Fallacies of Capitalism 2: The Trickle down Effect

What is the "trickle-down" fallacy, and how does it relate to the distribution of wealth in a capitalist system?

The "trickle-down" fallacy is the belief that when the wealthy and corporations accumulate more wealth, it will eventually "trickle down" to benefit everyone in society. This theory suggests that if the rich have more money, they will invest, create jobs, and stimulate economic growth, which will ultimately improve the well-being of everyone, including those at the bottom of the income ladder. However, this theory ignores several important aspects of wealth distribution in a capitalist system. Let's understand it with simple examples:

1. Tax cuts for the wealthy: Advocates of the trickle-down theory often argue for tax cuts for the rich, believing that they will use the extra money to invest and create jobs. However, in practice, the wealthy may not necessarily invest their additional wealth in ways that benefit the broader economy. They might opt to invest in offshore accounts, buy luxury goods, or engage in speculative activities like stock trading, which may not lead to significant job creation or widespread economic growth.

2. Wage stagnation: Trickle-down economics assumes that as the wealthy accumulate more wealth, they will increase wages for workers. However, in reality, wages for many workers have stagnated or grown at a slower pace compared to the rising incomes of the wealthy. For example, over the past few decades, productivity has increased significantly, but the gains have primarily gone to executives and shareholders, while workers' wages have not kept pace. This demonstrates that the benefits of wealth accumulation often do not trickle down to workers in the form of higher wages or improved living standards.

3. Rising income inequality: Trickle-down economics fails to address the issue of income inequality. Over the past few decades, the wealth gap has widened, with the top earners capturing a disproportionately large share of economic gains. This suggests that the benefits of economic growth and wealth accumulation are not evenly distributed across society. Instead, they tend to concentrate in the hands of a few, exacerbating income and wealth disparities.

4. Lack of investment in public goods: The trickle-down theory assumes that the wealthy will invest their additional wealth in ways that benefit the broader society. However, in practice, a significant portion of wealth accumulation may not be directed towards public goods, such as education, healthcare, infrastructure, and social programs. Instead, the wealthy may focus on maximising their personal wealth through financial instruments, real estate, or other investments that primarily benefit themselves, further exacerbating societal inequality.

In summary, the "trickle-down" fallacy suggests that the benefits of wealth accumulation by the rich will automatically benefit everyone in a capitalist system. However, this theory ignores the reality that wealth does not necessarily trickle down to the broader population. Instead, it often perpetuates income inequality, fails to address wage stagnation, and may not result in significant investment in public goods. Understanding these limitations is crucial for developing policies that promote a more equitable distribution of wealth and opportunities in society.

Inflation: How Markets Fail?

 

UK finance watchdog exposes lost Private Finance Initiative (PFI) billions

Henry Mance and George Parker in The Financial Times

Britain has incurred billions of pounds in extra costs for no clear benefit by using the private finance initiative (PFI) to build much of its infrastructure, the National Audit Office has said. 

Recent PFI contracts — for schools, hospitals and other facilities — are between 2 and 4 per cent more expensive than other government borrowing, and involve significant additional fees, the watchdog said in a report published on Thursday. 

The GMB union said the NAO’s report showed that PFI was a “catastrophic waste of taxpayers’ money” and projects were “financial time bombs”. 

Political criticism of PFI has intensified this week following the liquidation of Carillion, a leading provider. Jeremy Corbyn, the Labour leader, told parliament on Wednesday that Carillion was evidence of a “broken system” and “costly racket”, and called for some companies “to be shown the door”. 

Although Theresa May, the prime minister, accused Labour of opposing “the private sector as a whole”, some Conservatives have joined in criticism of PFI. 

Former cabinet minister David Willetts, a one-time Treasury official, was a key promoter of the scheme, but this week admitted that some recent projects had gone awry. Carillion’s collapse exposed cases where, in the end, the risk reverted to the government, which had to maintain public services, he said. 

Labour has promised to bring many PFI contracts back in-house “if necessary” if it wins the next general election. But terminating PFI deals could involve billions of extra fees because most contracts do not include break clauses. 

