The 1% and the former "trickle down" pyramid

Once upon a time, when there was a lot less disparity between the rich and the poor in the US, an idea was proposed to justify giving more tax breaks to the rich. This idea was called the "trickle down" theory. Note that this blog concentrates on income inequality -- wealth inequality has parallel workings.

At heart, the trickle down theory was an economic pyramid and is the basis of the concept of regulated capitalism. However, the main word in that sentence is regulated. The idea is that the people with the most money generate more money which is distributed (in lesser amounts per person) to a larger set of people, who then generate more money which is distributed (in lesser amounts than the people of the second level) to an even larger set of people. At the bottom of the pyramid are the people who are unemployed or are working for whatever they can get paid and not die.

The original pyramid for the "trickle down" idea worked rather like this (note that these numbers are all just examples):

1 person earns $1,000,000/year
3 people each earn   $500,000/year
6 people each earn   $300,000/year
10 people each earn $200,000/year
25 people each earn $100,000/year
55 people each earn $40,000/year

This forms a pool of 100 people. In total, they earn $11,000,000/year. The top earner gets 25 times as much as the lowest paid earner. and the top 20 people (20%) make 57% of the total money (leaving 43% to the lower 80 people (80%). The top earner gets about 9% of the total.

However, in order for this distribution to hold, it is necessary to have laws and regulations that keep redistributing money to the rest of the people according to their wealth. In the 1980s, it became politically popular in the US to think that if the rich were allowed to accumulate more money then there would be more money to distribute -- or "trickle down" -- to the rest of the population. That started a process of steadily increasing tax loopholes and favored treatments, lower (if paid) tax rates, substantially lower wages (based on pre-inflation 1985 dollars), and concentration of wealth which led to a new structure such as the following (once again, these are made up numbers -- the real ones are different but not better):

1 person earns $5,000,000/year
3 people each earn $300,000/year
6 people each earn $200,000/year
10 people each earn $125,000/year
25 people each earn $60,000/year
55 people each earn $22,000/year

Once again, this is a pool of 100 people and, together, they earn $11,000,000/year.

However, this time the top accumulator (no longer calling them an earner) gets 227 times as much as the lowest paid earner. The top 20 people (20%) have increased their total to 76% of the $11,000,000 but look carefully (this type of statistical use is often in political advertisements) -- the 19% below the top 1% are actually earning LESS than they used to. The top accumulator now controls 45% of the total money pool.

This is a situation where the top accumulators redistribute the earnings of the lower rich, middle class, and working poor to give to themselves. I call this distribution the "splash over" economic theory -- or a vivid, real, example of unregulated capitalism. You fill up the top and some of the excess splashes over to the bottom.

This was the situation in the "Gilded Age" in the 1800s. It was shifted, for individuals, with reforms such as the creation of income tax toward the turn of the century -- and it was shifted, for businesses, with "New Deal" reforms that came out of recovery from the Great Depression.

And, at the root of it all, the voters carry the responsibility.