Tuesday, October 9, 2012

Trickle Down Economics Examined

I know that most of you regular readers understand basic economics and more. But there are always new people joining us that haven't been exposed to some of the basic ideas. Besides I enjoy writing on economic subjects from time to time. One concept that has been much maligned of late is that of "trickle down economics".

It seems to give our president great pleasure to stand, surrounded by his teleprompters, looking down his nose at his audience, and exclaim in his most condescending professorial voice, "it's been tried before and it doesn't work". It has been tried before, a number of times. JFK tried it and it worked. Reagan tried it and it worked. George W. tried it and it worked. Actually, it always works. It is Obama's plan that Romney labled "trickle down government", which is the opposite of "trickle downeconomics", that never works.

So let's examine both methods. Let's say that the tax rate for couples earning over $200,000 is 40%. Also, let us say that the economy is stagnant and in recession. New mortgages are down and orders for durable goods are down.

A president believing in "trickle down" will decide to lower the tax rate across the board by ,maybe, 5%. All of the tax paying population will benefit. (Please see my other posting, "Skin In the Game". It ties in nicely.) But those that earn over $200,000 are the ones that are important as they will be the ones that break the downward spiral. Why, you ask, are they so important? For two reasons. First, as they see money stay where it was earned, in their pockets, they are encouraged to spend. Much of that spending will be on durable goods like new cars and new appliances. Some may take advantage of a housing market that is still depressed to buy a new home. This will kick start the economy.

Reason number two is that many of the folks earning over two hundred grand own small businesses. A lot of these businesses are S Corporations. Those are privately held corporations where the profits are shown as the owners income. In other words, if an owner wants to hire more help or buy new equipment it comes out of his personal profits or his bank account. If the government doesn't take the money as taxes for the politicians to spend the business owner can use it to expand his business.

Business improves from the top. As things get better and more people get good jobs consumer confidence goes up and the economy blossoms. The state of an economy depends a great deal on the state of mind of the earners in the economy. If they're happy the economy's happy.

Obama's theory, I've also heard it called "trickle up", seems to have three components. First, let half of the working population pay no income tax. Second, pass out a dole in the form of increased time for unemployment payments and get more families on food stamps. Third, tax heavily those making over two hundred thousand dollars. As I write this, it really gave me a feeling that this shows dismal outlook on the economy.

The problem is that the people on the low end of the economy must spend their money on things like food, fuel, rent, and clothing. They buy the basic needs not durable goods. And as the cost of food and fuel rise to meet any extra money available there is no net gain to the economy.

The politicians will tell you that there is a lot more to "trickle up" than that. Yes, there is, the politicians take part of the earnings of the American people as income tax and "invest it". What they can't get in taxes they borrow. So how do they invest it? They created 87 duplicate job training programs when there are no jobs. They invested in car companies where the only ones that came out ahead were the unions. They invested in "green energy" companies run by their supporters that were already on the way to bankruptcy court when the government so kindly gave them your money. The president thinks this will boost the economy? Really?

Now is the time to say "no more". The hole is already too deep. Stop the digging. It is time to back fill and move onward and upward.

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