In one example, Liverpool City Council is due to pay a further £47m in fees for Parklands High School in Liverpool, even though the school cost only £24m to build and was shut after 12 years owing to poor teaching standards. 

“Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change,” said Meg Hillier, chair of the Commons public accounts committee. 

Breaking these contracts would involve settling interest rate swaps. The largest 75 PFI schemes would cost £2bn to break, a quarter more than the outstanding debt, even before compensation to shareholders is considered, the NAO said. 

PFI can be attractive to government as recorded levels of debt will be lower five years ahead even if it costs significantly more over the full term of a 25-30 year contract, National Audit Office 

Stella Creasy, a Labour MP, said the government should negotiate directly with PFI providers or impose a windfall tax on the special purpose vehicles (SPVs) involved. “It might seem that our hands are tied, but they’re not. What we can do is use our tax system,” she said. 

PFI was devised in the UK in 1989 but its use jumped while Tony Blair was prime minister in the late 1990s and early 2000s. 

It refers to deals where SPVs are set up to finance construction projects. The SPV borrows money to fund the construction, but that debt is mostly not included on the public sector balance sheet. In the last financial year, Britain paid £10bn in PFI fees; future charges amount to £199bn spread over the next three decades. 

“PFI can be attractive to government as recorded levels of debt will be lower over the short to medium term (five years ahead) even if it costs significantly more over the full term of a 25-30 year contract,” said the NAO. 

Off-balance-sheet public-private partnerships, such as PFI, now represent 1.7 per cent of Britain’s gross domestic product, the third highest ratio in Europe, behind Portugal and Hungary. 

The NAO report detailed how the government’s decision-making was slanted in favour of PFI. While the US and Germany compare the cost of private finance with government borrowing costs, Britain’s value-for-money assessment compares it instead with the government discount rate of 3.5 per cent, which is significantly higher. 

Overall, any public body “has an incentive to show that private finance offers better value for money than the [public sector comparator] as unless alternative capital funding is made available the project is unlikely to proceed,” the NAO said. 

The NAO found that, after former chancellor George Osborne’s relaunch of PFI in 2012, the “fundamentals of the financing structure and contract remain the same”. Ms Hillier said she was concerned the Treasury had not addressed “most of [PFI’s] underlying problems”. 

The Treasury argued that PFI contracts have benefits — including making the private sector bear the risk of cost overruns, and introducing an incentive to reduce long-term running costs. 

But the NAO collated evidence suggesting that such benefits have failed to materialise. It cited research by the Treasury select committee, which found PFI projects charge higher prices to cover unforeseen costs, and by the Department for Education, which found a school’s construction cost was not affected by how it was financed. 

On the question of efficiency, three government departments surveyed by the NAO said operating costs were higher under PFI, while one department said the costs were the same. 

The additional costs of PFI were easier identify. Deals and equity investors in agreements signed since 2013 are forecast to receive returns of between 2 and 4 per cent above government borrowing. But on some deals the level is above 5 per cent. In addition, PFI contracts entailed other costs — including fees for arranging the borrowing, which average around 1 per cent of the principal, and management fees, amounting to 1-2 per cent of the total payment. 

The value of new PFI deals peaked in 2007-08 at £8.6bn and has declined since, a trend that the NAO attributed to the greater cost of private finance after the financial crisis.

It's time to revive public ownership and the common good

Despite its dire record, privatisation is rarely questioned. We must push for our shared interests to take precedence

• 
• • Anne Karpf
  • The Guardian, Friday 4 July 2014

Ed Balls on The Andrew Marr Show, where he said: 'I don’t want to go back to the nationalisation of the 1970s.' Photograph: Jeff Overs/BBC/PA

It might sound like an oxymoron, but this is a positive article about public services. So effectively has the coalition rebranded an economic crisis caused by private greed as the consequence of public ownership, that nationalisation has come to be seen as a universally discredited hangover from bad old Labour. So while current Labour is considering taking back parts of the rail network into public ownership the shadow chancellor, Ed Balls, last weekend was intoning the neoliberal catechism: "I don't want to go back to the nationalisation of the 1970s."

