The rich don’t. The government, on the other hand, is responsible for the economic policies it implements and for harmful consequences they have.
They don’t. And that’s why trickle-down economics doesn’t work as well as some would suggest.
Just to add my 2 cents to what matt_mcl and Max have already said: When one is making public policy of giving the wealthy large tax breaks on the supposed idea that this will benefit everybody because of the way the rich will use the money then how the rich actually do use the money is more than a tiny bit relevant to the debate. If the rich aren’t going to use the money to benefit us all, then you have to justify why they are more deserving of large tax breaks than everybody else in some other way.
I find any argument of this type very interesting. It usually comes down to a subjective debate of one groups perceived ethics vs. another’s. The fact is, In my opinion, that neither group is more deserving. especially, the wealthiest. Families 3,000 years ago had the same situations they face today. Financial surplus vs. financial misery. It’s the same see-saw.
I applaud countries that put the interests of the people first. This is the way off that see-saw.
I think many Americans (you know who you are, we saw how the Presidential vote went…) get involved in philosphical debates with principles they’ve absorbed from flawed power mongers.
I think that putting your personal time, energy and finances into even a small improvement for the happiness of your community far surpasses the power mongering that the current Presidential administration spends it’s time on.
JS, put your power into yourself and your community. That is the true leadership we need.
Not to fish for compliments, but I’m sure you’d be happy to hear that these are the same arguments I used when I ran for Parliament in November.
You can tell us, but you can’t prove it. In fact, I think the Canadian system is far more robust and efficient than that of the States. I’m not sure what you mean by “socialized medicine”, but if this argument is as cogent as your other ones, it’s probably a waste of time to argue with you.
matt, I would have voted for you! 
That’s not what I was saying. What I meant is that taxing the rich heavily and redistrubuting that wealth through beaurocracy to the poor is charity, while letting everyone keep more money and expanding the economy will naturally produce jobs.
I definately agree with this. My position is not that trickle-down should be a primary economic policy, but rather that, as part of a comprehensive policy trickle-down certainly helps. Trickle-up is also important, and of course it happens when poor people have more money anyway.
My own cynical opinion is that there’s nothing in it for either side. But I don’t want to hijack this thread into a discussion on this topic.
Back on the subject: at this point, I don’t think there’s any doubt that a tax cut is needed right now. It’s the one issue on which I agree with Bush, even if I would prefer that he go about it by simplifying the code, as my opinion above implies. Given that, how would you even implement trickle-up anyway? With the Earned Income Credit, the poor not only don’t pay any income tax, they get money back from the government. I’m not opposed to the EIC, as its a way of smoothing the transition from welfare to work, but I can’t see what you would do at this point.
Unless you put payroll taxes in play. That would certainly be opening a can of worms.
Actually there’s quite a bit of doubt. It is difficult to use taxation as a counter-cyclical (read: anti-recessionary) policy: typically the economy is in recovery by the time the tax cut takes effect.
Interestingly, there has been very little talk about increasing government spending temporarily to fight the recession. This would have the following advantages over a tax cut:
- It would be temporary, by design. So it is consistent with medium and long run fiscal constraint.
- Most of the money could be spent while the downturn is occurring, rather than afterwards.
- Spending has a higher multiplier than tax cuts (sorry for the technical language) so that for every dollar of outlays, the economy is stimulated more. Explanation upon request.
I request!
I think the problem is that all economies are now a mix of free market and special interest laws which ends up in a total mess.
A much more effective and simpler system would be a complete free market BUT with a guaranteed minimum salary for workers and guaranteed minimum welfare payment level plus free school fee vouchers / healthcare for those who can’t afford it.
I don’t really see any advantage in taxing income, why not tax spending i.e. a percentage tax on luxury vehicles, housing, clothing etc ?
As people are very ‘status’ driven they will still buy these things if they can afford them but it would mean that the poor and middle class could get some transport,housing,cothing etc where required.
To be totally honest, an economy which encourages the rich to have more kids than the poor will win in the end as the rich are usually smarter or more in demand by the economic conditions, this is why they get paid more.
Of course this isn’t always the case and inheritance tax has always been a good levelling idea.
Whoa Dude! What are you saying? Please, please, please, look at what you said.
I would rather we all pick up nice pieces of beautiful sod than have bureaucrats think for an instant that they are deemed the chosen few because they are richer or smarter or braver or whatever.
They are the chosen few because, in general, they have more kids and hence outbreed us.
