Trickle-Down Economics

One commonly cited solution for increasing the disposable income of the lower-class is rooted in the principles of trickle-down economics, implying that any gains of the wealthy “trickle down” to the remaining members of society. According to this theory, the government should offer more tax cuts and financial benefits to large businesses or investors to stimulate an overall widespread economic growth. Proponents of these trickle-down policies argue that redistribution of wealth from taxpayers to the upper class in the short-term will incentivize high earners to expand their levels of output, and thus generate more jobs and boost the overall standards of living in the long run. However, this proposal fails to recognize the important fact

that many members of the upper class do not spend the entirety of their income. Rather, the majority of their wealth is instead invested abroad, set aside for speculative endeavors, or hoarded within savings accounts. Additionally, it should also be noted that the rich do not have an unlimited capacity to consume. With each extravagant purchase made, the amount of marginal satisfaction received from each acquisition rapidly diminishes. For this reason, you rarely see billionaires purchasing excessive numbers of private jets or luxury sports cars. Taking both of these factors into consideration, the total expenditures of the upper class are significantly lower than what many trickle-down economists assume them to be. That is, ultimately the expenditures of the upper class alone are not enough to maintain the necessary level of total demand required for a thriving economy.
Other economists assert that the current state of the economy does not require drastic reorganization to help the poor become more financially stable.

According to this argument, as long as the bottom 99% are not currently negatively impacted by the gains of the 1% the economy is functioning acceptably. This growth is considered a Pareto improvement, or an action that favors increases total utility in for some without making others worse off. Proponents of Pareto efficiency contend that the large profits of the wealthy only serve to increase overall capital wealth and stimulate the economy because the lower-class is not being directly suffering from their actions. To support this claim, data from the Congressional Budget Office shows that since Great Recession, after tax-incomes have actually increased for the bottom one-fifth of households, solidifying the belief that the bottom percentile are not currently declining due to the actions of the rich. For this reason, many assume that it is illogical to focus on any actions, such as the redistribution of funds to the poor, if it leads to an overall drop in economic growth. Following this line of thought, minimum wages should not be increased, because, as dictated by basic economic principles, the demand for the supply if labor will fall, thus leading to further unemployment. Similar to the ideologies of trickle-down economics, instead of insisting on progressive taxation or government intervention in labor markets, there should be greater emphasis on deregulation and decreased income taxes. This recommendation, however, fails to acknowledge the fact that under current economic conditions, the lower class are in fact facing serious social repercussions that impede their ability to accumulate wealth, thus invalidating the argument of a Pareto improvement. It has been proven that societies with larger wealth gaps between the upper and lower classes are plagued by a range of social problems such as increased levels

of violence, low math and literacy scores, metal and physical disabilities, greater drug use, a larger number of imprisonments, and increased rates of teenage pregnancies. Moreover, according to the United States Department of Labor, raising minimum wage does not in fact lead to higher rates of unemployment. In actuality, research suggests that increases in the minimum-wage boost levels of consumption and overall demand due to laborers possessing additional earnings, thus leading to greater job growth and a stronger economy.