Trickledown v. Trickle Around Economics

I’m no economist, so I will be the first to admit that there is a lot about the debate over America’s debt that I don’t even begin to understand. But, since Dr. Blanchard is traveling, you’re stuck with me for a time. Therefore, I thought I’d try my best to wrap my head around some of it. No doubt most readers have a better understanding than I have, but that’s never stopped me before!

According Senator Marco Rubio, America’s deficit problem is simple: We’re spending too much money and we’re not taking enough money in. The way to solve this problem, according to Rubio, is to cut trillions of dollars worth of spending and to spur the creation of jobs by simplifying the tax code and reforming governmental regulations that make it unattractive for employers to do business.

Rubio and his counterparts seem to put a lot of stock in President Reagan’s idea of “trickledown economics.” The idea is that if the government makes it easier for businesses to become profitable, companies will hire more workers (or hire American workers instead of shipping jobs overseas, where the business climate is more favorable). When businesses hire more workers, the government will receive more capital through taxation, because more people will make enough money to begin paying taxes on it.

Liberals like Paul Krugman argue that trickledown economics does not and has not worked. They suggest that the solution to our debt problem is more spending. As I understand it, the idea is that if you spend enough money on job creation, you then have more taxable workers and less unemployment.

At first blush, it seems like using tax money to create federal jobs would do little to solve the problem. If the government (or really, the taxpayers), pays the salaries of federal workers, it isn’t taking in more money, it’s just shuffling it around a bit. But those who believe in Keynesian economics note that creating jobs has indirect benefits. By creating new jobs, the government either directly employs formerly unemployed workers, or it hires workers who were in other positions. The unemployed are then supposed to fill in the gaps left behind. This is supposed to decrease unemployment, which, in turn, is supposed to increase confidence and the willingness to spend and circulate money, thereby leading to economic recovery.

To me, this sounds suspiciously similar to trickle-down economics. The government, like a rich employer, creates new jobs for its “business.” These new employees, with their newfound prosperity are meant to begin spending money, which is supposed to stimulate the economy and lead to success in both the public and the private sector.

There are, of course some major differences in the two approaches. In the conservative version, business owners are in charge of hiring new workers. Here, businesses spend their own money to create new jobs and the government takes in more capital through taxation. In the liberal plan, the government is at the helm and it spends our money to create more jobs. And, because presumably the government adds jobs at many different levels, perhaps the approach is better referred to as “trickle around”, rather than trickledown economics.

It will probably come as no surprise when I say that I prefer the conservative plan. I prefer it, because I do not think the liberal plan has worked. We have been engaged in massive government spending since Bush was in office. Under Bush, federal and government employment increased substantially. Indeed, National Review’s Veronique de Rugy writes the following:

Under Bush, private employment shrank by 673,000 jobs, federal employment grew by 50,000 jobs, and government employment grew by 1,753,000 jobs.

If private employment were increasing along with federal and governmental employment and the creation of new jobs actually led to more private employment, or some sort of boom in the private sector, perhaps the liberal plan would work. But, instead, private jobs seem to have been disappearing when new federal jobs have been created. This presents a problem for the government and for the economy. This is because it costs the government more to employ each federal worker than it will ever get back from taxes. The more jobs we shift out of the private sector and into the public sector, the less money we will be able to generate from taxes. Allowing businesses to operate privately and making it easier and more attractive for them to hire workers seems to me to be a better way for the government to bring in more capital.

Comments

[Bill Fleming]

Miranda, how do you fit supply and demand into your analysis here? And how do you reconcile non-taxable markets? (Black market, off shore labor forces, investment transactions, etc?)

[Miranda]

Bill: Good questions, both! Regarding supply and demand: Suppose the government creates a job that does not directly compete with a private sector job. The job pays $20.00 an hour. That salary is paid for by the taxpayer, who then has less money to purchase goods and services he might have otherwise purchased. Suppose, for instance, our taxpayer was a frequent traveler, who patronized hotels and restaurants on visits to relatives. If this taxpayer finds himself with less money to spend, he may cut back on his visits, which in turn, costs the hotels and restaurants he used to frequent his business. If this happens to enough taxpayers, hotels and restaraunts will lose enough money to make them reduce jobs or even close. So I would argue that increasing the number of federal jobs decreases demand for public sector goods and services and leads to fewer private sector jobs. But, as I say, I'm not an economist and I certainly welcome other arguments!

I will mull over your question about non-taxable markets and get back to you!

[Stan Gibilisco]

Miranda,

At the risk of dating myself, I should say that the current situation reminds me of the Carter administration years. I graduated college in 1976, and my "colleagues" (classmates) were papering their walls with job rejection letters.

