House of Cards: How Money Flows From the Poor to the Rich

Posted on March 6, 2006 by Dave Pollard

On a couple of occasions, I’ve tried to explain the vulnerability and unsustainability of our over-leveraged, debt-dependent, consumption-dependent economy.While Jon Husband was visiting with me today, he talked about the power of visualizations, and I decided it might be easier to explain this with a chart. Ideally, we need an EcoLanguage animated chart for this, but tell me what you think of the cash flow chart above for now. Here’s its explanation:

The economy depends fundamentally on the ‘consumer’ activities of taxpayers, and specifically on the willingness and ability of taxpayers to spend their money on real estate (flow 1), taxes and user fees (2), and the purchase of (now mostly overpriced, imported) products (3). The spending on real estate (1) drives up real estate prices, providing increased collateral to consumer lenders (4), allowing these lenders to loan ever-more money to taxpayers (5). This creates a self-perpetuating Real Estate Cycle (flows 1, 4, 5) that produces the Two Income Trap.

The taxes and user fees paid by ordinary taxpayers (2) fund large tax cuts to rich taxpayers (6) which are rewarded by campaign contributions to ‘friendly’ politicians (7), so that a Campaign Funding Cycle (flows 2, 6, 7) is created.

The government also rewards these campaign contributions (7) by giving large subsidies to major corporations (8) to enable them to globalize and crush smaller competitors (9), which drives up the share values of these large oligoplies (10), which in turn produces huge profits for the oligopolies and their rich taxpayers (11). The result is a Corporate Subsidy Cycle (flows 7, 8) and an Oligopoly Creation Cycles (flows 9, 10, 11).

The oligopolies invest some of their profits (a decreasing amount) in wages to domestic workers (12) to keep these cycles from running out of steam. They also invest come of these profits in financial organizations and instruments (13), and use some of the rest (an increasing amount) to make wholesale purchases of cheap imported products (14). These purchases are financed by foreign loans from the grateful struggling nation producers (15), producing an Offshoring and Trade Deficit Cycle (flows 14, 15, 8).

As taxpayers are forced (because of shrinking real wages and the elimination of domestic alternative suppliers — the Wal-Mart Dilemma) to buy the (mostly overpriced, imported) products of the oligopolies, they complete both the Price-Gouging Cycle (flows 12, 3) and the Consumer Deficit Cycle (flows 3, 13, 5).

These seven self-reinforcing ‘vicious cycles’ have led to our current economic crisis, characterized by:

bankrupt, corrupt government
over-extended, cheated customers
the disappearance of the middle class
overheated real estate and stock market ‘bubbles’
unfair oligopoly practices inhibiting innovation and entrepreneurship
massive transfer of wealth from the poor to the very rich

The problem with these cycles is that the taxpayer outflows (flows 1, 2, and 3) are all expenses — none of them get repaid, while the taxpayer inflows are either decreasing in real terms (12) or repayable with interest (5). This means that the taxpayers are consistently spending beyond their means and getting further and further into debt. It’s a cycle of addiction.

What happens when the credit crunch comes — taxpayers have borrowed their limit and just can’t spend any more? What happens when the heavy trade deficit causes a spike in interest rates , making debts unrepayable (other than record rates of bankruptcy)? What happens when the real estate bubble bursts?

The answer is that flows (1), (2) and (3) suddenly dry up, and then all the flows that depend on them (flows 4 through 15) also dry up, or even reverse direction, exacerbating the problems. The negative flows are self-reinforcing just as the positive ones are. It’s called an economic depression.

How do you break these cycles of addiction? Each one has its own solution, none of them popular, all of them difficult:

Real Estate Cycle and Consumer Deficit Cycle: Pay off personal debts, live within your means.
Campaign Funding Cycle: Campaign finance reform (real reform).
Corporate Subsidy Cycle: An end to subsidies.
Oligopoly Creation Cycle: Restore anticombines laws and prosecute offenders.
Offshoring/Trade Deficit Cycle: Amend corporate charters and tax laws to discourage offshoring; Cancel ‘free’ trade agreements; Cap budget and trade deficits.
Price-Gouging Cycle: Strengthen labour laws and other social responsibility regulations.

