grab-bag category which includes all sorts of money—like Medicare spending by the government—which never passes through the hands of households. PCE also includes all the consumer goods imported into the U.S.—cars, computers, clothing, and the like—which create very little economic activity in this country.

In fact, by my very rough calculations, the money that people actually pull out of their paychecks and bank accounts to pay for domestically-produced goods and services drives about 40% of economic activity in this country. That’s still large—but the U.S. is nowhere near as dependent on consumer spending as people think."

posted by storybored at 8:28 PM on August 6, 2010 [6 favorites]

I'd like to be less involved than I am in the consumer economy. I don't buy much, but I'd like to have a house with yard in which I could garden and raise chickens and possibly goats so I could get away with shopping less. I recently bought a nice sewing machine and I've been learning how to make clothes. I make my own yogurt, kajmak (Serbian butter) and occassionally bread. I'd like to get the equipment for making beer and distilling spirits from fruit. I'd like eventually to homeschool my children.

I'm often frustrated because it seems to me that the things I enjoy doing are made difficult because relatively few people also enjoy those things. That my values are out of step with the mainstream makes acting in accord with them more challenging. For instance, I'd like to be able to work maybe 25 or 28 hours a week and make 5/8 what I make now but still have the benefits for which I'm required to work 40 hours a week. I have a car, but I don't particularly like using it. I do bike about six miles each way to work. I wish it were easier to shop, get to entertainment, appointments, etc. without having an auto. If public transportation were better in my town, I'd be less dependent on the car, but I can't really cause an improvement in public transportation by myself. I'd like to able to buy quality made, locally produced products like clothes and shoes that would last longer than the stuff I see at Target. On a slightly more radical note, I think local currencies might be a good idea.

I don't think my desires are particularly odd, but these sort of behaviors don't seem to be the kind to "create wealth" for the consumer economy as wealth is measured in that economy. If the consumer economy is in fact a kind of plutonomy, my desires put me at odds plutonomites. In my darker moments, I think I'd like to see the wealthiest 5% suffer is the plutonomy collapses. The wealthiest 5% are, after all, those who've benefitted the most from forcing the least wealthy 80% work ever more strenuously for a decreasing share of the resources. Opting out looks like a chance to secure one's own position while weakening the plutonomy.
posted by Wash Jones at 9:08 PM on August 6, 2010 [5 favorites]

I'd like to thank Faze...in his cluelessness, he's spawned a bunch of genuinely interesting comments.
posted by maxwelton at 9:27 PM on August 6, 2010 [3 favorites]

In a free economy, the wealthy are people who've come by their wealth more or less honestly by providing or being associated with someone or something that has provided goods or services that people want and are willing to pay for.

And yet so many of the ultra-rich made their money from trading securities on Wall Street - an activity which is neither goods nor services (Wall Street also makes money from services like investment banking but trading for one's own profit is not a service...)
posted by lupus_yonderboy at 9:35 PM on August 6, 2010

Doesn't the financial sector kind of provide a useful service by moving the wealth around to the most productive parts of the economy? Or am I just trying to rationalize something awful?
posted by mccarty.tim at 9:42 PM on August 6, 2010

That's what it should be doing. Apparently it, if unregulated, information asymmetry and greed make it do... other things.
posted by Zalzidrax at 9:58 PM on August 6, 2010 [1 favorite]

Don't trickle down my back and tell me it's raining.
posted by dirigibleman at 10:00 PM on August 6, 2010 [3 favorites]

Did Amway steal their terminology from Scientology, or did Scientology steal their terminology from Amway?
posted by Evilspork at 10:24 PM on August 6, 2010

The solution is so simple. Raise taxes on te wealthy for every dollar they don't spend. Look saving for the future is fine, but do we really need you to pile up a few hundred million in checking? Go buy another 10 cars or remodel with that money you rich bastards. If you can't be bothered to spend it or give it to a charity that will spend it for you then the government gets it.
posted by humanfont at 10:25 PM on August 6, 2010 [4 favorites]

Anyone who thinks Faze is clueless hasn't really paid attention to what he does around here.
posted by hippybear at 10:47 PM on August 6, 2010 [10 favorites]

Doesn't the financial sector kind of provide a useful service by moving the wealth around to the most productive parts of the economy? Or am I just trying to rationalize something awful?

