‘Trickle-down doom’

Last week was a horrible week for the British economy. The British pound fell to its lowest level vis a vis the US dollar and interest rates zoomed up. Most economists and columnists stated that the newly elected Prime Minister Liz Truss did so much damage to the British economy only in a few days. Since the British pound is an international currency, the repercussions were bound to be felt around the world. Stock markets outside the United Kingdom fell one after another. By the end of the week, Truss and Kwasi Kwarteng, chancellor of the Exchequer, were forced to reverse some of their economic and fiscal policies.

Their initial goal was to institute massive tax cuts especially for the rich which would provide, in their words, a “huge boost to economic growth.” This is an economic theory popularly known as “trickle down” which states that if the rich are afforded a chance to earn more, they will inject that money into the economy which would boost economic growth. This is a discredited economic thinking that most countries have rejected. Even Pope Francis, in one of his encyclicals, said that trickle down does not work and, in fact, increases the gap between the rich and the poor.

The modern world has realized that trickle down benefits only the rich and punishes the poor. Experience has shown that the rich will only spend additional income not on expenditures on the local economy but on purchasing luxury items. In the Philippines, one of the most common ways to practice the trickle-down economy is to keep the wages low in order to increase the profits of companies which will then increase the dividends going to the very rich.

And yet, the idea of keeping wages very low in order to make the Philippines “competitive” continues to thrive. This is one reason why the rich get richer and the poor get poorer. Even during the pandemic, it was obvious that the very very select rich continued to grow in wealth.

In the United Kingdom, the trickle-down policies of Truss were viewed as resulting in an increase of the budget deficit and would feed inflation. The biggest victims of inflation are the daily wage earners and the unemployed. This is why it has often been said that inflation is really a tax levelled on the poor. Another criticism of the trickle-down plan of Truss and Kwasi Kwarteng was that it would force the government to reduce social expenditures such as health, education, housing. This is actually what happens in the Philippines where social budgets are sacrificed in spite of the enormous foreign debt we are incurring. Taxes on dividends, which are exclusively for the very rich, are protected and considered negotiable while wage earners see that taxes from their wages are automatically deducted.

One outspoken critic of the Truss economic program is author and New York Times columnist Paul Krugman. He said, “… slashing taxes for the rich, who are already less affected by higher energy prices than people with lower incomes are, instead sends the message that only the little people will face hardship. This message is especially toxic given that the British public is already in an uproar over cuts to public services, specially health care, and wants to see taxes go up, not down, to pay for more. And it is hard to govern effectively when you have anger among most of your nation.”

Sometimes it is difficult for me to understand why the poor can react so quietly and even in a docile manner even when public services are so poorly managed. PhilHealth, public education and social welfare are among these areas which are poorly funded. And yet, there is no major outcry among the proposed recipients, the poor and the lower middle class.

Krugman also said in his column, “In tough times, leaders need to be perceived as being both realistic and fair. What Britain got instead is a leader who seems to live in a fantasy world and is oblivious to concerns about social solidarity.”

The biggest economic and political problem in the world today is the ever-growing gap between the rich and the poor. Unfortunately and unbelievably, there are still economists who propagate the myth that economic growth or Gross Domestic Product should still be the main goal of economic policies. They completely ignore the fact that this increasing gap between the rich and poor has given rise to the increase in populism and the decline of democracies.

We still hear the argument that we must first increase the size of the economic pie which will allow the distribution of more wealth even to the poor. This has not happened and will not happen. Unless mandated by law, there will be no limit to the accumulation of wealth by the elite. Sadly, in Third World countries, the elites are more prone to investing in real estate in foreign capitals like London and New York City, rather than in their own countries. The very rich who consider traffic as a nuisance resort to buying private planes and yachts and multi-hectare estates. Hopefully, the example of what happened in the United Kingdom where the trickle-down economics was soundly rejected by the population will open the eyes of our own elites and those who work for their benefit.

A British member of Parliament coined the phrase “trickle-down doom” which best describes the economic philosophy of the elites.

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