I applied for one job and got it. The wages were under four dollars an hour, but it was a "dream job" and I never looked back. Never looked down, either -- and hence never fell.

Those of us old enough to remember the contrived shortages, rampant inflation (approaching 20% per year), and astronomical interest rates (also approaching 20% per year) of the Carter "stagflation scenario" might forecast similar woes in store for us in the next few years. But things don't have to turn out that way, as our venerable Treasury Secretary would have us believe they will. (Didn't he warn that we'll have a rough go for the next TEN YEARS?! Talk about making excuses in advance!) No, we don't have to put up with "four more years of this," much less ten more years.

I might also suggest that the number of jobs isn't a fixed quantity. The number of jobs depends largely on consumer demand, which in turn depends on disposable income and a reasonable confidence that hard times do not, in fact, lie ahead. As things are now, people are hunkering down, companies are hoarding cash, and the whole economy is frozen by fear and uncertainty. What's going to happen to the economy in general? What's the government finally going to settle on for a tax policy -- or will they ever settle on any fixed tax policy at all? The word "currency" comes from "current," as in electrical current. No currency flow equals a bad economy. If enough consumers want enough stuff, there'll be plenty of jobs for everybody. Low paying jobs, some of them, but if people can find things they like to do, it won't matter much.

We stand at a crossroads now as we did in the 1970s, the 1930s, and even back in the time of the Teddy Roosevelt administration. The capitalistic patient got sick from overindulgence, and required heavy medication (bailouts, TARP, etc.) for a time, just as an alcoholic in detox might need tranquiliers for a little while. Now that we're past that phase, we need to get off the economic Librium and onto a good long-term recovery program. Then, if we're smart, we'll figure out a way to keep capitalism alive without letting it go overboard again and end up back in detox, or in a jail of its own making, or in the grave of obsolescence in favor of a "cowardly new world" that few of us would actually want to toil in.

We had to have Carter before we got Reagan. Here's a hint from my crystal ball: God bless Texas.

[Hans]

So was the premise here is that Rubio is an economist and expert? Correct me if I'm wrong, but is his plan for more revenue to put more middle and lower class people to work so we can tax them? Interesting thought as opposed to closing some loopholes. That's a great plan, business has no risk that way.

Who could blame business for wanting the revenue increases to come from their employees, but the job creators, while enjoying the highest profits and lowest taxes in decades, aren't hiring anyone.

[Miranda]

Stan: Thanks, Stan! It’s nice to see a bit of optimism!

“The number of jobs depends largely on consumer demand, which in turn depends on disposable income and a reasonable confidence that hard times do not, in fact, lie ahead. As things are now, people are hunkering down, companies are hoarding cash, and the whole economy is frozen by fear and uncertainty.”

What would you say factors like tax breaks, tax cuts, the creation of federal jobs or fewer regulations for businesses have on demand?

“Then, if we're smart, we'll figure out a way to keep capitalism alive without letting it go overboard again and end up back in detox, or in a jail of its own making, or in the grave of obsolescence in favor of a "cowardly new world" that few of us would actually want to toil in.”

Hear, hear! But the question is, "how?"

Hans: Thanks for your comment. I do not claim that Rubio is an economist. However, as a US Senator (and an eloquent one at that), he is, in my view, a good spokesman for the ideas offered by the right. I used Krugman as a spokesman for the left, because I think he presents a clearer plan than most of the Democrats in Congress.

Rubio’s plan is to “grow jobs” by making it easier for employers to create jobs. You write that job creators “while enjoying the highest profits and lowest taxes in decades, aren't hiring anyone.”

One might suggest that if it were more profitable for businesses to hire employees, they would do it. If Rubio is right, and cumbersome regulations are preventing employers from hi ring, then, presumably, lifting some of those regulations might solve this problem.

What sort of plan would you endorse?

[Donald Pay]

Time for Republicans to deal with reality. The middle class in the US is hollowed out. Republican trickle down economics has assured little disposable wealth created in the middle class from about the 1980s on. There have been various bubbles that have masked this fact and the middle class got through the 2000s only because they increased debt. Now that taking on more personal debt is not possible we see exactly where Republican trickle down economics has gotten us--no ability to generate demand and no jobs as a result.

Under Republican economic policies (continued under Obama) the middle class can not create demand, so there will be no jobs created no matter how large the tax cuts to the purported "job creators. " It can't work because to justify creating a job you have to have some expectation that someone will buy your product or use your service. The only jobs that tax cuts will stimulate are those in China, because there there is a rising middle class in China. Here we have a declining middle class.