That is not the same meaning of "service" as in the phrase "someone or something that has provided goods or services that people want and are willing to pay for".

The "service industry" consists of people doing things for other people - masseuses, waiters and, yes, stockbrokers. As I was very clear to state in my post, people trading for their own account aren't providing a service in that sense.

Now, there is the idea that Wall Street supposedly provides "liquidity" by giving accurate evaluation of prices and diverting money to where it's supposed to go. This certainly has some value to society (though it isn't a "service") but the fact is that the system now acts as if any quantity of liquidity, no matter how tiny, is worth any amount of money, no matter how great - when in fact excess liquidity might be of negative value to the economy!

See my comments here.

And again, since I get misunderstood, let me be clear - a modern world without the financial markets is inconceivable, and liquidity is an important component of those markets - but I do believe that the trillions of dollars that have been taken out of the economy by traders in the last decade under the name of liquidity has been a strong negative for society and the economy.
posted by lupus_yonderboy at 10:54 PM on August 6, 2010 [2 favorites]

As long as we're here, are there any insights to be gained by comparing wealth & money circulation to blood circulation?
posted by ZeusHumms at 11:12 PM on August 6, 2010

buying some land...become as self-reliant as possible...use the natural resources you get on your property

Way to widen the wealth gap, buddy.
posted by ryanrs at 11:36 PM on August 6, 2010

The wealthy might be cutting back on spending but their wealth is increasing:

The 10 million [High Net Worth Individuals] HNWIs -- in a global population of 6.8 billion in 2009 -- amounted to 0.14 per cent of the earth's people. Together, they owned a total of $39 trillion in "investible assets." To see what this means: in 2009, the US GDP (total output of goods and services) was $14.6 trillion. The combined GDPs of the world's 9 richest countries(US, Japan, China, Germany, France, UK, Italy, Russia, and Spain) totaled less in 2009 than the investible assets of the world's HNWIs.

During 2009, as tens of millions lost their jobs, the number of HNWIs rose by 17.1 per cent and their combined wealth rose by 18.9 per cent. They had a genuine "recovery." HNWIs regained in wealth most of what they lost in 2008. No wonder they celebrate "recovery" while the rest of the world wonders (or rages at) what they are talking about. In the US, for example, the HNWI population grew by 16.6 per cent in 2009 while the US GDP fell by 2.4 per cent.

posted by Abiezer at 12:42 AM on August 7, 2010 [4 favorites]

In a free economy, the wealthy are people who've come by their wealth more or less honestly...

Western fairy tales aside, I believe "born into it from dumb luck" remains the most common method of wealth acquisition.
posted by rokusan at 1:14 AM on August 7, 2010 [8 favorites]

"I'd like to thank Faze...in his cluelessness, he's spawned a bunch of genuinely interesting comments.
posted by maxwelton at 5:27 AM on August 7 [+] [!] "

*Clicks*

I just knew, as soon as i read that first comment, what was coming. Joseph Stiglitz comments in "Globalisation and its discontents" that "trickle-down is discredited."

A great thread. (adds "I find this thread humurous" meme img)
posted by marienbad at 6:05 AM on August 7, 2010

The wealthy might be cutting back on spending but their wealth is increasing:

...If they're not spending as much, wouldn't that be somewhat obvious?
posted by rulethirty at 6:09 AM on August 7, 2010 [1 favorite]

Proper use of a fiat money system also removes the issues of giant credit busts, similar to the one we have now.

I wasn't actually describing a problem. I was remarking on the state of affairs. "Trickle down" isn't a theory or system. It's the way things are. Like evolution.

