Trickle down economics has been hotly debated for decades, with forms of the theory being a part of the governmental economic philosophy long before the president most associated with the trickle down concept, Ronald Reagan, pressed forward with tax cuts and other benefits for wealthy individuals and corporations under the auspices of promoting general economic growth. While the truth or not of the primary stated positive effect of trickle down – economic growth flowing from the top down — is still argued about today, it is plain to see that a number of negative economic trends today are trickling down from the world of big business and high finance to affect average Americans in the mid-range and lower income brackets.

It is no secret that the biggest names in business and finance are suffering from a variety of fiscal troubles in the current economic circumstances. The bursting of the housing bubble and the melt down of the mortgage and lending industries unleashed a world of hurt on the economy, as one crisis led to another, and another, and… there seems to be no end in sight. As lenders lost big in the sub-prime market and the ugly potentials of the implosion of the derivative markets became readily apparent with the falling of the top 5 investment banks, credit became increasingly strangled. Credit became strangled because liquidity dried up, leaving lenders on almost every level with little to lend, with even banks being reluctant to lend to each other.

This has had a devastating effect on our economy, as credit is the foundation of how business is done today. From the top, business and finance, and the credit that allows them to extend loans, ship goods, stock stores, etc., to the bottom, the consumer and his credit card, our consumption-based economy – in which about 70 percent of our economy rests firmly upon consumer spending — relies heavily upon the availability of credit. The trouble at the top has seeped down to the consumer. For example, as home values plummet, home equity loans and lines of credit are reduced. As credit card companies fear increased consumer default due to the number of financial challenges faced by the average credit card holder, they have been reducing credit limits and availability.

The average consumer is already maxed out in terms of credit, on top of having to deal with increasing prices for just about everything. There has been a marked and sharp reduction in consumer confidence and consumer spending. In fact, according to the Associated Press, the latest Conference Board’s Consumer Confidence Survey revealed that the consumer confidence level recently reached the lowest point ever measured in the 41 years that it has been collecting such data, falling from a score of 61.4 in September 2008 to a mere 38 out of a possible score of 100 in October 2008.  With a drop in confidence has also come a widely reported and quite significant drop in consumer spending, reaching lows not seen in well over a decade. 

While, for the individual, reducing spending isn’t a bad thing, a widespread and overall reduction in spending is sure to affect an economy that, unfortunately, depends on that spending to function at par. One of the effects this reduction in consumer spending has had is to contribute to increasing levels of unemployment. In a recent article by Luis Uchitelle, headlined “Spending Stalls and Businesses Slash U.S. Jobs,” published in the New York Times on October 25,2008, the writer explains “as the financial crisis crimps demand for American goods and services, the workers who produce them are losing their jobs by the tens of thousands” and states that “the list of companies announcing their intention to cut workers has read like a Who’s Who of corporate America: Merck, Yahoo, General Electric, Xerox, Pratt & Whitney, Goldman Sachs, Whirlpool, Bank of America, Alcoa, Coca-Cola, the Detroit automakers and nearly all the airlines.”

“Unemployment claims, already well into recession territory, are rising even faster than expected, leading economists to warn Thursday that the worst is yet to come,” according to a recent Associated Press report. On October 23, 2008, the Washington Post reported that “employers are moving to aggressively cut jobs and reduce costs in the face of the nation’s economic crisis, preparing for what many fear will be a long and painful recession,” citing data from the Labor Department to point out that “in September, there were more mass layoffs — instances in which employers slashed 50 or more jobs at one time — than in any month since September 2001.”

According to the Christian Science Monitor, in an article published on October 6, 2008, “the Department of Labor reported that the US shed 159,000 jobs in September, a considerable increase in the firing rate.” In addition, “the September numbers also showed that the number of Americans out of work for more than six months is at a five-year high.” Many experts expect that the numbers for October will be more troublesome still.

David Lazarus, writer of the LA Times column Consumer Confidential, raises an excellent point in his October 16, 2008, column, concerning the degree to which the United States economy is dependent on consumption. He quotes a Middlebury College economics professor, David Colander, stating “our whole economy is designed to convince people that they want more. Nobody is asking the big question: How much of a consumer society do we really want to be?” Lazarus goes on to demonstrate that we are significantly more reliant on consumption than other nations, noting that “in Europe, consumer spending accounts for about 60% of economic activity, according to the United Nations. In Japan, it’s closer to 55%. And in mega-exporter China, it’s around 35%.”

As the United States moves through this financial crisis period, the nation would be well served by considering a more sustainable economic model than the mass consumption that has led millions to the edge of financial insolvency, staggering under the weight of high interest credit card debt, upside-down mortgages, and other debt-related woes. To have such a huge percentage of the economy resting upon people not making the best financial decisions for themselves – valuing consumption more than thrift and saving, for example – is simply risky. It is unfortunate, but true, that moving beyond the current consumption model will involve some pain, including job losses, as the shift is made to a more productive way of being. However, those that are able to move beyond consumption and debt are less likely to suffer from the trouble that periodically trickles down from the top.

 

  

         

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