[Stan Gibilisco]

"What would you say factors like tax breaks, tax cuts, the creation of federal jobs or fewer regulations for businesses have on demand?"

Reduced taxes might help; reduced regulations might also help. More federal jobs would presumably translate into more people with disposable income, so that might actually help the private sector.

Special tax breaks, especially for the wealthy ... I don't know.

The main trouble right now, I suspect, is uncertainty about the economy in the near term future, and uncertainty about tax policy in the near term future.

[Miranda]

Donald: Thank you for your comments.

"Republican trickle down economics has assured little disposable wealth created in the middle class from about the 1980s on." How would you say trickle down economics did this? What would you say is the solution to the demand problem?

[duggersd]

Donald, the little disposable income in the middle class is why everywhere I look, I see families with necessities such as 42" flat screen digital televisions, MP3 players, cell phones for everyone in the family, three or four laptop computers, SUV's in the driveways of just about every home in the neighborhood, dogs, cats and other pets, and etc. The list goes on.
Hans, from your comment, "Correct me if I'm wrong, but is his plan for more revenue to put more middle and lower class people to work so we can tax them?". I do not know if you are aware, but currently approximately 1/2 of the people in this country who are eligible to vote do not pay anything in federal income taxes. In fact, many of them get a "refund" of more than they pay in. Yes, the idea is for everyone to be paying taxes. I would like to see jobs available so that instead of 50% of the people paying taxes, something like 80% - 90% of the people are paying taxes. If that happens, I think you will see a lot of the lack of "revenues" we are experiencing right now go away. BTW, if you are talking about loopholes for corporations, corporations do not pay taxes. Taxes are eventually paid by people like you and me in the forms of increased prices, decreased dividends, decreased or static employment and less R & D. I know, I know, Big Oil needs to have their "loopholes" closed. From what I understand of those "loopholes", when I was in accounting class we called those legitimate expenses.

[George Mason]

Miranda; A correction. What Reagan tried to implement was "Rising Tide" not Trickle down. By putting more money into the hands of the tax payers you create demand. Thus a "Rising tide lifts all boats." The greatest expansion of the middle class (and the largest move of people from the lower income groups into the middle class) took place in the 1980's. What is hollowing out the middle class now is the Obama push to regulate all aspects of business and the looming burden of Obamacare.Combine this with the constant drumbeat by Democrats to raise all forms of taxes and business have not only no incentive to hire, they have a well justified fear of what the future holds. The ultimate question is will we live in a free society or will we live in a society dominated by the government. If the government continues to suck more and more of our sustenance away, and if the heavy hand of government dictates more and more how we lead our lives and our business, we will live in an ever deepening depression.

[Jimi]

Donald,

"The only jobs that tax cuts will stimulate are those in China, because there there is a rising middle class in China. Here we have a declining middle class."

"Middle Class" is not enough of an exact term. You have to define it, especially if you are going to compare to another country. The definition has changed several times over the years. In terms of disposable income, standard of living, access to Housing and Health Care.

[George Mason]

Jimi; If you reduce tax rates the American people have greater opportunity to determine how their money will be employed. Despite all the left wing rhetoric most of our money gets spent here. You reduce tax rates you increase individual wealth which leads to greater industrial output to meet increased demand. That means jobs. Increased job creation means increasing wages. Currently we need more than just income tax rate reduction, that is because the Obamites are imposing so many hidden taxes, the great reach of their regulatory agenda and Obamacare primarily.

[Jimi]

George,

Yes....I agree with your comment!

[Mar]

If you itemize (see if your itmeezid deductions on 1040, Schedule A exceed your standard deduction, which is $10,700 for married filing joint, $7850 for head of household, $5350 for single or married filing separate in '07), you may deduct EITHER state and local income taxes OR your state and local general sales taxes. You cannot deduct both. You make your election on line 5 of Schedule A by checking box a for income taxes or box b for general sales taxes. The option to claim sales taxes instead of income taxes will not be allowed following 2007 unless Congress extends the law permitting this option.

[Shin]

You were told wrong. Tips gotten by rasnaurett workers are definitely 100% taxable legally. Do people cheat? Yes. Do many of them get caught? Also yes. The IRS is very aware that tips are a place people do a lot of tax cheating.Same thing with strippers. Their tips are 100% taxable. Do most strippers follow the law and report all their tips? I doubt it.

[Heyder]

They do pay federal inmoce tax because it is still a job; a job is job government related or not. It is still a source of inmoce that is taxable and so they must pay inmoce tax as well as any other taxes required by the IRS and the government. Being a part of the system does not exclude you from your taxes.