Page 1 of 1

Supply side economics – why it doesn’t work…

Posted: Fri Oct 17, 2008 3:43 pm
by nygmen
This was brought up, and I need to rant. Thanks for reading in advance,

The trickle down looks GREAT on paper…
1) Reduce taxes increasing income, especially for those that can afford to invest.
2) Increased income will mean an increase in Demand.
3) An increase in demand will mean an increase in supply
4) An increase in supply will require capital investment and increased production from companies.
5) So people with the money invest in these companies (debt or equity), foreseeing the rising returns upcoming.
6) The extra capital allows the suppliers to increase the supply to meet demand, shifting the two lines, with the SAME SLOPE, to the right, i.e.: economic growth.
7) BOOM recovery starts to happen.

Now here is where the rubber hits the road. The increased investment of the companies has a multiplier effect on the GDP. If Company A has 100,000 and is planning to spend 70% on investment, the 70,000 becomes income to Company B. So B now has 70,000 who want to invest 90%, so 60,000 becomes income to Company C and so forth. This means both a raise in money supply & velocity, which increase demand even more…

Sounds great right? Except for those that couldn’t afford to invest in the first place.
1) Marginal tax decrease for the “poor – middle class” means marginal spending increase. (how does a lower Capital gains tax help those with no capital to gain from?)
2) Increased production at work means over time, and maybe a marginal amount of new jobs, so again a marginal increase in wages. (Most of the above companies will try and increase production while keeping staffing levels stagnant, and I’ll address that below.)
3) This means a new car, family vacations, and diner out once a week. Marginal income increases DO NOT equal suddenly enough money to invest in the stock market, i.e. above. (There are a few exceptions to this, very few “American Dream” exceptions.)

So now the recovery peaks, and another recession begins. The economy works in cycles, recession, occasionally, is unavoidable. So what happens?

1) The rich, either sit on their investments, not adding more, or pull them back for the higher interest earning money markets, because interest rates rose during the recovery and peak. (Pull back is very not good.)
2) Investment stagnates, so supply begins to shift back to the left, increasing the price of goods. (Plus durable goods were purchased; you don’t buy a new lathe machine every other year.)
3) Increased price reduces demand, further reducing a decline in supply. Again with no slope changes. (the price increase can also come from companies pushing the increased production costs from diseconomies of scale down to customers.)
4) The rich made a ton of money during the recovery, so they are fine, but still want the same returns & dividends, or bond payments.
5) How do you keep the same returns and dividends in a period of declining revenue? CUT COSTS.
6) What is often one of the largest expenses on the Income Statement? That’s right salaries and wages. Chop chop, “spending freeze.”
7) The poor – middle class has less money then when taxes were higher 8 years ago, further reducing demand, further reducing supply, furthering “downsizing.” Companies never cut the CEO’s pay or top management; it’s always 2,000 guys at the bottom of the flow chart, not one at the top that would equate to twice the cut of 2,000.

It doesn’t work… My parents can’t retire, and they were 20-28 during the Regan years, let alone H Bush perpetuating his plans.

That means my mom is going to die at her desk, not at a career, but at a job. Where is her trickle Mr. Reagan, Mr. Bush, Mr. Bush, or Mr. McCain?

Posted: Fri Oct 17, 2008 4:55 pm
by Ironman
That's about how it is. They didn't let it trickle they kept it.

I can understand the thinking that everyone paying the same tax percentage is fair. It would be in ideal circumstances. The thing is, it's not very fair to tax people who are struggling with the basics. That is what we have because of trickle down, the gap between rich and poor keeps growing exponentially. We have also discovered, the consumers having more money to spend makes more sense.

Posted: Fri Dec 19, 2008 3:18 pm
by tostig
Trickle down econimics. It's been tried by Ronald Reagan with his tax cuts. And economists - even in his own cabinet - ended up wondering where all the money went.

John Kenneth Galbraith described trickle down economics as feeding oats to a horse.

And in the past eight years of GWB tax cuts, in Canada two years and guess what, we're in a recession anyways.

Just last week the Central Bank cut the interest rate almost down to zero %. The banks kept the rates unchanged - no help to consumers, or investors. And what more do I hear? The banks are calling for more tax cuts.

Can we really listen to same people who brought us into this recession how to get us out? It's like listening to GWB on how to end the war in Iraq.

