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 + (exports − imports), 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.