In Support of 'Trickle-Up' Economics

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Benj Gallander

NEW YORK ( TheStreet) -- With Hanukkah and Christmas swiftly approaching, I decided to trash some old economic principles while presenting one that if adopted, could dramatically improve the economy and people's quality of life. To begin, I head back to my university days where there were many dubious but accepted wisdoms that young minds had to learn and regurgitate.

One that was popular in the Business 20 course I took at The University of Western Ontario was that money was not a motivator. Yep, you read that right. This followed the work of Frederick Herzberg, who believed that the key factors to motivation were achievement, recognition, work itself, responsibility, promotion and growth. Pay was a "Hygiene Factor," with an improvement potentially reducing dissatisfaction. Well it can indeed, but still there is conviction here that it can indeed inspire.

At Dalhousie University, there was the wonder of "perfectly efficient markets." This idea states that stock markets cannot be outperformed, because all information is out there and baked into stock market prices. Therefore, it is not possible to beat the market. I had a rather vociferous debate with a professor. We ended up at loggerheads and later when I came back after an MBA he asked, "Gallander, why do you bother?" Maybe today my old professor wouldn't ask again given the contrarian market bettering career I have enjoyed by ignoring the "Perfect" hype.

Another brainstorm that was common was the idea of "trickle-down economics." The idea here is basically that by putting more money in the hands of the rich, their investments in productive enterprises will ultimately mean more for the poor. So tempting and delightful, especially for the rich! Why not just give the people at the top all of the money, while the laboring and unfortunate masses obtain just enough to get by? Taken to its extreme, it is evident that if the vast majority of people do not have much, they will not be able to stimulate the economy with their spending.

I am a huge advocate of "trickle-up economics." Under this model, placing more money in the hands of the poor and those of lower income, and decreasing the current ridiculous income disparity will lead to economic stimulation and a more stable society. This will not only create jobs, but save them, essential in an economy where layoffs are rampant.

Here's an example of trickle up economics at work. Let us take a billion dollars or so from someone who has way too much money, say Warren Buffett who is advocating higher taxes. Then give the money away, $1,000 at a time to people at the bottom of the economic ladder. That money would be distributed to one million people. Imagine what those people might buy to stimulate the economy! One can postulate that the recent financial results at Whirlpool ( WHR) would have been better as the recipients purchased their washers and dryers and fridges and stoves. In all likelihood then, the company would not be laying off 5,000 people.

Other recipients might use the money to pay off debts. Even this will stimulate the economy as banks can then lend to others. In addition, those at the bottom are most likely to have financial problems and easing their burden will create more stability in the financial system.

The stats on income disparities can be measured in many ways, but irrespective of how one looks at it, there is no question that in the United States, the rich are getting richer and the poor, poorer. Between 1979 and 2007 real income in the U.S. grew by 62%. But the after tax income gain for the bottom earners was 18%; at the top 275%. Plus, the net worth of the rich is increasing, while the group at the bottom stays asset poor.

This movement to a larger percentage of money in the hands of fewer people is killing the economy. The Occupy Wall Street movement is a demonstration of the need to change this. It is indeed somewhat akin to the sixties and rebelling against the establishment. Ideally, the establishment will look out and recognize that sacrificing some of what they have -- which generally they will barely miss and hardly notice anyhow -- so that others can have a better lifestyle, will also benefit them to some degree by economic stimulation.

Henry Ford understood this. He wanted his workers to make enough money so they could buy his cars. Effectively, that is what this is all about.

I am waiting for trickle-up to be enacted. Whoever gets the word out there in a big way, or at least writes a cool paper or book on it, might even have a shot at a Nobel Prize. Hopefully though, it is obvious enough that it could be put into play without waiting for years of research to prove the obvious.

All of this is not to say that trickle-down does not occur. In fact, this economic effect does take place but not in the standard way outlined. When corporations or countries declare bankruptcy, this can lead to a major disruption in the economic system. Jobs are lost, debts aren't paid, and this has a major adverse impact. In the case of a major enterprise, say Lehman Brothers, their bankruptcy led to huge amount of cash being wiped out of the system from the stock market price collapsing, further debilitating the global slowdown.

As an aside, as I continued on his educational journey, I learned at university that there was a world beyond Chez McDonald's and Mr. Submarine. It might not have had anything to do with commerce, but it was certainly fulfilling, as it would be if the economic system evolved to give more to those with less. Yep, holidays are in the works and it would be nice to give more people a chance to fill their stockings, every day.

Benj Gallander is co-editor and president of the Contra the Heard Investment Letter.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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