At the moment, the economy, in general, demands IQ, an hence the higher your IQ ( not always, but in general ) the richer you are.
See Darwin on how the population can stay the same number BUT only 10% produce offspring etc. etc.
flowbark:
While I personally agree with your idea of government spending to help out the economy (I seem to remember this being called Keynesianism, not the trickle-up effect, but its been a while since I’ve taken a course in economics), wasn’t this tried out in the 30s with only mixed results? Just wondering if you could clarify this a bit.
Here’s the basic flaw in the assumptions of this thread. This money isn’t being given to the wealthy. The Bush plan merely proposes to take less than is the current practice.
Just how do you suppose “the rich” use their money? Does not money spent on capital goods or invested in business, public or private, enrich the public through the ceration of jobs? I assure you “the rich” don’t simply stuff their mattresses with cash. That money goes somewhere and does something.
This is absurd. Why should you, or anyone, be able to dictate how a person uses their wealth? I’m sorry, but what you are suggesting is immoral.
UncleBeer:
How is taking X amount of money from someone and then giving back Y any different from taking (X-Y) amount of money from that same person? I don’t think that those semantics constitute a “basic flaw” in the assumptions. You say (X-Y), I say take X and give Y, it all comes out the same.
As has been mentioned earlier in this thread, if the rich spend their money investing in foreign businesses, buying foreign cars and goods, then no, the public is not enriched through their spending.
Again, as has been mentioned earlier in the thread, it’s not that people are trying to dictate how the rich spend their money. The issue here is that trickle-down economics are built on the premise that the rich will spend the money to better the nation’s economy.
As the previous sentence in jshore’s argument that you quoted says, when the spending habits of the rich are used as justification for an action, these spending habits are germane to the debate, and when these spending habits don’t conform to the assumptions posited, then perhaps the entire argument for trickle-down is null and void?
freido: “I request.” Dang, and I thought I’d be left off the hook.
This windy explanation is from intro economics. Some background: total final spending in the economy, is equal to
consumption (C),
plus investment (I) -which is defined as purchases of plant and equipment or other business purchases which are used to create future products, (NOT purchases of assets such as stocks or bonds by individuals),
plus government spending (G), which is defined as a purchase of goods and services and NOT as a payout to an individual (the latter is called a transfer payment),
plus exports (X),
minus imports (M).
Now for the multiplier: Say the government spends an extra $100 on road construction (I’m using a small amount for ease of explanation: think of an extra $100 million if you want). Total spending in the economy initially goes up by $100.
But wait, those who receive the $100 as wages (or as profits) will spend a share of that. Call that share the MPC (marginal propensity to consume, and assume it is .8). So total spending now equals 100+80.
In the next round, 80% of the $80 is spent adding $64. (If you calculate the some of this infinite series, the equation simplifies to:
The Multiplier = (1/(1-MPC)). In our example the multiplier would be 5.
So an initial $100 becomes $500.
Getting to the point
Now, judging from previous posts, you knew this. But let’s do a contrast. Instead of hiring someone to build a road, and starting off the chain of spending with $100, you simply give somebody $100. Or you cut their taxes by $100.
Before they spend the money, total spending in the economy has not gone up. The problem is that they, like everyone else, are likely to save a share of the money. That means that they will only spend a fraction of it, .8 in the example above.
SO: Total short run stimulus of $100 increase in government spending
= $100 * The Multiplier
and Total short run stimulus of a $100 tax cut
= $100 * MPC * The Multiplier
MPC<1., so tax cuts stimulate less (over the short run) than spending increases.
Of course if you cut someone’s taxes and they spend all of the tax cut, then the effect would be the same as if the government spent the money directly.
The next thing you’re probably wondering about is entitled, “The Paradox of Savings”. But this post is long enough as it is.
MilTan
Yeah, it’s called Keynesianism.
The experience in the 1930s and 1940s is often said to vindicate Keynesianism. The basic argument is that fiscal and monetary policy were not sufficiently stimulatory until WWII. Roosevelt believed in balanced budgets, so as soon as the economy showed signs of recovery, he (and also the federal reserve, as it happened) put on the brakes, causing another dip in 1936-37.
What’s missing in the above story are the effects of a self-administered negative supply shock, i.e. NIRA. Though some of the more egregious price fixing was overturned by the supreme court, some have argued that many elements remained in practice until 1939. Specifically, rampant collusion was tolerated by anti-trust authorities until the end of the decade. Monopolistic collusion involves an attempt to support prices by cutting back output. Attempts to restrain output (and, by extension, discourage new investment) are counterproductive on an economy-wide scale.