Wuwei, your interesting comments do, however, present us with a problem. That is, the "proper use" of the fiat money system. Who decides what is "proper?" The commonwealth may have the best motives, but no small group of people can meet the complex needs of a modern society at the granular level. In any case, the commonwealth is more likely to be a self-interested corporate player, like any other, only worse, since it lacks any market motive to satisfy its customers. Booms and busts are inevitable, and while we should work to discover ways of moderating them, we should also nurture philosophies and communal associations that will help us through them.
posted by Faze at 6:22 AM on August 7, 2010

"I'd like to thank Faze...in his cluelessness, he's spawned a bunch of genuinely interesting comments."

It's the broken window fallacy in action!
posted by Eideteker at 6:51 AM on August 7, 2010

wuwei, you're making the mistake of confusing currency with wealth. The two are not the same thing. You have adequately described the problems with a fixed currency--it leads to liquidity crises--but fiat currency is not, in fact, wealth as such. It just helps wealth move around.

Think about it: a person who owns a big house outright but has little currency still has wealth, because he owns something. He may be "house poor," but he still has significant assets. But a citizen of Weimar Germany who had wheelbarrows full of fiat currency couldn't buy bread.

Economists aren't entirely sure what wealth is--Quesnay thought it was agricultural land, Smith thought it was that and manufactured goods, Locke thought it was labor mixed with raw materials, Marx thought it was labor as such--but until the nineteenth century they were all convinced that it was something. Today, contemporary economists have conflated price with value, saying that something is worth whatever someone will pay for it and that anything and everything can count as wealth.

I'd argue that it was this attitude more than anything else which led to the recent financial crisis: when you pretend that value is whatever you say it is, all it takes to cause a massive crash is for someone to point out that the emperor has no clothes. If, on the other hand, you treat value as somehow related to something real, i.e. beyond the power of the market to determine, you're less likely to see the sorts of destabilizing price fluctuations we're currently experiencing.

But even the most ardent neoclassical economist would laugh at the idea that currency, as such, constitutes wealth. Again, fiat currency aids in wealth creation by providing adequate levels of liquidity, but it is not wealth per se.
posted by valkyryn at 7:08 AM on August 7, 2010 [4 favorites]

"Trickle down" isn't a theory or system. It's the way things are. Like evolution.

You are aware that evolution is a theory, correct? As is most science? You know, the 'theory of gravity'? Yet I can point to bacterial immunity to antibiotics and my not suddenly floating off into space as supports of the theories of evolution and gravity. Hopefully you can understand why your silence is frustrating to people who repeatedly ask you to support your claims that this theory of trickle down actually works in the real world.

For example, I can assert the theory of ndwright, which states "ndwright is the awesomest person that ever awesomed", but without any support you'll likely remain skeptical of this claim. As you continued to ask me proof of this theory, wouldn't it be frustrating if I repeatedly barged in saying "I'm the awesomest EVAR, don't you know how AWESOME I am?!" over and over again?
posted by Ndwright at 8:24 AM on August 7, 2010

Wealth is how long you can slack off before you die of starvation, exposure, disease, or insanity.
posted by PsychoKick at 8:26 AM on August 7, 2010 [3 favorites]

> Hopefully you can understand why your silence is frustrating to people who repeatedly ask you to support your claims that this theory of trickle down actually works in the real world.

To be fair, most people disagreeing here are doing so ideologically, without substantiating their claims either.
posted by Spanner Nic at 9:48 AM on August 7, 2010

...If they're not spending as much, wouldn't that be somewhat obvious?

Not necessarily, it could also reflect an increase in their income.


To be fair, most people disagreeing here are doing so ideologically, without substantiating their claims either.

To echo bearwife and be even MORE fair, Faze kinda does this sometimes, co-opting discussion of an interesting topic by throwing something demonstrably false or highly contentious in a thread early. And I think it's been substantiated that most people here think "trickle down" is merely one part of the circulation of wealth rather than an accurate description of how an economy does/should work. On top of which, Faze appears to be talking about a magical fantasy free economy which cannot ever exist rather than any set of economic circumstances we'll ever encounter, so I fail to see how it's even worth discussing in the context of these articles.
posted by Kirk Grim at 10:21 AM on August 7, 2010

I think the nomenclature is all wrong. It's more of a trickle UP* process, if you look at the evidence of capital flowing from one segment of the population to another, as delineated by % of wealth. The super-rich have grabbed an increasing percentage of the capitol over the last 20 years or so.

