Karl Marx, Trickle-Down Economics, ARITHMETIC And You

Author: November 25, 2012 2:34 pm

Trickle-down, or supply side, economics has been given decades to work. It hasn’t.

It also didn’t work when it was called “horse and sparrow” economics.

See, the idea with that one was, you feed the horse generously, and then the sparrows can pick a few predigested corn niblets out of the horse crap left behind. Someone got wise and realized that not only is this image gross, people start questioning just how many oats one horse needs. One horse can only eat so much, and a couple of barns full of oats being hoarded do no one further down the food chain a bit of good.

So it goes with trickle-down. The idea is that the wealthy getting more tax breaks will somehow encourage them to spread that wealth around, and the sparrows will get some poopy corn dividends. What really happens is that the rich can only buy so many things, even luxury goods, before they start socking extra money away to sit in banks collecting interest but not circulating around in the economy.

Having more cash in a bank doesn’t encourage anyone to “create jobs.” Why? You need customers and consumers to buy your goods and services. If you funnel money to the rich and it stagnates in a trust fund or tax shelter, it doesn’t get passed down to the needier folks. If you try demand-side, which is consumer-driven, then consumers consume. The more expendable income the middle class and poor have, the more they spend on things that are not merely survival-based necessities. The more they spend on goods and services, the more profit businesses providing those goods and services make. If demand for those goods and services increases, then businesses will need to expand to meet that demand and make more profit.


When businesses need to expand, what happens? Businesses hire people when they need to expand. They need more people to make the widgets, and sell the widgets, and draw pictures, write copy and film commercials to sell the widgets. They need to hire truckers and shippers to get widgets from point A to point B. They need to hire people to work in offices managing accounting and supporting the salespeople and managers. They hire.

What happens when businesses hire? More people have jobs. When more people have jobs, the more income they have. The more income they have, the more they can afford to spend. Those oats don’t rot away in a barn. Those oats are shared with more horses and sparrows (who don’t have to wait around for poop to sift).

Supply side/trickle-down is FAIL. Middle-out and bottom-up demand-side is what really stimulates an economy and everyone benefits, not just the richest few.

 

Scientist and author, Dr. David Brin, writes articles for The Institute For Ethics and Emerging Technologies (IEET) on a number of topics and has tackled economics several times. On the subject of supply side economics, he says:

Let’s step back and examine how, in the U.S., Democrats and Republicans have become identified with two quite opposite economic theories. We’ll start with the Republicans, who still clasp fealty to Supply Side Economics (SSE), a theory once labeled “voodoo” by the elder George Bush, but now mainstream conservative catechism for three decades.

Supply Side holds that you best stimulate economic activity by Increasing the net wealth possessed by society’s top echelons—people and groups who have no urgent material needs. Instead of spending it on direct “demand” purchases, these wealth-owners will invest any marginal wealth-gain (say from tax cuts) on things that increase “supply”—factories, new businesses, innovative goods and services. Thus the name Supply Side.

Interestingly, the most famous proponent of this approach was Karl Marx, who maintained that the owner-capitalist class propels industrial development by re-investing profits in plants and equipment, thus building up society’s capital stock and the means of production. SSE is, in that respect, an entirely Marxist theory. Of course, Marx then looked farther ahead. He hypothesized an eventual “completion” of this capital-formation process, a final phase when all the factories are finished—an image we now find ludicrous, since productive capacity must be updated at an accelerating pace. (Hence there will always be a need for capitalists.) Still, it seems kind of sad that SSE supporters won’t ever acknowledge this fundamental root of their theory. They do not study their ideological forebear. Nor do they try, as Marx did, to extrapolate where their prescription may eventually lead. [...]

Marx and Keynes

This lengthy definition is needed understand why a credibility deficit now burdens the Republican Coalition. All through the 1980s, 1990s and 2000s, the mantra was:

    • if the federal budget is in deficit, cut taxes on the rich, in order to repair that deficit;
    • if the federal budget is in surplus, cut taxes on the rich, because it’s their money, not the government’s, and there will henceforth be no rainy days;
    • in times of peace, cut taxes on the rich, because government has lower priority in peacetime, and
    • in times of war, cut taxes on the rich, because…well, this one never made sense even by conservative logic!

