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Thursday, October 2, 2008

The Misnomer of Bottom Up Economic Building

Barack Obama justifies his economic strategy of income redistribution by calling it bottom up economic growth

If elected, Mr. Obama said he would to try to forge a popular mandate for policy changes that could reverse a generation of slow wage growth and outlast any one administration. At the top of his list would be shifting the tax burden more toward the wealthy and making investments — in health care, alternative-energy research and education — that would cost a significant amount of money but could ultimately lift economic growth.

“The project of the next president is figuring out how do you create bottom-up economic growth, as opposed to the trickle-down economic growth that George Bush has been so enamored with,” Mr. Obama, an Illinois Democrat, said.

The thought process is that once the poor have more money they spend more and thus lift everyone up. It is all right, furthermore, to take from the wealthy because they don't "need it' anyway. This is a faulty policy on several levels. First, no one needs any money. We could all live in the forest and hunt and gather and live outdoors. That would cost nothing. Justifying taking someone's hard earned money by claiming they don't "need it" makes no sense at all. Everyone has a lifestyle they want to maintain and the more the government takes from someone the more difficult it is for them to maintain that lifestyle.

That is the philosophical fallacy of the plan. Where the plan really falters is once you measure its execution. First, let's examine the make up of the Gross Domestic Product

GDP = consumption + gross investment + government spending + (exportsimports), or,GDP = C + I + G + (X-M).

Now, the poor and the middle class save little if nothing and thus invest little if nothing. As such, a "bottom up" economic model would be driven by consumer spending. By giving the poor and middle class more money, they will spend more. Taking away from the wealthy is fine because they weren't going to spend it anyway. Of course, this thought process requires a shocking lack of understanding in basic economic principles. Each and every dollar earned goes somewhere. Even though the wealthy don't "need" this money, that doesn't mean that it wouldn't be used in some way or another to stimulate the economy. Just because someone has money that they don't need to survive at that exact moment, doesn't mean that money isn't working for them and the economy by extension. Barack Obama makes the faulty claim that money that isn't "needed" is just sitting idly by. It isn't. It maybe invested in a business, in a CD. a stock, a mutual fund, a piece of real estate, or even just in the bank. Either way it is working not only for the individual but the economy as a whole.

The fact is that the wealthy, unlike the poor and middle class, don't merely spending but they save and they invest. As such, Obama's plan would likely create the simultaneous situation in which consumer spending would increase while investment would decrease. That isn't a recipe for economic growth but stagnation. While businesses and individuals would see their own sales receipts go up, most of that added gross sales would only go to paying higher taxes. The key to economic growth isn't consumer spending but investment. Yet, the only group that invests are small businesses and wealthy individuals. Yet, Barack Obama will make sure to stunt that vital growth element but taxing exactly those two groups more. While those groups may not "need" to invest, our economy needs them to invest in order to grow.

Furthermore, the drivers of new job growth are the wealthy not the poor and middle class. You can put more money into the hands of someone that makes $50k a year but the only thing they will do with that money is buy stuff. If you put more money into the hands of someone that makes $200k, they can buy stuff, invest stuff, save stuff, and/or give someone else a job. That's the basic idea behind trickle down economics. Put more money the pockets of the wealthy and they will expand all parts of the economy: spending, investment and savings.

Barack Obama seems to think that the economy can grow by increasing consumer spending while maintaining all other parts of the economy at a steady level or even on a downward trajectory. The fact is that his economic philosophy makes for excellent politics. It is a powerful message to say you will give a tax cut to 95% of the people. That makes ninety five percent of the people your likely voters. It gives you a populist appeal. It allows you to demonize and easy target, the wealthy. Politics is all well and good, however this policy is also a recipe for economic disaster. During a campaign you can sell something that is good politics but bad policy, once you are President the economic effects of bad policy will sell themselves. Barack Obama's "bottom up" economic policy is leading us down the road to economic disaster and no amount of happy rhetoric will change its outcome.


sglover said...

First of all- I want to thank you for explaining the causes of the current economic crisis in such a non-partisan way- I couldn't get that sort of understanding any other place.

I have some questions about your thoughts on taxes. We have had a hard core trickle down economy for the past 8 years, and while the stock market has risen to new levels, your average person has seen no rise in income (adjusted for inflation). In fact, except for the very wealthy, no group has seen their real wages increase since the early 70's. So, empirically speaking, trickle down doesn't seem to do much good for most people except the wealthy (who have seen their real wages rise significantly).