*(not absolutely certain of the veracity of claims made on that particlular blog, but it seems to be a common enough set of data)
posted by Devils Rancher at 12:52 PM on August 7, 2010

*capital.* They already own the capitol outright.
posted by Devils Rancher at 12:56 PM on August 7, 2010 [1 favorite]

TINKLE DOWN, DAMN IT! Weren't any of you alive in the '80's?
posted by psyche7 at 1:45 PM on August 7, 2010 [1 favorite]

I think the Old West Narrative is partly to blame: gold is discovered in some desolate corner of nowhere, miners get rich, a whole economy springs up around them. Saloons, stables, churches, whorehouses -- a whole ecosystem develops to accommodate the spending of miners and cowboys.

That story is incorrect on one count - "miners get rich" should be changed to "a handful of miners get rich, lots of money is made selling supplies to people wanting to get rich being miners." You're better off selling shovels than using them in this scenario.

So, in the type of economy we're in now, you'll probably do very well getting paid to provide infrastructure to energy suppliers.
posted by krinklyfig at 2:45 PM on August 7, 2010

I wasn't actually describing a problem. I was remarking on the state of affairs. "Trickle down" isn't a theory or system. It's the way things are. Like evolution.

Evolution is descriptive of a biological process. Trickle down is a purported effect of the supply-side theory of economics. Whether it's the "way things are" right now, economic theories are either in effect or they are not, but it is a choice we make. I would argue that supply-siders are still very influential, but we are gradually returning to a more egalitarian system. The reality is that supply-side economics transfers wealth upwards, which is what happened under Reagan as well as Bush II. This is not unintentional. But it isn't just about supply-side and Milton Friedman. There is also Friederich von Hayek.
posted by krinklyfig at 3:16 PM on August 7, 2010

"trickle down" economics have always struck me as absurd, even on a purely abstract level. That is, if you're going to build a sturdy anything, you don't start at the top and hope that somehow, magically, enough good material will accumulate at the bottom to support it.
posted by philip-random at 3:24 PM on August 7, 2010

you'll probably do very well getting paid to provide infrastructure to energy suppliers.

e.g. Halliburton.
posted by Jimmy Havok at 3:57 PM on August 7, 2010

Someone should really write a series of simulations similar to that which demonstrate a bunch of different economic models.

Catherine Austin Fitts did that.
One might wish to look into the model and the results.
posted by rough ashlar at 6:41 PM on August 7, 2010

"trickle down" economics have always struck me as absurd,

I believe someone called the concept "voodoo economics".
posted by rough ashlar at 6:42 PM on August 7, 2010

I don't know what this thread is even about but just wanted to say: say whatever you want about amway, L.O.C. was the shit. It made great bubble baths, too.
posted by dpx.mfx at 6:50 PM on August 7, 2010

Maybe the anarcho-syndicalists are on to something.
posted by phrontist at 1:48 PM on August 8, 2010

The solution is so simple. Raise taxes on te wealthy for every dollar they don't spend. Look saving for the future is fine, but do we really need you to pile up a few hundred million in checking? Go buy another 10 cars or remodel with that money you rich bastards. If you can't be bothered to spend it or give it to a charity that will spend it for you then the government gets it.

Right, because what we really need is a greater share of our resources dedicated to luxury goods.
posted by phrontist at 1:53 PM on August 8, 2010

Trickle down has been falsified by the fact that during the time people gave massive tax cuts to the rich, income inequality dramatically *increased*. If trickle down were to work as advertised, giving massive tax cuts to the rich and cutting services for the poor should have raised everyone's income, so that there was less inequality-- it wasn't supposed to (officially) redistribute wealth from the poor and middle class to the rich. Given that that that's what it actually did, the idea is bogus.