Indeed, this was the first time in US history that the clade of uber-wealth demanded ever-increasing state largesse even while the nation was under deadly threat. In any event, we must admit that the core demand of SSE believers has been utterly consistent: reducing taxes on the uber-wealthy is good for America, across all circumstances, under all conditions and without limit.

 

Here’s where supply side apologists get cranky. They say:

“If you don’t give The Job Creators all these tax breaks, they will not be inspired to invest in business. If you don’t invest in business, then business is not motivated to make widgets. No widgets, no demand for widgets.”

This is, roughly, true. The part where it goes awry is where you bring demand into the picture. Demand is what makes a widget business successful.

Let’s say your business makes the best doodads on Earth. The craftsmanship is impeccable and they are superior quality doodads. You approach some wealthy investors and venture capitalists and describe your doodads to them, and hope they will be inspired to spend some money to help you get your doodad business off the ground. For some reason, however, they turn you down. Why would they do such a thing? Aren’t they the Job Creators?

Let’s say these doodads are buggy whips. These Job Creators have realized that there will be next to no demand for your product, as excellent as it is. If there is no demand, you will not sell enough doodads/buggy whips/8-track players/top hat blockers/mustache wax/Victrolas/bustles/spats/etc. to turn a profit. Even the most ardent supply side enthusiast eventually gets to the point in their defense where the success of an innovative idea or a business funded by supply-siders is dependent upon demand for the business’ product or service.

As Brin points out, we have had a chance to test supply side (trickle-down, laissez-faire economics, voodoo economics, horse and sparrow, Reaganomics, top-down, whatever synonym you like best) economics for over thirty years. The idea and practice actually predates the Reagan administration, of course, but that was when supply-siders perfected their messaging and gained a lot of converts, and when top tax rates were slashed (from around 70% to 28% under Reagan).

Supply-siders argued that reducing the taxes on the wealthiest portion of the population would encourage the wealthy to release funds to be used to create new and desirable products and services, would boost the economy so dramatically that new revenue generated by that boost would erase any deficit caused by giving tax breaks to the rich, and would eliminate government debt. Take a minute to ponder those assertions, and see if any of them ring true for you.

They don’t ring true for blogger jamess at Docudharma who says:

If you’ve ever heard anyone talk about our “Regressive Tax System” — well the meaning of that is shown by the long-term Trend Lines (the Red Lines) in the Charts (above). In a nutshell, a Regressive Tax System favors the Wealthy, who keep paying less in Taxes, per Dollar earned, than do their Working Poor counterparts. [The red line in the following two charts is the "Historical Trend" for the Tax Percentage Rate.]

Larger image here: http://s158.photobucket.com/albums/t106/OnlyObvious/Tax_Rates/BottomTaxBracket_TaxRate.jpg

Larger image here: http://s158.photobucket.com/albums/t106/OnlyObvious/Tax_Rates/BottomTaxBracket_TaxRate.jpg

Larger image here: http://s158.photobucket.com/albums/t106/OnlyObvious/Tax_Rates/TopTaxBracket_TaxRate.jpg

Larger image here: http://s158.photobucket.com/albums/t106/OnlyObvious/Tax_Rates/TopTaxBracket_TaxRate.jpg

In Absolute Dollars, the Poor pay less Taxes, true — but that is due to the fact that, in Absolute Dollars, they make much less. About 100x less, if you compare the scales on the charts. Relatively speaking, in the last 3 decades, the share the Poor have paid in Taxes “has skyrocketed,” if compared to historic levels.

I think raising the Taxes on the Wealthy Class is necessary for many reasons [...]. Suffice to say, the 35% percent they are paying now — thanks to the Bush Tax Cuts — is pretty meager, when compared to what the Top Tier of society has Historically paid. As much as 50%, 70%, and even 90% through out much of the Nation’s History.

