Trickle Down Economics Doesn’t Work. “Stacked-up Innovation” Can.
We live in an era with incredible technological advances, Tesla just launched a Mars rocket, there’s self-driving cars on the street. Humanity is stretching to the limits of artificial intelligence and the stars. Yet, for the average American, wages have dropped compared to inflation. Healthcare costs are increasing, costs of education have skyrocketed. There is this very real sense that though the future is being built by a few people, for a few people.
A lot of politicians push for trickle-down economics as the answer. Trickle-down economics is the idea that if you give large tax breaks to the rich, they will use the money they now have to invest in building new businesses. This has shown to not be true. With this extra money, they now spend it on either more goods, saving it, or investing it in very safe ways. It is not creating the kinds of exponential returns to the American economy that it proports to do.
The push back is that we could instead turn to “trickle-up economics.” This is the idea that you give massive tax cuts to the poor. Here this idea would likely create more meaningful results in terms of the comfort levels of these people. An extra two thousand dollars a year to a very rich person means a handful more stocks bought, or a nice wrist watch. An extra two thousand dollars to a poor American means greater food security, fewer pay-day loans that need to be taken out, greater home security. But here still, while this money is likely to be more meaningful, it is still only shifting the conversation slightly. If income inequality between the median income and the income of the 1% is a difference between 36,000 per year versus 1.4 million or the difference is between 38,000 and 1.2 million, there is still a system of structural inequity in place. By becoming engrossed with the specific percentages to tax, we are only fiddling at the seams of the problem instead of fixing it.
This is because taxation is the lowest level of possible change to a system. And we need to think bigger if we want to make substantive change to the system of inequality in America. This idea that taxation is the lowest possible place to intervene in a system comes from Donella Meadows “Places to Intervene in a System”. In this paper she outlines twelve different ways to change a system. 12, the least effective, is constants, standards, and parameters, which includes standards, subsidies, and taxes. There are other, more powerful ways to change systems, like the structure of material stocks and flows, or the structure of information flows (who does and does not have access to information). Each of these levers provide insight into how governments, non-profit organizations, and start-ups, can all be thinking about how to change the current system of inequality in America.
The specific lever that I want to dive into is the ability to “change, evolve, or self-organize system structure.” Proponents of both trickle-down economics and trickle-up economics keep saying that the tax breaks given to people won’t simply give more money to people to spend on commodities that are already on the market, but be a leverage point to make more people become entrepreneurs, thereby exponentially returning greater value to the overall system. But both systems imagine money in “trickles,” amorphous droplets with no substance to them. This metaphor is telling in terms of how politicians imagine innovation happens: put money into people’s hands and it will take care of itself.
While money is one important resource in a person’s ability to become an entrepreneur, to imagine that a tax break alone will increase entrepreneurship, spur on the economy, and decrease inequality, is a fundamental misunderstanding of how people become entrepreneurs. And it is a terribly inefficient use of money.
Instead of simply giving either side more money, we need to take a deeper look at all of the structures that perpetuate inequality and change them at deeper levels than taxes or subsidies. The specific system that I know is that of innovation and entrepreneurship. This is a system not just of “give poor people investment.” This is step one. But the system of entrepreneurship, the thing that can create exponential returns to the economy, is currently fragmented and biased. To meaningfully change inequality in America, we need to invest in structures that promote greater access to entrepreneurship for all. This means more classes across the country on how to start and run a business. More maker-spaces for people to experiment and prototype their ideas. More business development classes for small mom-and-pop shops to help them understand how to grow their businesses.
This is the idea of “stacked-up innovation.” Not trickles of money, but better structures that can meaningfully change how entrepreneurship is done and provide greater chances for people across America to start businesses.
