Tobold's Blog
Saturday, January 21, 2023
Trickle-up economics

My interest in hobbies like gaming leads to me coming across more news about companies that make games and other forms of entertainment than news about companies in let's say heavy industry. And lately all the news about these companies have been bad. Tech companies like Apple are laying off record number of employees. Game companies like Hasbro are making very bad decisions in an attempt to stop the rapid shrinking of their profits. The share price of Netflix is half what it was at it's peak in 2021.

None if this is actually surprising. The current economic problem is a cost of living crisis, where between inflation and rising energy prices the average household is increasingly squeezed to pay its bills. And while that is bad news for the whole economy, it obviously disproportionally hits companies that make things that people buy from their disposable income. Share prices of energy companies are doing just fine; Exxon's share price nearly doubled in 2022. But once people have paid for all the necessities of life, these days there isn't much money left, if any. It is easier to not buy the latest iPhone, or Magic cards, or cancel your Netflix subscription, than to cut your spending on rent, food, and heating.

Previous recessions, like the one after the 2008 financial crisis, have shown a curious phenomenon: Countries with higher minimum wages and stronger worker protection got through the crisis a lot better than others. A prime example was Germany, where a deal was struck between unions, industry, and the government for workers to work shorter hours, receive some wage subsidies, and not be fired. That turned out to work brilliantly, because recessions do end, and it is a lot easier to increase cut hours than to rehire people you fired.

In 1914, Henry Ford more than doubled the salary of the workers in his Ford Motor Company, from $2.25 to $5. Henry Ford wasn't a socialist. But up to that time a typical worker didn't earn enough money to even consider buying a car. With Ford being the only one to produce affordable cars, the salary increase led to Ford's workers buying Ford cars. Giving money to working class and middle class households works wonder for the economy, because they tend to spend most of it. If the same company profits go into dividends payed out to already rich people instead of increased salaries, the money tends to get stuck in savings accounts. Ben Bernanke coined the term "savings glut". It describes a situation in which the spoils of capitalism are distributed in a way that gives the holder of capital too much, and the providers of labor too little. But beyond a certain point, capitalists can't find any productive investment for their money, which leads to it getting stuck in low-interest savings accounts, or wasted on bad investments like crypto. Economists talk of the "velocity of money", and it has fallen dramatically since the start of this century.

The short term economic future of Europe will see a lot of strikes. To an American that might look like a bad thing. But the end result will be an at least slightly larger share of the pie going to working class and middle-income households. And that money will have a higher "velocity". Unlike trickle-down economics, which has been repeatedly shown to not work at all, trickle-up economics makes everybody richer.

You'd think this would be common sense, but apparently not. Kind of the say way water doesn't nourish as many ecosystems if you pile a bunch of snow from the top of a mountain into a dump truck and cart it to the ocean, where it will end up eventually anyway . . .
While Amazon, Alphabet, Meta, & Microsoft have laid off over 10,000 each, Apple's layoffs - so far - were 100 contractors in August.

Massive government debt and large costs/inefficiencies for dealing with climate change temper my optimism for solutions.

There are many jobs, companies, and industries that need to cease to exist or greatly go away. I worry that increasing political involvement will make it harder to do the correct / efficient thing.
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