You now know more more about the economy than some so-called economists. There are quite a few that will tell you that all these cycles are’self-correcting’ and that more deregulation is all that is needed.

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8 Responses to House of Cards: How Money Flows From the Poor to the Rich

Karen M says:

March 6, 2006 at 19:49

What came to mind when I first saw the diagram was… dysfunctional tarot spread. Maybe because you titled it House of Cards.
Peter Bodo says:

March 7, 2006 at 02:40

Solution: cooperativesDon’t fight the rich, ignore them.cooperative housing, banking, energy, food, etc.
Blyden says:

March 7, 2006 at 06:49

I like the graphic. It puts a lot of concepts together in a relatively simple, illustrative way. That said, there is at least one error and probably a couple ways the graph can be improved to better represent the concepts it is trying to convey. First, the error: (6) Tax Cuts should be going from government to “Rich Individuals” not corporations and similarly, (8) corporate subsidies should go from government to corporations, not directly to rich individuals. Then, some suggestions: One flow that isn’t charted is the profits from corporations to rich individuals. Instead the two are overlapped as is if they are one and the same. Certainly it is true that rich individuals own a huge fraction of large corporations, but I think it would be useful to represent this profit flow.Also, as it is currently drawn all the lines are the same thickness, but the relative amounts of capital flow moving along each line vary. It might be helpful to draw the lines with a thickness that represents the amount of $ flowing in that direction. That would aid in showing where the net gain (i.e. wealth accumulation) is going. Another thing is that “Rich taxpayers” is really a subset of “All taxpayers” and “All taxpayers” are not affected by (12) falling wages. Only wage-workers are negatively impacted by falling wages. Is there a way to have an “All Taxpayers group” and then subdivisions within it? Also, about (12) falling wages. While the wages are paid in that direction, the key aspect of them falling is that — to the extent wages really are falling — the money flow is shrinking meaning more of the flow is retained by the corporations. Is there a way to depict that?
Bill Harris says:

March 8, 2006 at 10:15

Dave, nice use of a graphic to explain your idea, and a good tool to help others catch on. Have you heard of system dynamics? It’s a simulation-based approach that has a diagramming style quite similar to yours, and it offers the benefit of being able to test and demonstrate claims such as you’ve made. See the downloadable models at http://pegasuscom.com/aar/model.html (there’s an archive with models on different topics) and postings such as http://facilitatedsystems.com/weblog/2005/11/more-on-two-types-of-numbers.html and http://facilitatedsystems.com/weblog/2006/02/stocks-flows-and-greenlands-glaciers.html (once I figure out why the graphic isn’t showing up—hopefully in just a few minutes).
Randall says:

March 9, 2006 at 17:49

Dave, A couple of other machines that transfer wealth: 1) Warped Legal system (think of the War on Drugs, and other highly biased legal structures that transfer wealth to a select group of lawyers, or to the State, or both.)2) Medical duress (think of a highly privatized system that easily bankrupts a middle class family), or perhaps introduces them to an unsustainable cycle of debt.
Dave Pollard says:

April 1, 2006 at 18:08

Good points, everyone. Blyden, yes, you’re right (I cheated a bit to avoid lines crossing over each other). I’m a big fan of system thinking and system dynamics but I haven’t yet found a really good tool for doing the diagrams. Besides, this approach doesn’t work well for especially complex systems, where there are too many variables and the causal connections are too complex to assess.
Kevin Carson says:

April 25, 2006 at 14:02

Excellent post. My brain generally shuts down when I see a complex diagram like that, but the textual explanations were perfectly clear to me.
buermann says:

May 2, 2006 at 14:45

This is a really clear illustration of how to synthesis the disparate methods of the ongoing class war, but I’m not sure I understand how “cheap imported products” became “overpriced, imported products” a few sentences later. Which is it?