But bringing outsourced services into public ownership isn't about looking back: it's about moving forward, and is a popular idea (66% of respondents in a poll last year supported the nationalisation of energy and rail companies, including 52% of Tories). For today, in the face of the combined bungles of G4S, Serco and Atos, not even the slickest PR-turned-politician can sustain the myth that private equals efficient.

Yet privatisation is touted as a panacea and cliches are trotted out about the evils of the "nanny state". We need to develop a new language to talk about public ownership, one that detoxifies it and taps into the wide recognition that natural resources and essential public services should not be treated as commodities.

Instead of talking about the state, Hilary Wainwright, in a powerful new booklet – The Tragedy of the Private, the Potential of the Public – describes water, health and education as "the commons" – an excellent term. What's remarkable, and hitherto fairly undocumented, is how all over the world a quiet process of remunicipalisation is taking place. Wainwright gives examples from Newcastle to Norway. In the UK, she found over half of 140 local councils bringing services back from the private sector. In Germany, by 2011 the majority of energy distribution networks had returned to public ownership. Even in the US, a fifth of all previously outsourced services have been brought back in-house.

The case of water is a particularly powerful one: to most people the idea of privatising it is alarmingly similar to the privatisation of air. Wainwright tracks struggles to resist the privatisation of water and defend it as a public good in Brazil, Uruguay and Italy.

What makes all this heartening is that new social forms of ownership are emerging in which public utilities are run by coalitions of workers and service users. Theirs isn't just a defence of public services but an attempt to democratise them so they are not the top-down bureaucracies of old or simply job-saving strategies (important though these may be). They become what Wainwright calls "new forms of collectivity" – unions and public managing common resources together for shared benefit.

There is a palpable momentum to these ideas. Last summer saw the formation of the We Own It campaign, which is lobbying for a public service users' bill. This would promote public ownership as the default option for public services and give the public a say in whether services are privatised. This week, a New Economics Foundation working paperalso set out alternatives to the marketisation of public services.

These constitute a challenge to the fatalistic there-is-no-alternative narrative that has dominated political discussion. In his recent book, Does the Richness of the Few Benefit Us All?, sociologist Zygmunt Bauman argues that the alleged "musts" of political discourse "are nothing other than various aspects of the status quo – of things as they do, but in no way must, stand at the moment".

Wainwright observes that austerity in the aftermath of the second world war applied to everything except the welfare state, which saw generous investment. In a decade or so, will we come to view the privatisation of public utilities as a brief historical interlude of market madness, of ideology trumping not only human values but also value for money?

On Michael Gove's A level proposals - A new kind of class warfare

Michael Gove's A-level proposal will return us to the days when only the privileged were likely to go to university

• 
• • Priyamvada Gopal
  • guardian.co.uk, Tuesday 3 April 2012 22.00 BST 
  • 
    

Gove, ‘who advocates rote-learning of poems and kings and queens of England, has always had a narrow conception of education'. Photograph: Oli Scarff/Getty

So Michael Gove, the education secretary, wants to give more power to academics at "top universities". This should be thrilling news, since coalition policy is swiftly morphing universities into business-driven degree mills, with lecturers feeling more powerless than they have in decades. Yet Gove's invitation to us to set A-levels has not set pulses racing. Few lecturers think A-levels in their present form prepare students well enough for university, or equip them to engage intelligently with the challenges of a complex world. A rethink would ordinarily be welcome. But this proposal will not achieve what it sets out to do.

Education cannot be overhauled in this typically top-down manner, with a select minority of institutions running the show at the expense of the sector as a whole. Like much else that characterises coalition higher education policy, this is a form of class warfare. A rigorous and challenging education is not magically effected simply by setting tougher questions or more essays – much as the modular answers of A-levels at present are to be deplored.