Also, a recent President's report that just came out, from the Bush administration, shows that under Democratic presidents (except Carter), the economy does better. Check out this Slate column (yes, Slate is liberal, but the facts don't lie:

I think those that want to "take money" from the rich aren't thinking straight. However, it is harmful (not to mention insulting) to think that the middle class won't save and invest. Many if not most small businesses come from the middle/upper-middle class- people pulling themselves up. So if they have more money, they can invest and create more business. The wealthy are going to invest regardless, and no one is advocating turning us into Sweden. These aren't revenge taxes, or shouldn't be. I believe all Obama is going to do is to let the upper brackets go back to where they were during the Clinton Administration, and people certainly found ways to invest back then.

Everyone needs to pay their fare share for our country to exist, whether you want small government or not. Letting the middle and poor pay more, relatively speaking, than the wealthy is fine, only if the wealthy deliver (remember, we are close to wiping out social security to cover breaks to the wealthy). If the wealthy can't deliver, and real wages don't go up and we keep getting financial catastrophes coming at us because of greed and reckless spending, then I think we should at least consider wether trickle down actually works (for anyone except the ultra-rich, anyway).

mike volpe said...

All right, well, call me perverse, but there is nothing I enjoy more than a good debate on tax policy. You raise all the most common left bullet points so let me challenge each and everyone of them.

First, to say that wages have been stagnant is a bit out of context. Keep in mind that when Bush came into office he was inheriting an economy in which the internet bubble had just burst. Three trillion dollars in paper losses had been lost between march and December of 2000. Then, we had 9/11 and Enron, Worldcom et al. I wrote about this earlier.

Wages got crushed in 2001-2002. They have been rising rather steadily since. They got crushed as a result of the three events I talked about. So called "stagnating wages" is a misnomer as well. Bush's trickle down economics has worked. We saved the economy from the brink of disaster in 2002.

Second, wages, in and of itself, is a very poor measurement. Folks simply do not any longer get paid in wages. A better measurement is income or wealth. Wages doesn't include bonuses, stock options, health care, commissions, etc. Third, I don't believe that wages have been stagnant as you claim.

As to liberal President's,except Carter, that leaves one President. What sort of a measurement is that? Clinton presided over the internet revolution, a speculative market that burst right before he left office. There are all sorts of ways to look at statistics. Reagan's economic policies are the blue print for trickle down economics.

Then, it is simply a matter of budgets that the middle class won't save. The middle class lives pay check to pay check. They don't have enough to save and invest.

Finally, your last point is misleading. The wealthy pay an overwhelming amount already. This isn't about fair share. I want a government that figures out how to tax everyone as little as possible. Most taxes are due to a bloated and corrupt government.

trung nguyen said...

the problem with trickle down economics is that in this day of globalization, the rich invest in areas where the will see the best return. so yes the rich save a lot of money and that money trickles down and helps millions of less fortunate people. unfortunately those less fortunate people live in india, china and mexico, where the rich are investing.

mike volpe said...

That is simply nonsense. First of all, trickle down economics includes tax cuts to corporations. The reason for these tax cuts is to keep the jobs here. Second, it goes to successful small businesses. While they are successful, they aren't usually so successful that they begin moving operations overseas. Third, wealthy people by and large aren't so wealthy that they are starting operations overseas.

One of the reasons that corporations move their jobs overseas is because the tax burden is so high here.

RestoreTheConstitution said...

The fact is that trickle down economics does work and always has. In fact we are still benefiting from Reagan cutting the top tax rate from 70% to 28%. This is much of the reason why Clinton and both Bush Administrations have had primarily excellent growth and low unemployment.
Terms like "Failed Reagan Economic Policies" and painting "trickle down economics" as a bad word are nothing more than partisan politics at its best.
sglover brings up rhetoric and has regurgitated it in a somewhat intelligent and non-offensive way, but the reality is there is no original thought or understanding of economics at all.
How do we see discretionary income go up? People get hired by business owners(you call them the rich), cash a pay check every two weeks, and pay their mortgage, rent, buy groceries, etc. Nothing provides more wealth and dignity to an individual than gainful employment by in large provided by the wealthy. Get it?
Nothing economically gets built from the bottom up and never will.

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