The way you reduce inequality-- which is actually good for both rich and poor because it increases health and happiness (countries with less inequality do best in world on both measures: see Scandinavia)-- is *raising* taxes on the rich and paying for services for everyone. This is not "trickle down" but rather common sense. Of course, if your actual goal is to support the status quo or help the rich get richer or get rid of government because you don't like it, trickle down "works" quite well.
posted by Maias at 3:05 PM on August 8, 2010 [2 favorites]

I can understand that remuneration may not be equitable, but can someone please explain how wealth doesn't trickle down? Surely, everyone has to spend their money, and then providers of goods and services have it?

Also, what is "stockpiled wealth"? How does one stockpile wealth so that it's not part of the economy? Even cash in the bank is reinvested on your behalf.
posted by esprit de l'escalier at 3:13 PM on August 8, 2010

Right, because what we really need is a greater share of our resources dedicated to luxury goods.

Isn't that for the consumer to decide whatever makes him happy?
posted by esprit de l'escalier at 3:18 PM on August 8, 2010

on the Gates/Buffett $600-gazillion challenge

wish I could find the first version of this that I read - of the first 10 comments, about 8 of them consisted of "Nice one, Bill - but see if you can get them to just pay their taxes."
posted by toodleydoodley at 4:44 PM on August 8, 2010

The wealthy DO spend more, because they have more to spend. The difference is how many items are bought. A million dollars will buy 1 house for a wealthy family, but can buy 5 pretty nice houses for 5 families. $80,000 can buy 1 Mercedes or 3 or 4 more modest new cars. $600 can buy one suit or a bunch of clothes at Target, Sears or Wal-Mart. The same amount of money creates a lot more economic activity when it is spent by the middle or lower classes.
posted by Daddy-O at 6:29 AM on August 10, 2010 [1 favorite]

The wealthy DO spend more, because they have more to spend. The difference is how many items are bought. A million dollars will buy 1 house for a wealthy family, but can buy 5 pretty nice houses for 5 families. $80,000 can buy 1 Mercedes or 3 or 4 more modest new cars. $600 can buy one suit or a bunch of clothes at Target, Sears or Wal-Mart. The same amount of money creates a lot more economic activity when it is spent by the middle or lower classes.

Why is more transactions better?
posted by esprit de l'escalier at 12:04 PM on August 10, 2010 [1 favorite]

Also, what is "stockpiled wealth"?

If you put money in the bank, some of it is indeed reinvested, but some of it stays at the bank as a reserve.

The theory is that rich people will put a larger portion of their money in the bank, so a larger portion of money will be held in bank reserves in an unequal economy compared to an equal one.

You can disagree with this theory (and plenty of smart people do), but you have to understand it first. Wikipedia's page on income inequality is an OK place to start.
posted by miyabo at 5:40 PM on August 10, 2010

some of it is indeed reinvested, but some of it stays at the bank as a reserve.

In the United States, the reserve requirement is only 10%, leaving 90% to be reinvested. Only three countries in the world have reserve requirements greater than 20%.

You can disagree with this theory (and plenty of smart people do), but you have to understand it first. Wikipedia's page on income inequality is an OK place to start.

I totally agree that (as I also said) "remuneration may not be equitable", but the question of saving being detrimental to society is not addressed by that wikipedia article.

I still don't see how anyone saving their money can be construed as an unkindness to the poor.

In any case, suppose that the rich really are hoarding cash and reducing the money supply. If it is to point of being recessionary, either: the federal reserve will increase the money supply (by, for example, buying back bonds, or printing money), or people with savings will spend their money since prices are falling and it's a good time to spend. If the fed increases the money supply, this is inflationary, and thus devalues the hoarded money, so the rich have essentially had their savings stolen from them.
posted by esprit de l'escalier at 9:01 PM on August 10, 2010

> It's not that more transactions is better, it's that the same amount of money is doing more. It takes roughly amount of labor and material to make a Mercedes or a Chevy. With $80,000 worth of new cars, building 4 Chevys employs 3 or 4 times as many people as building 1 Mercedes.