(Although, if you were lucky enough to be employed in one of these industries, you benefited from a wage floor. The problem was that output restraint was matched by hiring restraint.)
Another example of the failure of aggregate demand management is Japan in the 1990s. They had fairly loose monetary policy and very loose fiscal policy. It didn’t really work. I draw 2 conclusions from their experience:
-
Avoid deflation. If prices are declining, your real interest rates are necessarily positive, not good during a recession.
-
A screwed up financial system, exacerbated by debt overhang, can make stimulatory economic policy less effective. During the 1980s, I thought that the US dragged its feet during the S&L crisis. In hindsight, our elected leaders were a veritable SWAT team compared with the Japanese, who still haven’t cleaned up their books.
Well, it is nice to see this thread continuing to generate interest and interesting arguments. Thanks to all to contributing, and especially to flowbark for adding some informed economic theory to it all. (All that multiplier effect stuff is coming back to me now from way-back-when when I took Econ 101!)
Now, on to Uncle Beer’s contribution:
Not so fast here. I know this is an argument that you conservatives like to make. But, I happen to think it is flawed in a few ways. First, it is not a priori clear that the government is “taking” the correct fraction from each person that it ought to be, so a cut like Bush’s, which for the most part gives back the money in the proportion of income tax currently being paid is not clearly the best way to go. (In fact, this is only roughly true of Bush’s plan…I think the fraction that the top 1% gets back is somewhat larger than their fractional contribution, and for the ones who are paying very little income tax now and would pay nothing under Bush, the cut is clearly larger than their fractional contribution.) It assumes that the current income tax burden is equitably distributed to begin with.
A second point here (or perhaps a subpoint of the above) is that once one considers ALL taxes (payroll, state income, sales taxes, …), rather than just income tax, the wealthier are getting a larger percentage tax break than the poor…i.e., the tax cut is regressive. [For example, I believe it is something like the bottom 40% of income earners who pay more in payroll taxes than in income taxes.] So, in fact, what the Bushies seem to be saying is either “We think the rich are being too burdened by taxes in our current society relative to the poor…I.e., we believe wealth should be distributed less equitably than it is now” OR “We believe that the rich will spend the money in ways that will raise the economy as a whole more than if we give the tax cuts primarily to the poor and middle class.” (Or some combination of the two.) The point of this thread was to address this second argument, although I think the first one is well worth talking about too.
A third point is that this line between “giving” and “giving back” is more subtle than you let on. To take a complex, highly-interacting society like ours and say that every penny that someone earns is somehow theirs and theirs alone, as if their earning of it is independent of the context of the society in which they earned it, is naive to the extreme. People who amass wealth depend heavily on the institutions of the society, ranging from police, educational system (for themselves and their employees), infrastructure, corporate law (which was, after all, not bequeathed by God), corporate welfare in the form of tax breaks, government contracts, etc. Obviously, it is not easy to figure out how much each person “owes” to society, but perhaps one of the biggest differences between liberals and conservatives is that we liberals look at how this society is structured in favor of the economically powerful and believe that the correct direction to go is toward distributing some of that wealth and power more equitably, even if we may still be unsure about exactly where the correct point is. [Conservatives, on the other hand, seem to like to argue against “redistribution” as if there is some correct amount that they have somehow managed to figure out whereby each person could be charged in taxes exactly what they have used in services. And that anything more than that is “redistribution”. I say that is a complete red herring because there is no reasonable way to figure out that correct amount.]
Read the thread so far for further discussion of this. Noone is doubting that the money the wealthy receive in tax breaks isn’t subject to a “multiplier effect”, but what we are questioning is that this multiplier effect results in greater wealth overall in our nation than if the money were put to other uses (tax breaks to the poor and middle class, investments in education, …)
I stand by my quote. If one is going to try to justify giving the wealthy a large percentage of the tax breaks, as opposed to giving more to the poor and middle class or using the money in other ways, by claiming that this will benefit everybody, and this argument is shown to be somewhat suspect (to say put it mildly), then one must come up with other arguments to justify this public policy position. I am not talking about dictating to people how they should use their money; I am talking about making public policy decisions on taxes…i.e., how much of the money that people earn that we decide people owe back to society and how much they get to keep completely for their own discretion. If you still can’t understand that distinction, I don’t know what else I can say.