Search This Blog

Sunday, October 25, 2009

I am not an economist, but I did stay at Holiday Inn once

I also studied a little bit of economics many years ago and it was that particular study that changed my political views forever. I wanted to share a little of the principles I’ve learned for those who may not have had an opportunity to read or study a little of the basics. Others might do a better job explaining but this is my take on the subject.

Did you ever wonder what the “trickledown” effect is”? “Trickledown is a real phenomenon. It is going to happen whether you believe it or not. It can be good or it can be bad but it will happen to you. If you have a choice you want it to be good. Liberals mock the term as if it were some sort of disease or a bad ghost story because they want us to depend on a controlling government, but here a simple explanation.

The foundation of our capitalist economy is based on providing goods and services for one another. The productive worker produces something that another person needs or wants and in return the other person will pay for it out of their wages for which they provided some goods or a service for someone else.

Let me put it this way. On payday the production worker collects his check and goes out to buys goods or services from other people. Perhaps he will go out to dinner at a local restaurant, to a movie or shopping with his family. Perhaps he pays someone to cut his grass or wash his car. A portion of the money he spends goes towards the salary or wages of another person, the waitress, the gardener, the usher at the movies, the cashier at the grocery store or the clerk at the mall. Every dollar he is paid for his productive work and then spends is multiplied. It paid his wages plus it will pay a portion of the wages or salaries of other’s.

These people who received wages from his money will also spend money at the grocery store, the mall and other places so the money is again multiplied. A portion of what they spend will pay wages to more people. Over the course of time the dollar that was paid to the production worker was multiplied to pay a portion of people’s wages several times over. That one dollar earned and spent in the overall economy became two dollars in wages for many people. This is the “trickledown effect”. The more money I spend the more money is multiplied and passed on to others.

The same principle applies in reverse. Take away a dollar from the production worker and you removed a dollar not only from him but the people who would have received the “trickledown effect” from his dollar. Take away a dollar and you actually multiply the loss of a dollar in wages several times over. That is why it is said for every production job you lose, you will lose two or three service jobs. When one factory worker gets laid off two or more people actually lose their jobs. In a small town when a factory is closed the whole town is drastically affected by the loss. Many stores, shops and theaters may all close with it.

If you increase a workers’ wages his spending increases and the amount he spends is multiplied. For every dollar you add to his wages and you add several dollars to the economy. The economy grows and everybody gets a piece of the action. That brings us to the point about taxes increases and tax cuts.

When you cut taxes and give someone, anyone, more money to spend, then those extra dollars spent are multiplied as before and but now taxes are also collected on the multiplied dollars. As proven with the John F Kennedy tax cuts, The Reagan tax cuts and the Bush tax cuts, the revenue in tax collections actually increases when taxes are cut. The government had more money with tax cuts than with tax increases. The problem is they just keep spending more. In the Reagan years revenues increased twofold but congressional spending increased fourfold.

When you increase taxes on anyone, on a production worker, a white collar worker or even an “evil greedy rich” person, you remove a dollar from the productive economic system and its loss is multiplied two or three times over. A tax increase of a dollar removes the spending of that dollar from the economy no matter where it comes from, the rich, middle income or low income. It hurts everyone, beginning in your local economy.

The liberal mindset thinks that for every dollar they collect in taxes it produces one and one-half dollars in production. That is according to the Keynesian theory and I do stress the word theory (It is theory because it has never happened in the real world). In actuality the government does nothing toward real productive work and the results from previous tax increases show that for every dollar taken from citizens by taxation it produces about $0.80 of value, a net loss to the economy.

Liberals decry the trickledown theory as a hoax or smoke and mirrors. But the socialist tax collectors are actually using the same trickledown theory when they say they will create jobs by increasing taxes. Somehow they believe, when they take a dollar through the force of taxation, they can run it through a level of bureaucracy and waste and produce more than a dollar of value to the economy by giving it to someone who may produce nothing at all. This is not a practical working model for economic growth.

If an investor or a business is taxed, it is money taken away from businesses and that will lose jobs or wages as a direct result of the tax. When those jobs are lost then spending stops and the negative trickledown effect will take away even more jobs.

On the other hand a healthy tax cut will increase the spending of dollars and that money will be multiplied several times over. The production worker spends whatever he can because his wages limit his spending. The rich man spend whatever he wants because he has higher limits but either way the more dollars they spend will cause an increase in the economy and create more jobs and more money for everyone.

The rich man spends his money on a more expensive car, eats in finer restaurants, goes to upscale malls but he is still spending his money and it is still trickling down to the employees who work at the mall, the grocery store, the gardener, and the restaurants and so on.

A government stimulus versus a tax cut. The government stimulus package of 2008 didn’t really work because it was a short burst of income but nothing to follow it up (See WSJ article below). You can’t expand business based on a one time surge. Trickle down can’t create jobs with a onetime burst. You need a long term growth. A long term increase in spending dollars is needed for business to forecast a spending trend and then they will start expanding their businesses. A specific long term spending increase that will grow the economy for everyone is a tax cut for all who pay taxes. The rich, the middle class, everyone. Tax cuts do trickle down. We all benefit no matter what our income level.

You don’t want to tax someone’s money and take it away from them. You want them to spend it so it will multiply and everyone will have a share of it.

