IMF Study Finds Trickle-Down Economics Does Not Work

The notion that as the rich get richer, the benefits ultimately  “trickle down” to the rest of society has been thoroughly debunked since it first emerged by in the 1980s. Even though no amount of evidence seems enough to kill off these pernicious and invalidated idea, it never hurts to add more ammunition to the argument — especially when it comes from an otherwise centrist and mainstream institution like the International Monetary Fund (IMF). 

As CNN Money reports:

[Researchers] found that when the top earners in society make more money, it actually slows down economic growth. On the other hand, when poorer people earn more, society as a whole benefits.

The researchers calculated that when the richest 20% of society increase their income by one percentage point, the annual rate of growth shrinks by nearly 0.1% within five years.

This shows that “the benefits do not trickle down,” the researchers wrote in their report, which analyzed over 150 countries.

By contrast, when the lowest 20% of earners see their income grow by one percentage point, the rate of growth increases by nearly 0.4% over the same period.

The new report called widening inequality “the defining challenge of our time,” echoing earlier comments from President Obama.

As for how wealth concentration negatively impacts growth, the answer is simple: most of the wealth being generated by the economy is being siphoned to the top by a comparatively small number of executives, financiers, and shareholders. It is not being “trickled down” through higher wages, benefits, or invests in public goods — instead, it is enriching a small proportion of the population through exorbitant salaries, bonuses, dividends, equities, and other financial instruments out of reach from most workers.

The authors explain that high levels of income inequality drag down growth because poor people struggle to pay for health care and education, which hurts society as a whole.

“For instance, it can lead to under-investment in education as poor children end up in lower-quality schools and are less able to go on to college,” the report says. “As a result, labor productivity could be lower than it would have been in a more equitable world.”

The report builds upon research from other international organizations and Joseph Stiglitz, the Nobel laureate who has been campaigning against rising inequality.

All this evident in the everyday experiences of the average person. From otherwise thriving cities that are being hollowed out by high rents, to outstanding healthcare bills being a leading cause of personal bankruptcy, it is pretty clear that most of the wealth out there is not benefiting the needs of the average person. For trickle down to work, the companies and investors must be willing to part with just some of their massive gains, and instead allocate them towards the workers that helped make it all possible.

Why should so much of the wealth being generated by a society remain in the hands of only a few (ostensible) business leaders? There is plenty of resources to go around, and economic elites have a lot more to gain from an expanded market of middle class people — and the socioeconomic stability it brings — than with the historically insecure arrangement of massive inequality and growing hardship.

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