This site claims Hewlitt-Packard recently purchased two $30 million dollar jets and that they’ve recently laid off workers and outsourced jobs elsewhere.
I’m sure it’s a complicated situation (like whether or not HP actually saves themselves money using private jets over Delta) and I hope this thread remains non-political. My question is simply this: what is better for the country/economy in the long run - one person/company buying $60 million in airplanes, or the 1000 workers who could have been hired for this cash (WAG) spending that same money on cars/clothes/food/houses? Does the money saved by HP’s layoffs filter back into the economy one way or another through increased share price, coorporate/personal investment (even if the CEO takes a bonus, he either spends it or puts it in a bank, right?), or the purchase of jets (which goes to the manufacturer who pays his shareholders and his workers)? Is this what is meant by trickle down economics? Has it been shown to work or not, and does it make any difference how/where money is spent so long as it is invested or spent?
The concept of trickle-down economics was invented by the Reaganomics crowd to justify tax cuts to the rich. I did read recently somewhere (wish I’d kept a link) that at least one of them recently admitted this.
No, it doesn’t work. Did it work in any economy with a small number of extremely rich people and large numbers of poor? Say, medieval europe, India right up until that last few years, you name it. By rights that should have made a flood-down effect, but if course it didn’t.
Almost all the money spent by the rich ends up with the rich: houses, cars, boats, etc. The same amount of money spread around 1,000 normal people (to use your example) gets much more evenly spent.
That may be the most ridiculous response I’ve ever seen in GQ. “wish I had a link,” “flood-down [based on medieval europe and poor India,” and “more evenly spent”–I don’t even know what that means for sure.
Anyway, regardless of who begins spending the money, the money gets spent and multiplied. The question is on what should the money go to to maximize a measure of wealth. The free market does a great job at directing the money to the best use through signals (hey you can make a lot of money selling xyz, lets go make some xyz; now there’s more xyz and it’s cheaper and nobody had to pass a government edict for it to happen).
Two topics you might be interested in checking up on:
Say’s Law: supply creates its own demand, or in other words, when something is produced it will be sold because either it will sell right now or the price will drop until it does.
Laffer Curve: If your income tax rate was 0%, you would give the IRS $0. If your income tax rate was 100%, you would give the IRS $0 (because why the hell would you work). If your income tax is somewhere in between, you will give the IRS something. Therefore, there is a tax maximizing point between 0 and 100%. The importance here is that it means that if the tax rate were at the maximizing rate, then tax rates were raised, LESS money would come in.
I don’t know that it matters either way, really. In that wealthy people invest money, they don’t just sock it away in their mattresses. “Losses” (as such, “money forcibly misdirected”) only occur when money is redistributed by government–that’s why locales with lower taxes are generally more attractive to business. If people lose some money to taxes every time they spend any amount, they are less likely to spend it.
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On the other hand, there is a growing theory that the companies that are outsourcing all their tech to India and beyond will eventually get burned badly–they are transferring all the know-how to develop and maintain their products and markets to foreign low-paid workers who have very little loyalty to any employer, and whom they have no direct control over.
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This is what I’m curious about - does a jet purchase (or CEO bonus that is invested) of $60 million affect the economy exactly the same way in the long run as 1000 employees purchasing houses, cars, clothes, etc. I think you might be right, but am unsure since I’ve never seen actual statistics on this.
So in the long run is it better for a country to have more higher-paid workers or cheaper products for consumers?
The choice for HP isn’t between 1000 workers or two jets. Its between buying seats on airlines, or buying jets. Lets assume HP is rational and profit maximising, so the cost of a jet over its lifetime must therefore be less than the cost of buying airline tickets over this time. In this case the effects of the decision would be:
Boost the small jet manufacture and maintenance industries.
Reduce spending on the airline industry
Increase HP shareholder dividends/capital gains
It doesn’t destroy any money - it just gets reallocated.
Its a little more difficult when it comes to job cuts / outsourcing. The main benefit of this to the economy is a cheaper product, and increased profits for shareholders. If the same jobs can be done cheaper elsewhere then it makes economic sense for those jobs to be outsourced. The people who lost those jobs hopefully will get other jobs which cannot be done elsewhere cheaper, and this will be the most efficient outcome.
If those people don’t get jobs then overall the benefits from their layoffs may not exceed the costs of them not spending/paying tax etc.
Who builds the houses, cars, boats, etc.? The rich? Doesn’t that supports trickle-down economics. Give 1000 people 5 bucks each and they’ll buy little things that won’t help the economy much. Give one person 5,000 dollars and keep people employed by purchasing manufactured goods. (way over simplification)
Be happy with what you’ve got and don’t worry about what the neighbors have.
The wealthier a person becomes the higher the proportion of her wealth/income she saves. Picking arbitrary numbers, if one person has an income of $10, she may consume $2 and save $8. If instead ten people are each paid $1, then they’ll probably consume something like $0.9 and save $0.1. Thus the income of the rich goes to a larger degree to investing (that’s what saving does), whereas to the less-rich it goes into consumption.
Which option is “better” is a discussion for GD, IMO. The “money to the rich” option puts more bucks into investment, which boosts output, productivity, yadda, yadda. Greater consumption, however, means bigger markets for business, thus more investment and so on. Which it is better will boil down to which model you feel better fits reality, and what values you have.