Bubble-up economics

AIUI the theory behind ‘trickle-down economics’ is that if money is given to the rich, they will invest it in business and stocks so that businesses can produce more products and hire more people to produce them. So the poor and middle-class people will gain lower prices for products and there will be more employment, higher wages, and more consumption. IMO the current mess we’re in is a result of this philosophy.

I think ‘bubble-up economics’ makes more sense. Let me make an extremely simplified example: Suppose a hundred people are given $10,000 each. They might go out and buy cars. (Yes, most cars cost more than $10,000, but this is just a simplified example. Besides, ten kilobucks downpayment would be a good incentive to buy a new car.) If you give one person a million dollars, how many cars would he buy? A hundred? Fifty? Probably not. Since an automaker is in business to sell cars, the more cars he sells the better. Or choose any other consumer item. Chances are that a hundred people will buy more than one person. How many washing machines does a person need? ISTM that if more products are sold, the more of them the manufacturers have to make and the more people they need to hire; which gives more people the opportunity to buy. If I own a store I’d rather have a hundred patrons than just one; and if I lose one patron I still have 99 others, whereas if I have one patron and I lose him I have none.

So it seems to me that cutting taxes for the poor and middle-class will do more good for the people and the economy than cutting taxes for the rich and for corporations. But IANA Economist. I leave it to you to debate so that I may learn.

I love it. As a bottom dweller; I could send bubbles up to the fart-smellers on wall street.

Well, just off the top of my head, and just from your example, a $10,000 grant to everyone would be spent and gone; the equivilant bonus (in reduced taxes) to someone in business, could be**invested in expansion to make that businesman more money could result in more jobs and a general improvement of living standards.
Sorta “Give a man a fish/teach a man to fish”?

Poor example on my part, but as I said it was very simplified. I’m not talking about handing people money, but reducing taxes on the majority of the people. The idea is that if more people have money, then it’s good for the economy. And there’s no reason that those people couldn’t invest the ‘extra’ money they have from the tax cuts into stocks and bonds. Tax savings may also be just the thing some people need to start their own businesses.

The bottom 30% or so of income earners right now pay no federal income tax. At all.

I count the word ‘give’ 5 times in the posts above. I know this may sound like a trivial thing, but I think it’s important. The government doesn’t GIVE anything. It takes. That’s all it does. It takes using the monopoly of legal force. The only reason the government has any resources to redistribute is because it has the monopoly of legal force to extract them from its citizenry. Not because it has created any wealth.

I hop onto this point all of the time in debates not because I am trying to be pedantic or silly, but because this little play on words represents IMHO a fundamental principle of human behavior and economics that too many people are too willing to hand-wave away with a “Whatever”.

If the car manufacturer or TV producer or other companies in your example above, or the investors in that company, decide to invest and produce more but then get their profits taken away to the point where it doesn’t make sense to produce anymore, they will stop because there will be no point to their activity. And then there will be nothing more to take.

The concept usually is as expressed - a tax cut benefiting the lower economic stratas. The assertion is that such tax cuts benefit the economy more than tax cuts to the upper strata. The logic is that the lower strata actually purchase more on the basis of a tax cut and those purchases are what drive the economy forward. As businesses experience more purchases of their products and services they expand. OTOH a tax cut to a member of the upper strata is generally just added to the wealth; it will only be reinvested if there is more demand for the goods and services of their business, investments that will not happen because the right people are not getting the tax cuts and which would happen in any case if the demand existed with or without a tax cut.

What you are in essence saying is that you believe you can spend your way into prosperity.

The fallacy is that altering a single variable in a multivariable system will effect the system through all iterations of the other significant variables.

Quite simply, if you are in a system where tax cuts for the wealthy will trickle down and help the economy… than they will. If you’re not, they won’t. The opposite holds true as well.

The economy is a very large multivariable system. To give you a simple example, consider the internal combustion engine, with, for our purposes, only two variables: air and gasoline.

If the engine is running poorly increasing the gasoline content of the mixture may make it run stronger… until the point that it saturates the system and begins to drown it. Similarly, increasing the air may also help up until such point as the air content begins to dilute the gasoline below the optimum combustion level.