Also, it seems to me that G W Bush's lowering taxes for the wealthy was a major contribution to the economic meltdown that peaked in 2008. Too much money chasing too few goods is the definition of inflation. Suddenly, there was more money to invest because less was being given to the IRS. With higher after tax returns, people were more likely to invest. People were encouraged to flip houses because the capital gains tax was lower and the additional money in the economy (that wasn't used to pay taxes) made borrowing easier. The additional pressure to find investments for this money created lower quality investments, some of which blew up, harming the investors and banks in the process, not to mention the public in general.
posted by Daddy-O at 7:02 AM on August 11, 2010

The wealthy DO spend more, because they have more to spend. The difference is how many items are bought. A million dollars will buy 1 house for a wealthy family, but can buy 5 pretty nice houses for 5 families. $80,000 can buy 1 Mercedes or 3 or 4 more modest new cars. $600 can buy one suit or a bunch of clothes at Target, Sears or Wal-Mart. The same amount of money creates a lot more economic activity when it is spent by the middle or lower classes.

Why is more transactions better?

More transactions > more companies involved (and competition) > more jobs > more earnings > more economic activity.
posted by Happy Dave at 1:51 AM on August 12, 2010

It's not just more transactions, it's more goods: five houses versus one house, five times as many people with homes to live in, and five times as many people employed to make them.

But hey, why is that good? Shouldn't people be allowed to spend just as much on their houses as they want? Doesn't everyone have a million dollars for a house?
posted by Jimmy Havok at 2:01 AM on August 12, 2010

Also, it seems to me that G W Bush's lowering taxes for the wealthy was a major contribution to the economic meltdown that peaked in 2008. Too much money chasing too few goods is the definition of inflation. Suddenly, there was more money to invest because less was being given to the IRS. With higher after tax returns, people were more likely to invest. People were encouraged to flip houses because the capital gains tax was lower and the additional money in the economy (that wasn't used to pay taxes) made borrowing easier. The additional pressure to find investments for this money created lower quality investments, some of which blew up, harming the investors and banks in the process, not to mention the public in general.

That's an interesting theory, but if the money supply was the cause of the economic meltdown as you suggest, then the correct agency to tackle that is the federal reserve. My opinion is that there were two problems: AIG was allowed to get so big that taxpayers were on the hook for its failure; and, the investments were unregulated.

More transactions > more companies involved (and competition) > more jobs > more earnings > more economic activity.

The same argument could be made for larger transactions: more jobs, more earnings, more economic activity. One measure of economic activity, the velocity of money, does not count the number of transactions, but only the total size of all transactions.

It's not just more transactions, it's more goods: five houses versus one house, five times as many people with homes to live in, and five times as many people employed to make them.

I don't know how that follows. It probably takes a lot of people to make a very expensive house too. I have a friend who's a carpenter. Who do you think hires him? It's not people who buy all their stuff at scandinavian furniture stores.

But hey, why is that good? Shouldn't people be allowed to spend just as much on their houses as they want? Doesn't everyone have a million dollars for a house?

Why shouldn't people be allowed to save their money and spend it all on a house?

Looking at this thread, it sounds like a lot of people are defending prejudices against wealth, which seems nonsensical. How does it make sense to moralize saving and spending?

I'm all for trying to answer the tough questions of how to properly value work and how to set up the mechanisms so that valuable work is rewarded. But, one has to stay on message: Pay equity.

Wealth is the result of earning and saving -- neither of which is immoral. There are problems with disproportionate earnings, and one can focus on fixing that. Moralizing wealth itself is nonsense.
posted by esprit de l'escalier at 1:58 PM on August 12, 2010

Esprit, moralizing wealth is well, moral. Wealth is not simply the result of earning and saving-- as you yourself admit, it's also the result of the value we place on work. A recent article showed that a good kindergarten teacher creates something like $300,000 per year in value by boosting the future economic success of her students. Does she get paid anything close?

