Trickle-Down Economics, Giant Piles of Cash and Thriving Economies

Originally published: 02/2012 by J Wynia

Warning: What follows may be seen as political. Like the theme of this blog suggests, my political beliefs don’t fit into the neat boxes that typical political conversations sort people into. If I get into a discussion with a room full of Republicans and Democrats and genuinely share my opinions, I’m likely to upset nearly everyone, for different reasons. So, in any response you make, please avoid any projecting on to me the properties of other people you’ve argued with about such matters.

I've had a few conversations lately where supply-side/trickle down economics came up (I'm great fun at a party). There's something I see as missing from most discussions of the topic.

When you look at 20th century economic activity prior to Reagan, there's actually plenty of evidence that "trickle-down" actually works. When business owners and other wealthy people did well, they re-invested in their businesses, opened new factories, and gave to charity, thus fueling the economic engine.

I really do see “trickle down economics” working when I look at the evidence of that era. So, why do I think that most of the policies that Reagan and other that followed implemented based on supply-side economic theory are a failure?

Well, first, I should say that I do think that most of those policies are failures. The gap between the rich and poor, between CEO and low-paid workers in the same companies has widened. And, while that’s been going on, companies have been making record profits while sitting on more cash than any other time in history.

So, what’s different? Taxes.

The pre-Reagan era where supply-side economics worked was a “complete” system. The top tax bracket was anywhere between 63-94% between 1932 and 1981. Lots of people think that such tax brackets are about taking money from the rich (and that’s the focus of much of the recent debate). But, that presumes that people in such tax brackets look at those tax rates and just pay them.

What high tax rates generally do instead of actually collecting that money is encourage them to re-invest it in their business or charitable giving. If your business generates $1 mil in profit and you have to pay 94% of every dollar over $500K, would YOU just write the check for $470K to the federal government? Or, knowing that if you use it to build a new office/factory, hire new workers, build new machines, increase production capacity, spend money on marketing and advertising or, alternately, put the money to work in your favorite charity?

That’s the point of high tax brackets: the THREAT of having to give that money to the government.

When that threat is there, there’s pressure to put the money back into circulation. When it’s not, you get companies sitting on $76 billion in cash. You get companies sitting on that cash rather than using it to create new products, to innovate, to put people to work, to do goo charity work, etc.

When that threat isn’t there, presidents hold meetings with CEO’s and “ask” them to get the money moving. Eisenhower didn’t have to have such meetings during the 1950’s that people so often love to harken back to. Given that the whole point of a healthy economy is to keep the money moving, that stands out to me.

When you re-invest in your business, it tends to come back in higher revenues and the cycle repeats itself. That preserves the wealth while keeping the economy chugging. Remove the forced incentives and you’re left with only the “natural” incentives to re-invest. Those shouldn’t be minimized. They’re significant.

But, when you’re making plenty of money with your existing products, with your existing marketing, you probably don’t feel much of a push to re-invest. You might just sit on the cash until a really great idea comes along. There’s no urgency.

So, huge stockpiles of cash are forming in large corporations and for the wealthiest (the, ahem, 1% if you will). There are plenty of people advocating for increasing their tax burden and even a few wealthy people saying they should pay more. Their opponents say that we shouldn’t be taking their money and “redistributing the wealth”.

I think we should put those tax brackets back in place, specifically hoping we DON’T ever collect any of that wealth via the government. I don’t want the government to take Apple’s $76 billion. I want to see what amazing products and services Apple would create if they HAD to spend it. I want to know how many people would be put to productive work if the Fortune 500 put the $2 trillion they’re sitting on to work instead of it sitting in the financial services companies.

In short, I think that the facts point to nearly all sides of this argument being right on some points and nearly all being wrong on others. In between, there’s a system that actually works. That system is, in fact, the one that existed in the era that most business people hold up as a shining example of the version of The United States we should aspire to.

So, does this make me a “liberal” or a “conservative”?

Comments

blog comments powered by Disqus
Or, browse the archives.
© 2003- 2014 J Wynia. Very Few Rights Reserved. This article is licensed under the terms of the Creative Commons Attribution License. Quoted content or content included from others is not subject to that license and defaults to normal copyright.