Funny the Economy didn’t grind to a halt in those eras of the Wealthy paying those “patriotic” Tax Rates. If anything the Economy Boomed, because there was much more incentive to reinvest revenues, back into a Business (instead investing in Derivatives, Default Swaps, Off Shore accounts, and Hedge Funds).

Brin notes that tax cuts for the rich did not achieve any of the benefits that had been promised:

“The uber-rich did not take their tax-break largesse and invest it in innovative/productive equipment. They poured it into either passive investments—what Adam Smith derided as “rent-seeking”—or else risky financial instruments and asset bubbles. Above all, the direct forecast that reduced revenues would erase federal deficits went directly opposite to observed fact.”

Conversely, demand-side economics (also known as modified-Keynesianism) asserts that the economy is driven by demand for goods and services and that money in the hands of the middle class and poor has what Brin calls, “velocity”; meaning if you give a hypothetical dollar to a middle-class person to spend, that dollar will be spent and re-spent more often than if you give that same dollar to a wealthy person to sock away in his or her investment portfolio.

Will Rogers explaining "velocity" in plain English.

Will Rogers explaining “velocity” in plain English.

Brin does note that tax cuts for the rich make sense when “rapid inflation in an overheated economy calls for decreased monetary velocity” and that JFK’s tax cuts achieved this intended goal.

Keynes theorized that government should spend heavily–even risk going deep into debt–when the nation is in a recession, because this kick-starts higher-velocity economic activity. This is why President Obama’s opponents refer to him–negatively–as a Keynesian: he tried stimulus spending while the United States was in a recession. All indications are that the stimulus spending has worked.

You can compare Obama’s stimulus activity in his first term to George W. Bush’s stimulus measures (which included one or two checks sent directly to some citizens). They were of equivalent cost and scope, but Bush’s stimulus measures mostly benefited the most wealthy among us at the top of the social and economic ladders.

The 1990s demonstrated how a Keynesian approach works. Bill Clinton was able to wrangle small taxation increases on the rich in 1991, and then–using that ARITHMETIC he has been known to mention–the government used a pay-as-you-go budgetary model. Guess what? Under Clinton, we had a budget surplus, a strong economy, and what Brin calls “revenue-based debt reduction.” If Bush II had continued the Clinton administration’s policies of debt buy-down and pay-as-you-go (instead of boosting tax cut largesse to the richest Americans and putting two expensive wars on the country’s credit card), we’d have had a generous reserve fund available under Obama to weather the banking industry meltdown in 2008.

“ARITHMETIC!”

Some people hate any and all deficit spending measures, seeing them as the government handing out “gifts” which may or may not work to stimulate the economy and erase incurred debts. There are, Brin points out, major differences between Keynesian demand-side deficit spending and supply side deficit spending:

1. Demand side spending is targeted towards portions of the population where each dollar will have high-velocity impact.

2. Supply side “gifts” to the rich did not–as promised–go into capital formation (Karl Marx was wrong about that); it simply made the rich richer.

3. The beneficiaries of demand-side spending (the poor and middle-class) typically have a greater, actual, direct need. If the government invests wisely, demand-side spending can create more skilled workers and more small businesses.

4. The beneficiaries of supply side spending (the rich) do not have any financial needs that this type of spending will address.

5. Supply side proponents phrase their arguments in a variety of ways, but they all boil down to “give more money to the rich, no matter what.”

6. Demand-side proponents have proven that their policy is flexible and adaptable. They spend lavishly when in a recession, then, when a recession ends, they cut back on spending and start building up savings. Brin adds, “Right-wing rants and rails against the current governing party acting consistently with its own economic theory is simply hypocritical. You had your turn, now it is theirs.”

7. Experts who devote their lives to studying economics despise supply side policies. Notably, the political party (guess which one?) that shuns educated, professional advice in a number of areas – such as climate change – is not interested in listening to economics experts, especially if they punch holes in the long-cherished Republican stance of embracing top-down policies.

This is not to say that demand-side is always the right answer. Economies are complex, and there is no one-size-fits-all solution. Some Democrats, prior to the Clinton era, did spend much more freely than they should have, when there was no recession or other pressing need to do so. We can also look at Greece, which spent itself into trouble, and is now applying austerity measures that are also likely to fail miserably.