These two variables get more complex when you introduce other variables like air pressure, humidity, etc.

If your system is running too lean and you give it more air, you don’t help things.

Tax cuts for the wealthy will help in those instances of economies where the wealthy will respond with increased spending and investment in business. Tax cuts for the poor will help in such an economy where they are likely to spend that money. Neither will help in instances when such incentives are likely to be absorbed.

There are multiple other key variables besides taxes or rebates that govern an economy.

Sam is correct: you are only looking at the demand side.

Such an analysis is appropriate during recessions, when there is excess capacity in the economy. But during normal times, you should consider the supply side.

But you should be a sane supply sider. We should demand that tax cut advocates back up their claims with quality research, as opposed to the empty conjecture and wishful thinking of those outside of the economic discipline. R&D, education and prudent infrastructure spending are among the measures that can help expand the economy’s potential output.

I totally agree with Johnny L.A. here, and I gotta give him credit for coming up with a good name for it. The basic premise of trickle down economics is to reduce the tax burden on the rich so that they can invest more money. The benefits of this increased investment then “trickles down” to the less well off in the form of jobs and higher economic growth. “Bubble up” economics would be the opposite. The tax burden would be reduced on the lower and middle class, so they can spend/save more money. This will cause businesses to expand to meet the demand and become more profitable. That makes more profits and money for the well off owners and upper management of these companies.

Trickle down economics rests on the premise that there is not enough investment to properly grow the economy. This doesn’t seem to be the case in the U.S. at all. In fact, the U.S. seems to suffer from too much investment, driving down real returns on fixed income investments to near zero. Part of the cause of the current economic crisis has to rest on the availability of cheap capital. This drove interest rates down, and spurred people to invest more heavily in real estate. Not to mention the fact that low interest rates makes being leveraged half way to hell profitable.

Just a little bit of reality:

The personal savings rate has fallen fairly steadily since 1980. Cite. Up to date data here. And if you want to expand national savings, a decent place to start might be lower budget deficits, which can imply higher taxes.

And now for some theory
Ramping up the terminology a little, here’s a capsule summary of appropriate economic policy according to macroeconomics textbook author Brad DeLong:

Trickle-up economics as presented in this thread only covers the short run horizon. Trickle down economics doesn’t apply at all.

And the question is, which circumstance more closely approximates the current American economy?

Yes, of course there are many other variables and they operate upon each other in real time. How much of what is demanded is produced in America vs how much is actually produced elsewhere? How much investment is attracted into the American economy from other countries? How much of those tax cuts end up getting invested outside of America? Where do institutions move resources? What are future expectations? Etc.

In truth the best stimulus package would create a demand for goods and services that could best be met by domestic production and create an industry that produced products in demand elsewhere. That has been part of the logic behind both investing the “green economy” and in having an educated and creative domestic workforce - but that would be another thread … or two.

Okay, let’s step back a second and look at some basics, before we get into the details of Keynesianism vs Monetarism and all that.

What is it that makes a society wealthy? What makes it increase in wealth?

The answer is that the wealth of a society is measured by the cumulative collection of things, by the quantity and quality of the infrastructure, and by the ability of the people to make more such things efficiently.

What makes a society increase in wealth? An improvement in the ability to make things that members of society want. Improvements in productivity. More efficient uses of existing resources. That sort of thing.

The engine of prosperity in our society is capitalism. That is, the organized competition of millions of people competing with each other in an open market, driving innovation and constant focus on making things more efficiently and making new things that people want.

That is, what makes us wealthier is trade. Trading amongst each other, trading wtih other people in other countries. Without trade, we would be forced to subsist on what we can make ourselves, which generally would mean subsistence farming. A life that’s nasty, brutish, and short. But when we trade with each other, we can specialize. We can learn to be really good at something, let someone else get really good at what they do best, then we trade our surplus for theirs, and we both come out ahead.

Money in an economy is an abstraction - without it, we would be a barter society. Barter is fine for villages, but it breaks down when you don’t know the people you are trading with, and don’t have access to their goods. Plus, barter would require far too many levels of indirection. I want a new car, but no one around here makes cars. So I trade for a new goat, whcih I give to a guy who’s got something that I can trade for something else that I know yet another person needs, so that i can trade for something else… Instead of doing that, we create a monetary system that allows us to use pieces of paper to represent things in general.

