Supply Side 'Trickle-down' economics- does it work?

Supply-side (or 'trickle down') economics has for the past few decades been one of the discreet tenets of Western economy. It's the belief that giving financial benefits to the wealthiest of society (in the way of tax cuts/breaks, regulatory advantages given to big businesses) will inevitably benefit society as a whole, as the wealth will 'trickle down' the economic ladder in the form of employment, pay rises or whatever else of the extra wealth the richest will generously share with the rest of the population.

It's been a policy the conservatives of America has held ever so close to their hearts, and one that has faced much opposition by the lower and middle classes of America.

So how did trickle-down begin?

A turning point was certainly in the 1980s, during the divisive periods when Ronald Reagan and Margaret Thatcher were in power in the USA and UK respectively.
Perhaps never have two leaders either side of the Atlantic been so harmonious- Reagan curiously dubbed Thatcher "the most important man in England", and Thatcher once described Reagan as "the second most important man in my life".
The harmony of the two certainly extended to economic policy; both leaders were strongly influenced by the Chicagoan and Austrian schools of economics, the proponents of which included notable anti-regulation, free-marketers Milton Friedman and Friedrich Hayek.

Trickle-down was one of their most prominent legacies. Thatcher and Reagan carried out drastic economic changes that were designed towards 'supply-side economics' (another name for trickle-down). The most important relevant policy change was that of tax rate changes.
In the USA, the Tax Reform of 1986 saw the top tax rate for individuals drop from 50% to 28%, partly compensated for by an increase of the bottom rate of tax from 11% to 15%. This was the very first time in the history of the USA that the top rate of tax fell at the same time as the bottom rate rising.
In the UK, Thatcher followed suit by dropping the top rate of tax from 80% to 63%, meanwhile almost doubling VAT (Value-added tax) and the amount everyone had to pay to fund the National Health Service. However, she did indeed drop the common tax rate from 33% to 30%.

So what were effects of these trickle-down policies?
Let's remember, the motivation supposedly behind trickle-down economics was that the population as a whole would benefit from the wealthy being wealthier. The idea is that as the national wealth pie grows as a result of the richer getting richer, everyone else's pie would simultaneously grow as a result.
So has it worked?
Well, a certainly interesting effect is encapsulated well in the following graphic:

Comparison of wages of the top 1%, overall wages and productivity.
(Mother Jones) 

Note the real separation point on the graph, where the average income of the top 1% really lifts off- it's after the turn of the decade, through the 1980s- conveniently the decade of Reagan's presidency.

Note not just how the income of the top 1% rises incredibly, that as productivity increases the average overall wages of the population lags behind, barely increasing in relation to the other two factors in the chart.
The meaning of this is pretty unpleasant- the 'pie of wealth' may have increased, but this chart suggests that more prominent has been a relocation of sorts of national wealth.
The wages of the overall population has suffered since the 1980s when it is considered that productivity has boosted- the overall population have not benefited in terms of wages from this increase. Instead the wages of the wealthiest have been boosted far more than before the 80s.
CEOs in 1965 made 24 times more than the average production worker- in 2009, this figure was 185.

It seems clear that wages of the middle and lower classes, contrary to the motives of supply-side economics, have suffered as a result of the policy- meanwhile clearly the wealthiest have benefited HUGELY.

So why haven't most of the population benefited- a key belief of the theory is that it's better for everyone if the wealthy are wealthier, right?

Buffett has been a prominent opponent
of trickle-down economics.

Here there is a great fault in the trickle-down ideology- reduction in the taxes enforced upon the wealth is itself no guarantee of further reinvestment into the economy.
This is because the benefits are being given to people who are not in need of it. Little is in the way of CEOs creating new jobs to further production- most already have the capital available to invest where they see fit.
Warren Buffett (pictured right), one of the wealthiest men in the world, and perhaps the most prolific investor claimed "People invest to make money, and potential taxes have never scared them off". Taxes are rarely a stumbling block for the wealthiest, who are willing to take risks to invest (most entrepreneurs are where they are now as a result of their calculated risks).
Therefore tax cuts to the wealthy rarely open the doors to new investments. Instead it leads to simply a further amassing of wealth by the wealthy. By no means will the wealthy invest everything they benefit from tax cuts, to the gain of the middle and lower classes as the theory suggests. A staggering example of this is how currently the top 1% of wealthiest people in the world control 39% of the world's wealth. This is a clear sign of a broken global system, a large part of which is thanks to trickle-down.