An equal opportunities education requires systemic attention and proper public funding, quite the opposite of coalition priorities. Critical thinking, intellectual curiosity and good writing must be taught from an early age, and made part of every citizen's skills. Gove's suggestion reduces them to instruments for enabling the better-supported to get into a good course. Turning A-levels into old-style Oxbridge entrance exams is consistent with the coalition's damaging and hierarchical attitude to education. Only a handful of well-coached clever clogs will enter a shrinking and expensive university sector.

Gove's proposal to limit the number of retakes also requires scrutiny. As any teacher knows, one-off exam results are not a fail-safe indicator of a student's abilities. Gove's emphasis on them as limited-opportunity tools for determining university entrance highlights the coalition's refusal to see education as a democratic necessity, a resource that should be widely and equally available as a public good.

While it would be productive for schoolteachers and academics across the sector to share ideas about the content and evaluation of school curriculums, it is wrong to suggest that exams can be set by people not directly involved with the teaching of them. At Cambridge we spend much attention on ensuring that the exams we set are fair and enable a wide range of answers in relation to the teaching we provide, but the questions are not instrumental – nor do we teach solely with exams in mind. Schoolteachers, not lecturers, should be the driving force behind A-levels. What Gove calls "university ownership" of A-levels is a euphemism for the managerialism that is already part of the problem. Asking some universities to "drive the system" from a distance threatens to throw everyone else off the vehicle.

Our challenging times call for a richly resourced educational system that equips young people across social classes to develop their intellectual and creative abilities. Jobs and degrees are vital – but so, in a democracy, is the ability to think ideas through at length, make informed judgments, critically evaluate alternatives and argue a case. Would a government that is busily pushing through changes with no real mandate really want to encourage this?

Gove, who advocates rote-learning of poems and kings and queens of England, has always had a narrow conception of education. His proposal returns us to the bad old days when only the privately educated and well-funded could go to university. In tandem with tripled tuition fees, a funding regime that weakens the arts and humanities, and the likely privatisation of many universities, the already privileged will be the only winners.

Private supply of a 'Public Good'

 

 

Private 'police' provoke concern

 

The growing number of private security companies policing UK streets is a worrying development, senior police figures say.

The Police Federation of England and Wales said there is "huge concern" over their powers and accountability.

Former Metropolitan Police Commissioner Sir Ian Blair has also said there should be no role for the private sector in Britain's law enforcement.

The firms typically charge residents to patrol streets and deter troublemakers.

 

Regular patrols

The growth in private security firms taking on policing work comes despite an increase in police numbers.

A record 141,252 police officers are available for duty in England and Wales, although there have been reductions in 16 police areas.

Private security firms have no powers, although chief constables may award some limited ones such as allowing them to move people on.

 

 

" It's the police who patrol public space and we should be very wary about giving those powers to private security companies "

Simon Reed, Police Federation

 

BBC correspondent Keith Doyle joined one private security company who began patrolling the streets of Darlington this week.

He said residents there pay between £2 and £4 a week to have their homes included in regular patrols and to receive an instant response if they need help.

"These guards know they have no powers but they say simply by being here it prevents trouble and that's something local residents agree with and have signed up for," he said.

Francis Jones of Sparta Security told our correspondent the patrols provided a visual deterrent to potential criminals.

He said: "We are giving a deterrent to them and also raising the confidence of the public who have taken us on board and there are quite a lot of people coming forward, ringing us up, wanting our service."

 

'Fear of crime'

But the vice chairman of the Police Federation, which represents officers, said such firms could cause problems.

Simon Reed said: "We have got people who have certain powers, we are going to see them in uniform. Potentially there is confusion there for the public and who are they actually accountable to?

"I understand the public's fear of crime but actually it's the police who patrol public space and we should be very wary about giving those powers to private security companies."

Sir Ian Blair said more use should be made of community officers and civilians working within the police, otherwise there could be more private police patrols.

He said: "I do not see community safety as a commodity to be bought and sold and therefore we shouldn't be having the private sector in policing.

"Unless we get this right, we will end up with private security coming in and they will work for the rich and the poor will go without."

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