• Abiye Alamina

The Revenge of the Rich

A Bloomberg report released yesterday stated that the recent plunge in stock prices wiped out $114 billion from the fortunes of the world's richest. Among the victims, Warren Buffett, Mark Zuckerberg, and Jeff Bezos.

This dismal performance in the stock market coming off the heels of the Tax Reform law passed in December which promises a windfall of gains to the rich through huge tax cuts and other benefits is intended to ultimately trickle down and benefit the economy as a whole.

How do the very wealthy members of society, often referred to coloqully as the rich, respond to these wealth losses in the numerous other outlets that they have to potentially limit their losses? Would they still follow through on their non-binding promises to provide "one time" bonuses to employees? and raise wages for their workers?

Admittedly some of the rich do not directly run traditional businesses that hire workers, but how would this wealth change impact their spending choices? We know that the rich do respond to taxes. With the luxury tax enacted in 1991, they cut back spending on luxuries and this hurt the economy, so we should expect that this will also lead to a cutback in spending... and which will hurt the economy.

Interestingly, like the sticky wage theory in the Keynesian economics framework where wages are typically only downward inflexible, it seems quite the opposite that trickle down works really well when the rich are hit hard, the hardship like a waterfall mercilessly hits and floods the economy, not quite so when the rich benefit tremendously, only droplets are felt.

This is not an indictment on the rich but a reminder that we all respond to incentives. The rich are no exception. It may help to keep this in mind when setting policies. The good expected from incentivizing explicitly the rich can be superseded by the better if instead the middle class were incentivized directly.

We have now only to brace for the inadvertent but certain revenge of the rich.

#stockmarket #DJIA #taxcuts #crash

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