Our current economy essentially is experiencing a plumbing problem. Money is clogged when we need it flow. There is plenty there – it’s just not moving.
Economic activity is generated by what economists call the multiplier effect. For example, when I earn money, I take some of it and go buy groceries. The grocer takes some and pays her workers. One worker uses some to buy clothes, another to eat at a restaurant, another still to buy supplies at the hardware store. At each point, one economic transaction begets more, amplifying the effect.
A healthy economy requires money to circulate. Without the movement of money, the economy does not function, as our current economy now demonstrates. Let’s look at that picture of the distribution of wealth again.
Starting in the 1980s, our economic policies predominantly reflected the supply side economic theories of Milton and Rose Friedman, popularly known as Reaganomics. Supply Side theory assumes that the main engine of the economy is the investor or wealth holder, the person able to put his or her savings into businesses and earn profits. Since businesses rely on the capital investments of these folks, it is assumed that the more money the investor has to invest, the more businesses will be able to grow, create jobs, and benefit society as a whole. So supply side policies are specifically designed to move as much money or wealth to the top as possible.
The main policy strategies for moving chairs to the top are: 1) keep taxes low for the wealthy; 2) keep wages low (as they are often the largest business expense); and 3) keep the role of government to a minimum (as government is often a significant competitor with business). These strategies have dominated economic policy since the 1980’s, and the Ten Chairs picture shows that they have been rather successful at moving those chairs in the intended direction.
Now there is so much at the top and not moving that we have a major problem. In response, the Obama administration has advocated policies that are closer to demand side theory, also known as Keynesian economics after economist John Maynard Keynes. Demand side theory assumes that the engine of the economy is the consumer, and policies are designed to get money into the hands of those at the bottom on the assumption that those with the least will always spend what they have and generate economic activity and jobs. Demand side policies were used to lift America out of the Great Depression successfully. As you can imagine the demand side policy strategies are the exact opposite of the supply side ones.
Neither supply side nor demand side policies are inherently right or wrong. They are simply tools to help us achieve the outcomes we want in the economy, and there are times and situations where one may work better than the other. But right now, we have that plumbing problem where the money is stuck, and we need to use the right tools to fix it.
Regardless of the specific policy and its supply side or demand side leaning, we tend to think of changing the distribution of wealth as a bad thing because we see it as a “transfer” of wealth from one group to another. Economists even call them “wealth transfers” and narrowly assume that the benefits only go one way. This language sets up the competition again – us v. them, yours v. mine, wealthy v. everybody else – and we end up in juvenile arguments of “but that’s not fair!” Anyone who suggests redistributive solutions is accused of engaging in class warfare or worse. Is there a different way for us to look at the situation without injecting competition and fear?
One possible answer is to see it whole like we do with the Ten Chairs. The current situation where money is stuck does not serve anyone in the picture, not even the wealthy whose markets are drying up because no one else can afford to buy their stuff anymore. Money must flow and circulate to be of any use.
Our economy’s health right now cannot be measured in the number of billionaires we have but in the number of people who are able to participate in the economy. The more people there are who can participate, the more activity will happen and help create the flow we need for everyone to benefit. But because we are so out of balance and the degree of redistribution needed is so dramatic, in the short-term it can look like Robin Hood taking from the rich to give to the poor. But in the longer view, we can choose to see it as restoring the necessary flow so that we all have an opportunity to participate in a thriving economy. In this sense, those one-way transactions of the multiplier effect can add up to a system of reciprocity and mutual benefit, the potential inherent in our economic system if we are willing to aim for it.
This post is the second in a series on the distribution of wealth. The first can be found here.