Tuesday, February 24, 2015

Trickle down ... or trickle out?

Ronald Regan's "Trickle Down Theory" of economics (sometimes called "supply-side") goes like this:  If the rich and corporations do well, benefits will "trickle down" to the rest. So ... lower taxes on high income individuals or big business will benefit most of the population because all that money saved through lower taxes will trickle down to everyone else.  

I'm certainly not an economist (and don't even pretend to be), but my response has to be: HOGWASH!  You don't have to be an economist to have some common sense! Common sense and history make it clear that "supply-side" economics just doesn't work; it's "demand-side" economics that moves the economy.  A friend posted the best explanation of that today and I'm going to take from his explanation and then add some to it.

Let's say it takes five people to run the ABC Widget Company.  Only five.  Now let's say the state legislature - or Congress - reduces the taxes that must be paid by the company.  Nice tax break! According to the trickle down theory, ABC Widget Co. will take that tax savings and hire more people. The problem is that ABC Widget Co. doesn't need more people!  Why in the world would the tax savings be used to hire people that simply aren't needed?

Here's what really happens:  The CEO of the ABC Widget Co. will get a nice bonus ... and maybe even some jobs will end up in India.  The tax savings trickled out instead of trickling down.  You didn't benefit and neither did I.  The economy didn't benefit, either.

The company WILL hire more people, though, if they need to produce more widgets!  And that will happen only if people are buying more widgets (demand!) ... which means consumers need to have enough money to buy the product.  

Consumer spending > Corporate profits > Corporate hiring/raises > More consumer spending > Continue the cycle

Yes, there's more to it than my extremely simple timeline ... I know that.  But those ARE the basics.  Tell me how "trickle down" fits anywhere in that timeline.  It's supposed to and the concept is a fine idea, but in reality, it just doesn't happen - and history proves that.

Let's look at recent history, shall we?  Kansas governor, Sam Brownback, promised that his state would be the Republican Model so he and the tea-party lawmakers enacted a whole bunch of really deep tax cuts, right in line with the Republican playbook.  Business got huge tax cuts, the wealthy got really nice cuts, middle class and poor folks got cuts not worth mentioning because the percentage is so low.  Brownback called it a "pro-growth tax policy."  Hmmmm ... so .... what did happen?  Here's a partial list:
  • Kansas trails the nation in job growth.
  • No rainy day fund left - Kansas now in huge deficit.
  • After just two years -  revenue shortfall of $338 million.
  • Revenue even lower than the worst predictions.
  • School budgets never recovered and Brownback demands even more education cuts.
  • Healthcare, assistance for the poor, courts, and other state services being eviscerated.
 Brownback keeps promising economic growth, but it's not happening.  In California, though, there's a different picture.  In the middle of the recession, Gov. Jerry Brown pushed for tax increases in order to preserve the quality of state services.  Result?  California's job growth since then has left Kansas - and the country as a whole - in the dust. 

The next time a Republican talks about the benefits of trickle down or supply-side economics, ask for evidence that it works - or has worked - to improve the economy.  Then watch the stammering begin.

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