Overall, however, demand-side policies we have been able to witness over the past eighty years have been generally right. Government should outspend its revenues (the amount of money it takes in) when the country is in a recession, and direct those expenditures toward the middle-class and poor, where each dollar spent will have high-velocity stimulus on the economy. In good times, governments should use fair taxation rates to bring in revenue that will build up reserves to help weather future hard times. Brin points out that this is not a new concept: the Pharoahs of Egypt knew it and the Biblical story of Joseph mentions it; it is common sense economic theory.

Poppy Bush once called supply side economics “voodoo economics” and it has historically failed after being repeatedly tried and re-applied over the past thirty years. It’s a theory that is quasi-Marxist at its very core (ironically enough) because Marx predicted that an all-powerful wealth-based aristocracy would spur America–previously thought to be “classless and free,” as John Lennon once sang–into distinct class divisions of the sort that lead to revolt and riot. Perhaps Roman patricians sacking Rome financially, French aristocrats literally losing their heads after indulging in avarice, and Wall Street and corporate CEOs maximizing personal gain to sock money away into private off-shored tax haven hordes at the expense of the less-wealthy have given us ample warning that sucking the poor and middle-class dry to protect the personal profits of the rich–even when the economy is in a recession–is a bad idea. Planning on long-term profit based on positive word-of-mouth and a superior product rather than short-term profit at any costs (such as issuing home loans to struggling working-class people you know aren’t going to be able to pay their mortgages when the rates increase, and who will default) is also key.

Capitalism is driven by demand; supply responds to that demand. If there is no root, there is no fruit. If you kill off the roots of the system by slashing social safety net programs and diverting investments and tax breaks to the wealthy, the fruit can’t survive. Like water and nutrients nourish a tree from the roots upward to the leaves and fruit, money also flows upward, to nourish the wealthy.

Demand for widgets is what sells widgets, and selling more widgets lines the pocket of the businesspeople who own or invest in widget companies. Selling more widgets means that businesspeople have to create jobs to facilitate the selling of widgets. (Keeping those jobs on American soil is also key: if demand allows a businessperson to create more jobs but he or she gets a tax break to off-shore them to another country where the workers toil for pennies an hour, there are fewer jobs for Americans, who in turn have their income-earning ability slashed, which, in turn, decreases demand for non-essential goods and services.) In order to sell those widgets, people must want them, and must have the money to buy them and, thus, must have a job that pays a living wage.

Another way we give "presents" to the rich is by allowing wealthy business owners to pay workers low wages, which forces the rest of us to subsidize their survival with tax-funded social safety net programs.

Another way we give “presents” to the rich is by allowing wealthy business owners to pay workers cripplingly low wages, which forces the rest of us to subsidize the workers’ survival with tax-funded social safety net programs.

Arguably, the wealthy are more dependent upon the poor and middle-class than vice versa: if you trim back the top of a tree, the roots still survive and can regenerate new branches. If you kill the roots of a tree, the whole system dies.

Note also that under Clinton, the booming economy created a record number of brand new millionaires. Partially that was due to the technological advancements of the 1990s (and the dot.com bubble), but it was also because the average working Joe or Josephine had enough expendable income to pay their bills and to Buy Stuff. Capitalism is all about being able to buy stuff, both basic needs and superfluous wants, at its core.


Lorelei welcomes you to visit Liberal Lore on FacebookTwitter, her blog, or at Addicting Info.

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1 Comment

  • The conservative mantra against the redistribution of wealth (meaning, giving the poor and middle class wealth at the expense of the wealthy) is so hypocritical. We are today redistributing wealth – more to the wealthy at the expense of everyone else. This trend, if it continues is a sure road to disaster for our country. Do you really think the majority of uber wealthy really care? I am sure there must be some smart enough to know that. Why do they not care? They have more than enough money and investments in various foreign currencies and off shore bank accounts, they believe they can weather anything, even the decline of America into a feudal state. These people are not patriots; they are traitors to what America is supposed to stand for.

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