Taxing a business has a similar effect. In a small business it will mean less money is available and the owner has to cut expenses or raise prices. In hard times it is difficult to raise prices so they look in other areas to cut. Usually hard cost (rent, electricity, fuel) cannot be changed and suppliers will be passing on the taxes in their prices so the most flexible area to cut cost is in labor. You can cut back on salaries or in the number of employees. Now the employees have less to spend and some have nothing at all. Either way the dollars removed by a tax increase will have a negative trickledown effect. Everybody loses.

In general all business taxes are passed on to the consumer through lower wages or higher cost products and services. If a business sells a product for a dollar and he makes a 10% profit then he makes 10 cents. If his tax increased 10 cents then he can sell the product for $1.10 or make less profit. If he is competing for investment dollars he needs to maintain his profit margin or investor will go elsewhere with their money. So he is forced to cut cost (jobs) or raise prices. Raising prices may mean he will sell less because people can’t afford it. If he cuts jobs you lose. If he raises prices you lose. If he can’t sell enough to stay in business you lose. If you lower taxes then he can lower cost, lower prices, increase profit, do more business, retain investments and then add more jobs. It is really simply.

“The revenue cost of eliminating the corporate tax wouldn't be any more than their proposed $355 billion in new spending, and we guarantee its ‘multiplier’ effects on growth would be far greater. Research by Mr. Obama's own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3. “(Wall Street Journal 1/26/09)

The current stimulus plan proposes taking money from individuals and redistributing to others and that will “ripple out” into the system and grow the economy. When you look at the scheme what they are doing is taxing you, skimming some off the top to give to non-productive people (government employees, etc.) then slowly (depending on approval of projects) put the money back into the system and hope the trickledown effect is working. So the stimulus plan actually defers the working of the trickledown effect by processing the tax (a time consuming process) and giving back to favored groups the amount left over. After months the money begins to trickle to the rest of us.

If you have a tax cut today the money would begin to trickle down immediately and multiples itself right away.

Ideally we would pay taxes for only what we really need (the founder’s intent) and the rest would be for the people and businesses to have a robust economy. In a robust economy everyone who wants to work will have a job. Everyone will contribute to the greater good by being productive workers and voluntarily donating what is needed to the poor and helpless. The government should only require what is necessary and no more.

For many months a lot of people in the big medias groups were crying “recession, recession” when we were actually not in a recession but in a slowdown. The effect of that is to cause people to hold on to their dollars so they won’t spend them and the result is a real trickledown recession like we are having today (even without the Wall Street bust). It is much like when the news announces there will be a paper shortage or a water shortage. People run down to the store and buy all the paper or water in sight and lo and behold there is a shortage. Fear always makes things worst. In times of difficulty we need people who bring courage not fear, people who tell the truth and not exaggerate the bad news. We need real leaders, courageous leaders who will cut taxes, cut government spending and America and our economy will do just fine.

So require of your congressman or senator; Cut TAXES, Cut government SPENDING, pay off the overwhelming DEBT and free America from an overburdening government.


Taxes are good for things that are a necessity in our lives. We have police because we all need protection. We need firemen because they have the training and equipment to take care of us. Nationally we want protection from foreign sources so having a good military is also a necessity. If you can imagine each of us trying drill our own wells for water and dumping our sewage it make sense to have our local government provide these services. These are things that we want and need and we are willing to pay taxes for them. There are the things we need government for, but we do not need government to become our master and tax us into slavery. We do not need government to decide who has too much wealth and then take it away to give to those who are not willing to work on their own.

Why Permanent Tax Cuts Are the Best Stimulus

Short-term fiscal policies fail to promote long-term growth.

By JOHN B. TAYLOR (excerpts form the WSJ)
The incoming Obama administration and congressional Democrats are now considering a second fiscal stimulus package, estimated at more than $500 billion, to follow the Economic Stimulus Act of 2008. As they do, much can be learned by examining the first.

The major part of the first stimulus package was the $115 billion, temporary rebate payment program targeted to individuals and families that phased out as incomes rose. Most of the rebate checks were mailed or directly deposited during May, June and July...........................................................

After years of study and debate, theories based on the permanent-income model led many economists to conclude that discretionary fiscal policy actions, such as temporary rebates, are not a good policy tool. Rather, fiscal policy should focus on the "automatic stabilizers" (the tendency for tax revenues to decline in a recession and transfer payments such as unemployment compensation to increase in a recession), which are built into the tax-and-transfer system, and on more permanent fiscal changes that will positively affect the long-term growth of the economy.

Why did that consensus seem to break down during the public debates about the fiscal stimulus early this year? One reason may have been the apparent success of the rebate payments in 2001. However, those rebate payments were the first installment of more permanent, multiyear tax cuts passed that same year. Hence, they were not temporary.....................................

Some who promoted the first stimulus package have reacted to its failure by saying that we must now switch to large increases in government spending to stimulate demand. But government spending does not address the causes of the weak economy, which has been pulled down by a housing slump, a financial crisis and a bout of high energy prices, and where expectations of future income and employment growth are low.

The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.

Mr. Taylor, undersecretary of Treasury for international affairs 2001-2005, is a senior fellow at the Hoover Institution and a professor of economics at Stanford University.

Read the whole article at Wall Street Journal Online, 11/25/08

No comments:

Post a Comment