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?