An alternative to ‘trickle down’

My previous columns have discussed that traditional economists and economic planners have unfortunately focused on increasing Gross Domestic Product (GDP) rather than on narrowing income inequality.

This theory of prioritizing GDP growth is based on the belief that when the economic pie becomes bigger, the poor will be able to also increase their share of the economic pie. This is the so-called “trickle down” theory which I have always said, has never worked.

I have decided to explain the “trickle down” theory and the alternatives. This idea is based on the belief that benefits given to the wealthiest members of society, particularly tax breaks and incentives for corporations, will eventually “trickle down” to the rest of the population through job creation, economic development and higher income for the poor.

In practice the promised gains have largely failed to benefit the lower and middle income sectors in the Philippines, contributing to rising income inequality and persistent poverty. Reducing taxes on corporations and the wealthy are supposed to encourage them to reinvest in the economy and create more jobs for workers. A very large share of these benefits tend to stay at the top. Wealthier individuals and corporations often use tax breaks to increase their wealth through stock buybacks, dividends and other mechanisms that benefit shareholders rather than workers.

Increase in income for the very wealthy often results in increasing personal expenditures for luxury items like additional properties here and in foreign countries, luxury yachts, private planes, etc. rather than reinvesting and benefitting the lower class workers.

The “trickle down” theory also assumes that while corporations save on taxes, they are likely to reinvest in their businesses, thereby creating more jobs. In reality, many companies choose to allocate their additional savings to stock buyouts and other financial maneuvers that boost stock prices.

Stock buybacks increase the value of shares, benefitting the investors and doing nothing for the workers or the unemployed.

Furthermore, much of the corporate investment is directed towards automation and outsourcing, which may even reduce the number of jobs available.

During the last few years, especially after the pandemic, corporate profits have increased. However, wages for the average Filipino worker have remained stagnant. In fact, any move to have any meaningful increase in the minimum wage has been met with very strong opposition from the business sector.

Thus, today’s minimum wage is way below the living wage, which is the amount necessary to provide the basic needs for a family of four or five to lead a decent life. A significant number of Filipino workers are employed under temporary contracts with very little job security and benefits.

The limited disposable income of the average Filipino has led to very little increase in consumer spending, resulting in limiting economic growth.

The “trickle down” theory in the Philippines assumes that as corporations become wealthier, they will provide more benefits to the workers such as higher wages, health care and job security. However, weak labor protection, a weak labor union movement and insufficient social safety nets have left Filipino workers vulnerable. The lack of a robust social welfare system means that low-income families must rely on informal work and face significant hardships in times of crisis such as the COVID-19 pandemic.

“Trickle down” economics has led to a concentration of wealth, rather than a redistribution.

If “trickle down” economic policies do not work, what alternatives can foster economic prosperity for a broader segment of society? An approach known as “bottom-up” economics is a more effective means of promoting economic growth and reducing income inequality. This prioritizes policies which directly uplift working families and small businesses and therefore increase their purchasing power and economic mobility.

The first is increasing the minimum wage to the level of a living wage. This will help reduce poverty and boost the purchasing power of workers, which will lead to increased spending which will, in turn, eventually benefit small businesses and the broader economy. Poverty is reduced and the economy is more balanced.

The second strategy is to invest in education and vocational training, crucial for social mobility and increasing economic productivity. Access to quality education has become limited primarily to the upper class. Even in tertiary education, the gap between the leading universities – UP, La Salle, Ateneo, UST – and the rest is very wide.

Advanced countries, like the Scandinavian countries, are known for very heavy investments in education, resulting in a highly educated work force and relatively low income inequality.

Vocational training programs, particularly in high-demand fields like health care, technology, renewable energy, would improve employment prospects. A highly skilled work force can reduce poverty, increase income mobility and reduce dependence on low-wage jobs.

The third strategy would be strengthening social safety nets and public health programs which will provide families with the support they need to survive economic downturns, illnesses and other challenges. Programs such as unemployment insurance, affordable housing and universal health care can create a foundation of security that will provide a buffer that keeps people from falling into a poverty-stricken life.

The fourth strategy is a progressive tax system that places a greater tax burden on the wealthiest individuals and large corporations.

The government should consider a wealth tax in addition to income taxes. The additional revenue can be reinvested in social services, education and infrastructure.

The “trickle down” effect has increased income inequality. “Bottom-up” economics can lead to a more equitable society that benefits all Filipinos.

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