Enlightened Economics

Economics for an Enlightened Age

• International Monetary Fund Blasts ‘Trickle-Down’ Economics

Posted by Ron Robins on June 25, 2015

“A new report from the International Monetary Fund suggests that the widely popular ‘trickle-down’ economics just increases the gap of income inequality, creating injustices in almost every country. The study written by five IMF economists said that if governments want to increase growth, they should focus on helping the poorest 20 percent of citizens… The report analyzed 159 developed and developing economies from 1980 to 2012, searching to see how income is distributed differently in each system. It found that when the income share of the top 20 percent increased by 1 percent, economic growth slows down 0.08 percent in the following five years. Meanwhile, a 1 percent increase for the bottom 20 percent leads to a 0.38 percent increase in the country’s GDP in the following years.”
International Monetary Fund Blasts ‘Trickle-Down’ Economics, by Grant Whittington, June 23, 2015, TriplePundit, USA.

Commentary: Ron Robins
The clear implication from this report is mostly for income redistribution. However, as I’ve previously argued, I believe that though some form of income redistribution could be effected to help close the immediate income gap, but by far the better way — though longer to effect — is for the lower-income groups to benefit financially from corporate stock ownership.

How can this be done? Well, on February 25  I wrote that, “I believe an enlightened approach would be for the wealthy — and for corporations themselves — in each country to entrust a certain percentage of their profits in the form of company stock to a ‘sovereign wealth fund.’ Over time, some of the dividends and stock gains could be cashed and used to directly increase the incomes of the poor. Higher taxes for the rich (which is becoming popular)… could be introduced now but would probably have to be quite onerous to significantly improve the income of the poor.

Furthermore, as it’s proving in France which imposed very high taxes on high incomes, the wealthy become very adept in finding ways to avoid the higher taxes — and many even moving themselves to other jurisdictions!”

The IMF and others have demonstrated in various studies that societies with growing and grossly uneven income and wealth distributions tend to eventually financially self-destruct. However, before they self-destruct, there’s broad recognition of this possibility. Recognition of this offers everyone the chance to expand their awareness and consciousness to develop greater insights into the solutions. And this is what has to happen to all nations facing this issue.

What the wealthy must realize for their own self-preservation — and for even greater financial gain — is that they should take a proactive, optimal approach to solving the income and wealth distribution quagmire such as the solutions proposed here. These, though not new, are the best way forward to an enlightened, sustainable, and affluent future.

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5 Responses to “• International Monetary Fund Blasts ‘Trickle-Down’ Economics”

  1. Welath creation is another matter and distribution is another. If somebody works harder he is entitled to more wealth.

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  2. More About Luck said

    What additional benefits do you get from a sovereign wealth fund over higher corporate taxes?

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    • Ron Robins said

      It’s a good question. The benefits I see are longer term in nature. The SWF accumulates and compounds capital for generations and only its dividends, say, might be used to increase those with incomes. Higher corporate taxes might help with the immediacy of supporting lower income individuals — but if such higher taxes aren’t applied relatively universally, companies will shift their jurisdictional domains to countries with lower corporate tax rates. Also, such taxes might impede corporate growth by reducing their funds for productive investment purposes. (Which, unfortunately, hasn’t been the case for many years when companies spend their profits on buying back their stock! This will change in time.)

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      • More About Luck said

        Ok so for clarity you are saying, profits from large firms can be handed to the state for investment in sovereign wealth funds. By definition these profits will be invested by the SWFs in foreign assets and in exchange the firms can get some form of steady recurring revenue from handing over their profits? Gains that the SWF produce are then distributed to the poor or at least some of it?

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      • Ron Robins said

        Thanks for this conversation. Some clarification. I suggest that it’ll be shares and not profits given-over to the SWF. Dividends arising from those shares would be distributed as income to lower income groups. The SWF should also be arms length from the state so the state does not get involved in the management of the companies the SWF has assets in.

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