I'm Gary Stevenson welcome back to Gary's Economics

today we're going to explain "Trickle Down Economics"

okay so trickle-down economics is the term used  to describe the idea that if you allow rich  

people to get a lot of money, to accumulate  a lot of money, it will grow your economy  

on the basis that because rich people have a much  higher rate of saving from the income if they get  

money they will save more and that will lead to  more economic investment and more economic growth  

this is important now because here in the UK  we have a new government Liz Truss is a new  

prime minister and they are saying they want  to drive growth in the country by cutting tax  

on rich people which will lead to the rich having  more money and growing the economy so we're going  

to talk today about where the idea comes from  and basically why it doesn't work so

the first thing you need to understand is  

what is investment? and what is growth?  Okay so as an individual you might think  

if you buy a new house that is investment  from your perspective or if you buy

stocks and shares that is investment from your  perspective it's important to understand that  

investment will only grow the country if it  is investment in new productive assets so for  

example if you build new houses or if we build  more wind turbines or if we build factories or  

if we build more productive equipment or if we  upgrade the machinery on our farms this will  

increase productivity in the country and it will it will cause growth so the idea behind trickle down  

economics if you give money to rich people they'll  save it, then invest it and the country will grow  

and this is quite a sort of it's a simple idea  from economics which is if people save more then  

there must be more investment but what this  misses is that when rich people save money  

they have other options other than simply  investing in building new assets right they  

don't need to just build new houses or build  new wind turbines the other thing that they  

can do and often what they do do is buy the  existing assets so you know in the last few  

years we've seen a massive increase in the cash  holdings of very rich people in this country  

and they didn't rush out and build new houses or  build new wind turbines or build factories in many  

cases what they did is they gave that money to  their children and the children used that money to  

buy houses and that's why we've seen in the last  few years a very big increase in house prices in  

this country the UK and also many other countries  at the same time as a very big increase in cash  

Holdings of the rich so I think this is the first  problem in trickle down economics is if we give 

cash to the rich they're not going to necessarily invest  in building new assets they might simply use that  

money to buy existing assets which means that you  and your kids can't afford existing assets so in  

the last few years I've said a lot on this channel  your average Rich individual has accumulated about  

100-200 grand cash that means that people from  poor families who haven't accumulated that money  

their deposits are no longer enough for them to  compete with the rich families so what you see  

then is that all this money has done in this  case has meant that instead of younger people  

from poorer families buying houses, younger people  from rich families have bought those houses so  

it can lead simply to rich people buying extra  assets the other thing that rich people will do  

is they'll lend the money out you know um they'll  sit on the money and they'll lend the money that  

might sound good if rich people lend more money  out but if rich people lend more money out  

then not only are they lending it possibly to  you but they're also lending it to other people  

so that means that when you go to buy a house you  are competing with other people who can get bigger  

mortgages which means that house prices will go  up and the end result is that it's harder for  

poor people with lower deposits to buy houses  because they can't get those big mortgages  

and the people that do buy houses will end  up having bigger mortgages so the two big  

consequences that we've seen from giving cash to  the rich are higher house prices and fewer people  

from poor families being able to afford houses and  also bigger mortgages so more debt for ordinary  

families so I think this is the the key thing  that you need to realize right when rich people  

are given money they don't necessarily  go and build a wind farm you know  

the main thing they'll do is they'll buy  existing houses and that does nothing  

to improve the productivity of the country all  it does is make wealth inequality worse right  

because it means that ordinary families have  less assets and richer families get more assets  

and that that brings us to this this big  point of you know 'does it work?' and I think  

we've got a great example to look at to  explain to us whether it works or not which is  

the idea is if they have money they're not  going to build the wind farm themselves right  

what they're going to do is they're going  to lend the money to the corporation tool  

by the wind farm and the idea is that means that  corporations can then borrow at low interest rates  

so hopefully they'll go and invest and they'll  build these things which will grow our economy  

but we've had a really long period of trying  this out right since 2008 we had 14 years of  

basically zero interest rates and that meant that  corporations could borrow basically for free for  

that whole period did they then make loads of  Investments well if we look at that period 