It’s easy to think that money is wealth, but it isn’t. Money is just the representation of wealth. That’s why printing money and handing it out doesn’t increase wealth. Ultimately, you still have the same amount of goods an services, but with more dollars chasing it you just devalue the dollar.

So, if we can understand that wealth really is things we have built and are capable of building, and not cash, you can start to see how wealth must increase - either we have to work harder to make more things, or we have to learn to make the things we want more easily, or we need to value new things.

When the government taxes money from one person and gives it to another, it is not creating wealth. If you go and spend that tax rebate on a shiny new car, you are not creating wealth. You are consuming wealth. You wear out that new car, and suddenly society is one car poorer than it was. And of course, the other guy doesn’t get to buy what he wanted to buy. If he wanted to buy the same car, then nothing is any different - one car gets made and sold - only to you instead of the other guy. There is one difference - there’s now a governmental middleman who also is getting paid, so overall, wealth goes down.

Now, let’s say that the other guy was going to blow the money on hookers and booze, and the government taxed that money away from him and gave it to you, and you use it to build a new factory which can make lots of beer. Now wealth has been created. We pushed the money from the demand side to the supply side.

That’s the key principle of supply side economics - if you want to build wealth, you create conditions by which people who are building the infrastructure to supply society with goods have an easier time doing so. Right now, they’re taxed, and we’re taxed. A supply-side economist would say that if we decrease their taxes, we’ll make it easier to build new things. And if we instead tax consumption, we won’t consume as many things. Thus, wealth will increase.

A Keynesian will say that this is all well and good, but when a recession happens and the demand side is depressed, suddenly you find that you’re building too many things. You’re building far more than you consume. Eventually, this will cause the builders to go out of business, and that will hurt the ability of the economy to create wealth. So instead, during the slow times, you create demand-side tax cuts or other incentives, which keeps the supply side afloat. Then when times are booming, you increase taxes to get the money back that you spent during the down times.

Now getting back to the OP - Let’s say you decide to cut taxes for consumers so they have more money. Consumption goes up. You’re now consuming more of your society’s wealth. But if this isn’t a Keynesian fix - you’re not correcting for an overabundance of supply - then you’ve got a big problem. The problem is that the tax money had to come from somewhere. If it’s not coming from consumers, it’s coming from producers. So you’re making it harder for people to make new things, and you’re stimulating the consumption of things. In the short run, this might work. Economic activity will increase as the inventory of things gets burned up. But then you find that there aren’t enough things any more, so prices start to go up. And the new things that are being made are more expensive because the taxes the producers pay are going to be passed down to you through the price of the products.

This is a bad way to go. Again, you’re trying to consume your way to prosperity, and the world just doesn’t work that way.

Trickle-down economics says that if you make it easier to produce things, ultimately your society will be better off. Will that show up in the form of higher incomes for low-income people? Maybe not. But it will show up in lower prices for goods, in higher quality of goods, and in increased standards of living. You may not be earning more money than you did five years ago, but five years ago a 36" Plasma TV cost $10,000, and today you can get one for $500. Now, the rich might get rich faster than your standard of living increases, so the gap between the richest and poorest might grow.

As Measure to Measure said, it’s not as simple as saying supply side is always right, or demand-side stimuli are always wrong. Much depends on the current state of the economy and the structural imbalances that currently exist between the two.

But ultimately, societies get wealthier because producers get better at producing. To get better, they need to invest in production. If you tax them too heavily, they won’t have the investment money, and the economy begins to stagnate.

Then there’s the whole complexity of world trade, which opens up a new can of worms. That’s too big a subject to continue with here, but ask yourself this question - what happens if we tax a widget maker 25% of all the money he makes from widgets, but a widget maker from Widgetstan only gets taxed 10%? If we’re both equally good at making widgets, but the government is taking 15% more off the top from my widget profits, how am I going to compete?

Good summary, Sam. You get out all the essential facts and don’t press the contentious issues. Truly well done.

