Fuelled by failed economic theories, income disparity kills economies

Benj Gallander and Ben Stadelmann
Friday, December 9, 2011

With Hanukkah and Christmas swiftly approaching, Benj decided to trash some old economic principles while presenting one that, if adopted, could dramatically improve the economy and people’s quality of life. To begin, he heads back to his university days, where there were many dubious but accepted wisdoms in the community that young minds had to learn and regurgitate.

One that was popular in the Business 20 course Benj took at the University of Western Ontario was that money was not a motivator. Yep, you read that right.

This followed the work of Frederick Herzberg, who believed that the key factors to motivation were achievement, recognition, work itself, responsibility, promotion and growth. Pay was a “hygiene factor,” with an improvement potentially reducing dissatisfaction. Well, it can indeed, but still, there is conviction here that cash compensation can indeed inspire.

At Dalhousie University, there was the wonder of “perfectly efficient markets.” This idea states that stock markets cannot be outperformed, because all information is out there and baked into stock market prices. Benj had a rather vociferous debate with his prof. They ended up at loggerheads and later, a wiser, older student who had come back for his MBA via the world of currency trading asked, “Gallander, why do you bother?” And maybe today he wouldn’t, but he remains heartened that he was a contrarian back then and ignored that “perfect” hype, thereby building a career on bettering the market.

Another brainstorm that was common was the idea of “trickle-down economics.” The idea here is basically that by putting more money in the hands of the rich, their investments in productive enterprises will ultimately mean more prosperity for the poor. So tempting and delightful, especially for the rich! Why not just give the people at the top all of the money, while the labouring and unfortunate masses obtain just enough to get by?

Taken to its extreme, it is evident that if the vast majority of people do not have much, they will not be able to stimulate the economy with their spending.

Benj is a huge advocate of “trickle-up economics.” Under this model, placing more money in the hands of the poor and those of lower income, and decreasing the current ridiculous income disparity will lead to economic stimulation and a more stable society. And critical is that it will not only create jobs, but save them, essential in an economy where layoffs are rampant.

Here’s an example of trickle-up economics at work. Let us take a billion dollars or so from someone who has way too much money — say, Warren Buffett, who is advocating higher taxes. Then give the money away, $1,000 at a time, to people at the bottom of the economic ladder. That money would be distributed to one million people. Imagine what those people might buy to stimulate the economy! One can postulate that the recent financial results at Whirlpool would have been better as the recipients purchased their washers and dryers and fridges and stoves. In all likelihood, then, the company would not be laying off 5,000 people.

Other recipients might use the money to pay off debts. Even this will stimulate the economy, as banks can then lend to others. In addition, those at the bottom are most likely to have financial problems, and easing their burden will create more stability in the financial system.

The stats on income disparities can be measured in many ways, but irrespective of how one looks at it, there is no question that in the United States, the rich are getting richer and the poor poorer. Between 1979 and 2007, real income in the US grew by 62 percent. But the after-tax income gain for the bottom earners was 18 percent; at the top, 275 percent.

In Canada, the story is also getting worse. The OECD reported this week that the wage gap is at a record high, with the average income of the bottom 10 percent of Canadians $10,260, while the top 10 percent pull down $103,500. This 10:1 ratio increased from 8:1 20 years ago.

Plus, in both countries, the net worth of the rich is increasing, while the group at the bottom stays asset poor.

This movement toward concentrating a larger percentage of money in the hands of fewer people is killing the economy. The Occupy movement is a demonstration of the need to change this. It is indeed somewhat akin to the rebelling against the establishment that marked the 1960s.Ideally, the establishment will look out and recognize that sacrificing some of what they have — which, generally, they will barely miss anyhow — so that others can have a better lifestyle will also benefit them to some degree by economic stimulation.

Henry Ford understood this. He wanted his workers to make enough money so they could buy his cars. Effectively, that is what this is all about.

Benj is waiting for trickle-up to be enacted. Whoever gets the word out there in a big way, or at least writes a cool paper or book on it, might even have a shot at a Nobel Prize. Hopefully, though, it is obvious enough that it could be put into play without waiting for years of research to prove the obvious.

All of this is not to say that trickle-down does not occur. In fact, this economic effect does take place, but not in the standard way outlined. When corporations or countries declare bankruptcy, it can lead to a major disruption in the economic system. Jobs are lost, debts aren’t paid, and this has a major adverse impact. In the case of a major enterprise — say, Lehman Brothers — its bankruptcy led to huge amount of cash being wiped out of the system from the stock market collapsing, further debilitating the global slowdown.

As an aside, as he continued on his educational journey, Benj learned at Université Laval and l’Université de Savoie, along with a smattering of French, that there was a world beyond Chez McDonald and Monsieur Submarine. It might not have had anything to do with commerce, but it was certainly fulfilling. As it would be if the economic system evolved to give more to those with less. Yep, holidays are in the works, and it would be nice to give more people a chance to fill their stockings, every day.