Trickle-down, supply-side, Reaganomics, whatever name it is called, is a lie.

The solution lies not in blessing the wealthy with benefits and hoping that it will filter down to the rest of society, but the solution lies in the middle class. We need to make the middle the centre of our economic system, and see middle-out growth that will benefit everyone (yes, including the wealthy).

Middle-out. That is the solution we need.

Sources for this article can be found linked within.

The benefits of privatisation.

In the previous article we went through a brief introduction of privatisation; now let's go onto the benefits of it.

The benefits come under various categories, however a theme runs throughout- that is of efficiency, a key component of business management.

A prominent difference between private and state companies is the (usual) difference in motive. Whereas state companies can have an unclear, difficult-to-measure motivation (usually to 'serve the public'), private companies are generally far more strictly profit-driven; they seek to serve shareholders primarily (who want their pockets to be lined handsomely).
Now there is debate over whether profit is such a good motive for companies (that we'll discuss in the next article), but profit motivation usually drives companies to increase their efficiency.

A common criticism of state-owned enterprise is its tendency to over-employ, often in order to score the ruling political power popularity points when it came to annual employment figures. Another crucial factor in this overemployment was the power of unions- public-owned enterprises were often under strong pressure from labour unions to avoid firing staff, which in many cases was not so helpful in terms of keeping staff in line and also efficiency.

Overemployment is crucial as it leads to increased losses in the form of wages, for employees who the company could, essentially, perform healthily without. Private companies tend to avoid inefficient practices such as overemployment- in fact they look at doing the contrary, to shed costs: and cutting down on staff is often the easiest way to do this.

British Airways, under Lord King's leadership developed from
an oversized, outstretched struggler to a world-class airline.

The privatisation of British Airways was notable for its crackdown on 'unnecessary' employees. Before privatisation, BA were employing almost 60,000 staff; a huge number, especially when compared to close competitor Qantas' 15,000.
However, following privatisation and under the rugged leadership of Lord King, the workforce was reduced to 38,000 in a period of just three years- among these over 50 senior executives, the company was rebranded entirely to a more 'American' style- enlisting help of a San Francisco-based design firm to lead rebadging, and cutting costs wherever possible- in inefficient flight routes, in excess staff members and so on.
These almost ruthless cutdowns paid dividends indeed- in 1987 BA posted after-tax profits of around £166 million, among the highest airline profits globally and certainly one of the highest BA had ever experienced.

Introduction of competition is often heralded as a crucial feature of privatisation. Privatisation often comes with an opening of the market to other private companies as well, a good example being the gas market following the privatisation of British Gas. Competition is often a great thing to have in a market, as it forces companies to innovate and provide what consumers want, in order to maintain and expand their market share (and receive more profits, of course). Competition introduces pressure on businesses; often a good influence from a customer's perspective.
This argument has its pitfalls- but in general competition in a market is necessary for development (think how competition between Apple and Samsung has boosted the rate of development in the technology market, or BMW and Mercedes the car market).


Another feature of privatisation is that it is a a way for a government to quickly raise some cash, to reduce deficits in particular. Between 1979 and 1999, the Treasury raised over £70 billion from asset sales such as that of British Airways, British Gas and other companies that were privatised.
However, this is not such a strong proponent of the pro-privatisation argument as we'll explore in the next article (but I'll give you a hint: *cough* Royal Mail *cough*)

So efficiency is the general theme of the pro-privatisation argument. Privatisation can cut down on the poor decisions driven by political motives rather than efficiency, it can introduce competition into a market by smashing state monopolies and it can be a quick boost to a nation's coffers.

Stick around: next time we'll explore the other side of this argument, and have a look at why privatisation may be in fact quite a bad idea.

SOURCES:
http://www.baserler.com/onur/isletme/Privatization%20of%20British%20Airways-Before%20and%20After.htm

http://news.google.com/newspapers?id=R1YVAAAAIBAJ&sjid=a-QDAAAAIBAJ&pg=4326,3087813&dq=staff+british+airways

https://www.princeton.edu/~achaney/tmve/wiki100k/docs/British_Airways.html

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/9989430/Thatchers-legacy-how-has-privatisation-fared.html