Posted: Sat Dec 20, 2008 1:18 am
by TheHeb
"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion"

-Adam Smith

Posted: Sat Dec 20, 2008 1:33 pm
by Ironman
I agree with that. While I think my taxes are a little high, I still think I should have to pay a little higher percentage than someone who makes less than me.

Posted: Sat Dec 20, 2008 10:33 pm
by tostig
Ironman wrote:I agree with that. While I think my taxes are a little high, I still think I should have to pay a little higher percentage than someone who makes less than me.
Understood but have you ever heard anybody anywhere state that his taxes weren't high enough or are just right?

If corporate taxes were zero, they'd be bitching at something else. Also, I'm not sure what the latest stats are but I believe at some point (in Canada) the top 5% earners contribute to the least amount of taxes.

Posted: Tue May 05, 2009 11:15 pm
by Jebus
I don't believe people should be taxed, atleat to a bare minimum.

People always say, "Tax the Rich! Make them Pay!" But most rich people worked really hard for thier cash and deserve it! While all these poor people who decided not to get an education or decided to take welfare instead of getting a job get tax breaks and money basically given to them, from people who work hard for thier money.

I plan to become very rich when im older, infact i want to be the richest person in the world. My dream is to build a city lol and own everything lol

Posted: Wed May 06, 2009 5:58 pm
by Matt Z
Most rich people were born wealthy. In fact, most people spend their entire lives in the same economic class they were born into. The rich stay rich and the poor stay poor, although in recent years the middle class has been steadily shrinking.

Posted: Wed May 06, 2009 11:18 pm
by Jebus
I also want to add that everyone has the ability to become rich.

50 cent went from living in a 175 000 home to having a 175 000 ring.

Capatilism is awsome!

Posted: Thu May 07, 2009 4:36 pm
by tostig
Matt Z wrote:... The rich stay rich and the poor stay poor, although in recent years the middle class has been steadily shrinking.
Actually, the long term trend is showing the rich becoming richer and as the middle class shrinks, they join the poor.

Latest examples are the disappearing pension plans in this recession. In the 1970s the Archie Bunker types would be considered middle-working class. Today, a person like him would have fallen far-far behind.

Rich is good, but when they run into hard times - it's time for a government bailout. And where does the government get the money to bail them out?

Posted: Fri May 08, 2009 10:02 pm
by Ironman
I don't think your points poke any holes in the argument above in the first post. If you don't shift tax burden to the wealthy, you either end up with deficits, or you end up with a customer base who has no money for products being sold. this leads to economic collapse. Then deregulation causes boom/bust cycles indirectly due to decisions people make out of greed.

Posted: Sat May 09, 2009 8:58 am
by Rucifer
I think that the history of the world can pretty much prove that trickle down does not work. Rich people like to keep their money, especially in tough economic times. The aristocracies of ancients past bleed the middle, working, poor class, whatever you want to call it, dry (or peasants I guess). They always have and still are doing it to this day. PEOPLE ARE TOO GREEDY FOR TRICKLE DOWN TO WORK. Yea sure, they can start "investments", but to me what creates income for rich people to invest with is the middle class buys their stuff that's already being sold. Not the government handing them money practically to build stuff with.

Some people are not born rich but become it. But most ARE born into their social class, and generally stay there. Granted its not as bad as if we were living in a poorer place on the planet, but even in the western world its not exactly easy to maneuver to a high class.

As a sidenote, when I get into arguments with my hardcore conservative friends, they often use the argument that rich people worked very hard and deserve to be rich. And on the flipside, they say poor people deserve where they are at because they are lazy, stupid, bad, etc. While some poor people might fit this bill not all certainly do. They are not factoring in societal concerns as well (ethnicity, where you were born, etc) that hold back a lot of people. They are always not factoring in the fact that some people just tend to be in the right place at the right time. And this is equating financial success with being a better person. Not always the case. This is a very misinformed, almost social-darwinian approach to the whole situation. It can lead to dangerous consequences and generalizations.

Posted: Sat May 09, 2009 9:26 am
by nygmen
Rucifer wrote:social-darwinian approach
Yup, not to say we should wipe everyone's behind for them, but there is a balance between all out class war, and total redistribution of wealth.

Posted: Sat May 09, 2009 7:14 pm
by Ironman
nygmen wrote:
Rucifer wrote:social-darwinian approach
Yup, not to say we should wipe everyone's behind for them, but there is a balance between all out class war, and total redistribution of wealth.
Exactly. A liberal democracy with a free but well regulated market and some government run institutions is the way to go. It's left wing, but far to the right of socialism.