Tuesday, October 22, 2013

Trickle Down Brings The Bottom Up

Last week I wrote a couple of articles about Keynesian economics. I promised that in the near future I would take a shot at simplifying "Trickle Down" economics. Today is that day. But first, new unemployment numbers came out this morning and they are not pretty. Government economists expected over 180,000 jobs to be created, there were only 148,000. There was no announcement about how many of those jobs were part time. The unemployment rate dropped from 7.3% to 7.2%. You can chalk that up as another failed month for the, much touted, Obama recovery. For perspective, previous to our present President, any unemployment rate over 5.5% was considered unacceptable.

Economics, many times, works opposite of quick and easy logic. That is because there is an interaction between public policy and private decisions. When these private decisions involve money, those decision makers usually apply extra care. Most often, the more money these decision makers have, the more experienced and knowledgeable they are regarding finances. 

One basic tenet of both conservatism and "trickle down" is that the money belongs to the people that earn it. They are willing to give a reasonable amount to the government for support because they realize that a governmental structure is needed for the general good. Unfortunately, many in government consider all money to belong to the government and that they should decide how much to allow the producers to keep. That is just bad policy. It stifles creativity and energy in the workplace. 

Most job creation in the United States is by small business. Many of these small businesses are called "S Corporations". These are businesses that are owned by an individual. They could be a corner garage with an owner and a couple of mechanics. It could be a neighborhood bodega where everyone that works there is family and working 20 hours a day so that the next generation doesn't have to. It could be a factory with over a thousand employees making custom parts for the automotive industry. 

These businesses have one thing in common, the owners salary and the net profit for the business are the same. When the owner files an income tax form it is for both the owner and the business. So when the government increases taxes on those evil rich business owners they are taking money out of the business. Money that could be used to hire more people or purchase new equipment, or even expand the product line.

But if the government lowers taxes these businesses gain confidence. They hire. They expand. Other people see the success and they become entrepreneurs. Surprisingly enough, even with a lower tax rate, income to the government grows because profits grow. I know it has been a while, so you may not remember, that is called success. 

It is no secret to either side of the aisle. It has been seen in various business cycles through the years. Raise taxes , recession. Lower taxes, expansion. And as Ronald Reagan said,"A rising tide floats all boats". For the past five years, the rich have been getting richer while the poor and middle class have been losing ground. If you think this is not purposeful, you may want to re-examine the situation. 

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