Man that sounds so awesome. Except, whoops, real income isn’t tracking productivity at all. Hmm. Guess it is just a really slow trickle, but when it hits… man, things are going to be awesome!

Well, I wouldn’t say it’s about “giving money to the rich.” It’s more about “taking less of the wealth they created away from them.”

You’re right. They’d buy one car. But rich people got that way because they know how to create value for society (i.e., how to create things other people want to pay for). They move society ahead by finding innovative solutions to problems, etc. TDE is about staying off of these people’s backs and making sure the incentives for them to keep creating value remain in place. BUE would just shift value around while reducing these incentives.

Also, if the last sentence of the OP is supposed to be a very short statement of Obama’s and McCain’s tax plans, then it doesn’t do that very well. Obama’s tax cuts, for many people, are really a government handout. Obama would turn the tax system into a massive wealth redistributor. So it’s only a “tax cut” in the sense that many people’s taxes would be cut to a negative number.

Sam, that sounds good in theory, but it doesn’t seem to have worked out in practice. I don’t know how it is in Canada, but down here many things consumers buy are not made here. A huge number of our products come from overseas, so money goes offshore instead of accumulating here. In the meantime American companies are shifting operations to cheaper foreign countries and putting Americans out of work. Yes, the consumer goods are cheaper; but people without jobs tend not to buy things as much. It’s not that the rich are becoming richer at a faster pace than the middle class, but the the rich are getting richer while the middle class is either not gaining or is becoming poorer.

I do appreciate your detailed post, and I must admit I’m surprised that you acknowledged that in today’s climate tax cuts should go to the middle class instead of businesses (‘So instead, during the slow times, you create demand-side tax cuts or other incentives’). In theory what you posted makes sense. But it ignores the greed that happens in the real world. The impression that I have is that the goal is not to produce more and better supplies, but to accumulate chips.

Another impression I have is that capitalists just want to cut taxes without doing anything in return. There’s no quid pro quo. Some lawmakers seem to think that cutting taxes will magically make benefits trickle down. I think a better approach would be to give tax incentives to companies that do not outsource American jobs to other countries. Or to make products in this country (and Canada – part of my Jeep was made there) that people want. A case in point: Ford makes a car in Europe called the ECOnetic that gets 65 mpg. They will not sell it here because they can’t charge enough. Federal incentives for consumers would lower the price to about the same as a Toyota Prius. But Ford still can’t charge enough. One reason is that the engines are built in England where costs are high and the exchange rate is unfavourable. Do Americans not know how to build engines? Can we not stamp metal? Why not offer tax breaks to Ford so that they can retool to build the ECOnetic here? Lots of people around here buy Diesel cars, and it Diesel fuel can appeal to the Green movement because it can be made from renewable or recycled sources. And Americans would be employed building them To me tax breaks for building products that will be bought domestically and that keep American workers employed make sense. Tax cuts given on the assumption that wealth with ‘trickle down’ with nothing in return don’t.

That’s right. While it is true that giving money to the poor does not increase wealth, neither does a board taking money that could be used for investment and giving it to the CEO. Now, if CEO salaries actually tracked CEO effectiveness, this might actually work, but, like children in Lake Woebegone, all CEOs appear to be above average.

In fact, economies of scale improve profitability with increased sales from increased consumption. This can generate investment, either from the profits being reinvested, or from lower interest rate loans from a more favorable business environment.

To speak of a specific situation, the Bush tax cuts were designed to encourage investment (to be charitable) in a time of overinvestment. Thus does Republican ideology destroy the economy.

Certainly in an environment of reduced investment, perhaps because high interest rates set the ROI bar too high, a supply side cut would be useful. We haven’t seen such an environment for a while. But if the past eight years hasn’t taught us that a supply side cut under any circumstances doesn’t work, I don’t know what would.

Back in the old WalMart threads people wondered how those getting paid a pittance would buy the products of the companies stiffing them. We now know - borrow on your house, helped on by low interest rates set by the Fed to encourage house price increases and borrowing, to keep consumption up. And when that crashes, as it inevitably does, disaster.

Well, I did think of it on my own; but after reading this I googled “bubble-up economics” and found 54 pages. So I was slow.