It's immoral when the rate of pay for a CEO goes from 70x the amount of the average worker to 300x (these are not exact, but it's something insane like this) in a few decades.

It's immoral that the same CEO's and bankers who trashed everything continue to get bonuses while people who *did* earn and save wind up in foreclosed or underwater homes through no fault of their own. Sure some people ended up that way by overspending-- but why should they be made to pay while the guys at the top who enabled them pay no penalty at all and in fact, continue to thrive? Why should CEO pay go up and up and up even when their performance destroys their companies and the market itself?

The system has become beholden to corporate interests which protect themselves and by doing so corrupt our politics. Believing that it is moral to be wealthy on such a tilted playing field and that it is moral to cut spending during a massive recession is immoral.
posted by Maias at 6:00 PM on August 12, 2010 [1 favorite]

It probably takes a lot of people to make a very expensive house too.

I've worked on building both expensive and mid-range houses, and they both used the exact same work crews.

Wealth is the result of earning and saving

Yeah, that's how Donald Trump got rich. That's why the richest people in the country got richer and the rest of us lost out over the past few decades. They started saving more.

Your socratic method is absurd. Your questions depend on a profound ignorance of actual circumstances for their force.
posted by Jimmy Havok at 6:02 PM on August 12, 2010

Maias: I agree with everything except your conclusion. Do you really believe that no one is entitled to their wealth? It seems to me to be too large a blanket generalization.
posted by esprit de l'escalier at 9:40 PM on August 12, 2010

The same argument could be made for larger transactions: more jobs, more earnings, more economic activity. One measure of economic activity, the velocity of money, does not count the number of transactions, but only the total size of all transactions.

You've made a complete leap there. Who says large transactions means more jobs? Haven't we put down the myth that luxury purchases by a tiny heavily monied percentage of people will employ anywhere near as many people as hundreds of thousands of smaller purchases?

To put this in the simplest possible language, and, as noted upthread, building your five million dollar mansion in the Hamptons does not create anywhere near as many jobs as building twenty $250k houses. It just doesn't.

It's not about envy or the morality of wealth, it's about the effect that money can have. A fuckload (say five mil) of private money sitting in a private bank in NYC will earn interest for the account holder, fees for the bank, salaries for a tiny percentage of bankers and, yes, you're right, a bit of trickledown for the people who serve the $15 cocktails they drink and $300 meals they eat. But it will affect exponentially fewer people than if the same amount of money was spent in thousands of smaller transactions.
posted by Happy Dave at 6:37 AM on August 13, 2010 [1 favorite]

More transactions > more companies involved (and competition) > more jobs > more earnings > more economic activity.

There is also the idea of the velocity of money, which to some is a more important measure of inflation than prices or interest rates. Right now a very outsized proportion of money is sitting in banks, and to add to the problem a huge chunk of money disappeared when housing prices fell (loss of equity and subsequently mortgages and the investment products tied to them) as well as when the stock market tanked. No matter that we injected a lot of cash into the system, there is still much more missing and sitting stagnant than can be overcome by quantitative easing - for one thing, the banks still aren't lending, which is what is supposed to happen when interest rates are so low and the government prints money.
posted by krinklyfig at 6:13 AM on September 5, 2010

a huge chunk of money disappeared when housing prices fell (loss of equity and subsequently mortgages and the investment products tied to them) as well as when the stock market tanked.

Furthermore, as debts are paid off without new loans being made, under our fractional reserve system, that money disappears out of the system as well. I have been considering this for a while now, and am not sure if that is a bug or a feature.

The "money" that disappears when the value of assets drops isn't money that's in circulation, so it doesn't have that large an effect on the money supply, unless it has been used as collateral and the debts are called due in response. It does have a strong effect when an economy depends on the wealth effect, where people spend not because their income is high, but because they feel that their affluence has increased because the value of their assets has increased.
posted by Jimmy Havok at 2:39 PM on September 5, 2010