2008-2022 is actually one of the lowest growth  and lowest investment periods in the whole of  

British economic history so when we actually tried  giving corporations access to very cheap loans  

they didn't invest they they in many cases they  simply accumulate the money and used it to buy  

existing assets then after that in Covid we  tried this period of just absolutely smashing  

tons of cash to rich people and did it create  economic growth did it create boom economy well  

what we actually saw was massive increase in  inequality, massive increase in house prices,  

massive increased inflation and a collapse in the  cost of living and that is because of the other  

fact which which I mentioned in last week's video  money is the resource which we use to determine  

how we allocate the real resources like housing  food energy so if you give a ton of money to the  

rich they will also consume more housing food  energy you know there's more space if you give  

them money loads of money they will use more  stuff which means ultimately the prices go up  

and you guys will get less stuff so I think  if we look at the reality of the situation  

it hasn't worked if you understand the theory  of the situation there's this very simplistic  

theory which they'll save more than invest more  but as soon as you take a step back and realize  

they don't need to invest in new assets they  can simply just buy existing assets which means  

ordinary families have less assets then you  see that what this actually does is increase that  

spiral of increasing inequality which mirrors  that spiral of decreasing living standards so  

you know I understand the theory you know  you know despite what I sound like I have  

studied a bit of Economics I've got two  Economics degrees I understand the theory  

um I think the theory is horribly naïve and  it simply neglects to realise that rich people  

don't need to invest in new assets they can  simply buy existing assets from poorer and  

more ordinary families um so I think it's really  really important that we push back against this  

um because if you don't push back against  it then things can happen like what happened  

two weeks ago where the Government tried to  massively slash taxes for rich people and that  

will massively decrease your standard of living  um I think what is very interesting is that you  

know financial markets refused it and I think  that is in this instance very very fortunate  

but that doesn't take away from the fact that we  are still in a situation where during Covid  

£600 billion was transferred from the government  to the rich, now as part of trying to fix the  

energy crisis another 150 billion pounds is going  to be transferred from the government to the rich  

they're trying to convince you it's going to grow  the economy but in reality it's going to mean  

ordinary families lose their assets, younger  people from ordinary families can't buy homes  

um the rich will get a bigger and bigger share  of consumption which means ordinary families  

living standards will decrease so basically  the end message of this video is that um  

and I think people already know this  trickle down economics it is an idea  

there's some thinking behind it it's horribly simplistic and it doesn't work  

um if you allow inequality to increase especially  if you're allowed to increase massively like it  

has done in the last few years they're living  standards for ordinary families will decrease  

um oh the last thing I wanted to add was you know  

if you give a ton of money to rich people  even if they do give it to businesses  

businesses are not going to grow not going to  invest in growing their the size of their product  

if the middle class can't spend and what we've  done in the last few years is massively crushed  

the spending power of ordinary families so  if you combine these two things at the same  

time crushing the spending part of ordinary  families giving a ton of cash to the rich  

of course they're not going to invest in growing  businesses you know what we're actually seeing  

is businesses shutting down you know local pubs  are shutting down because people cannot afford  

to go to those places so um if  you want to grow the economy  

you need to have a strong consumer businesses  will not invest and grow unless there's customers  

and in order to do that you need to get more  money in the pockets of ordinary families  

um if you give it instead to the rich, prices will  go up and ordinary families will get poorer so  

um so yeah um trickle down economics it doesn't  work um send this video to your friends and  

family, maybe who believe in it um and yeah help  us push back and fight against it thank you

at the moment these guys are profiting from a  crisis that is going to keep our economy in a  

stump for 50 years. there is one other thing  they can do with that mass amount of income  

they can buy your mum's house