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The political
left wing has long tried to cast doubt on the fairness, and even the efficacy, of free market capitalism by branding it as a "trickle down" system. This epithet
is meant to show how the
middle and lower classes are dependent
on scraps of wealth that happen to fall from the buffet table of
the rich. This characterization
of an unfair and inefficient system has helped them demonize
policies that lower taxes (if they also extend to the wealthy) and reduce regulation on business.
To correct these
supposed problems, they have long called for policies to redistribute wealth or for government to inject funds directly into the economy. Either mechanism puts money into the hands of everyday consumers who they claim to be the true engines
of economic growth. They believe that consumer spending lies at the root of the economic pyramid. When people spend, business owners are able
to sell more products, hire more workers, and reap more profits. In essence, they
believe in a system of "trickle
up" economics, whereby
prosperity flows upward from government
into the lower and middle
classes and ultimately to the upper
class.
Conversely, they
argue, if consumers aren't
buying, business sales decline
and workers lose jobs.
The jobless spend less than the employed, putting even more
pressure on businesses. This leads into a vicious cycle of falling sales and increased unemployment. They believe that if a shock is
not applied to reverse the cycle it is possible for an economy to regress, in theory, right back to the Stone Age. Using
such logic, it is easy
to identify the foundation
upon which the economy rests: it's the spending, stupid. Some progressives have likened this process to a natural ecosystem wherein government spending is the rain that
makes grass grow. The grass attracts zebras and antelopes (consumers), which then offer
sustenance to the lions (capitalists).
If this is your diagnosis,
then your prescription should be patently
obvious: restore the demand
lost through unemployment and get people spending again. How to accomplish this is also equally
simple: take the money from
the rich who really aren't using it anyway.
Without entering into a parallel discussion of fairness, demand side economists simply see the redistribution
of money from the rich as
a way to generate economic growth, which benefits society as a whole. As they see it, the rich
have more money than they
need to satisfy their own personal
demand. No matter how rich, a single individual can only eat
in so many restaurants, buy so many
cars, or go see so many movies. The money they don't spend
is saved instead, thereby sucking needed demand out of the economy. In contrast, the lower and middle
classes spend a much higher percentage of their net worth. To break the vicious cycle, all that is needed is
to direct these idle funds where it
will be spent rather than saved. In a June 19th Wall Street Journal cover
story, reporter Jon Hilsenrath underscores
this point in explaining why the impact of the Fed's low interest rate policies are being weakened by the current preference for high credit
score borrowers. Says Hilsenrath, "Financially secure households are less likely than
lower-income households
to spend their interest rate savings. Wealthier households are more likely to save or invest."
A policy
prescription such as this
is seductive. It allows people to advocate a
moral position (it's a shame
that the poor don't have as much as the rich) in purely practical terms (redistribution
creates economic growth). And if spending is the panacea, then government can easily wipe
out suffering, even if they lack the political ability to raise taxes. After all, what stops them from printing all the money needed
for people to spend the economy
back to health? According
to Nobel Prize-winning economist
Paul Krugman, only the political cynicism of Republicans, who try to wring votes out of Americans' misplaced hopes for upward mobility and their stubborn fixation on thrift, prevents this painless and readily available cure.
But as usual,
they have it exactly backwards. The savings that they find so
unproductive is actually the foundation upon which the economy rests. Nothing can be
consumed until it is produced.
The act of spending is meaningless without something to buy. The savings of the rich forms the capital that funds business investment which increases productivity. The
more that society produces,
the more that can be consumed. The key here is the supply,
not the demand. The grass
that feeds the zebras comes from seeds, not rain. Capitalists provide the surplus seeds that are planted.
Demand always exists and does not need to be stimulated
by cash redistribution. 21st century Americans are no more desirous
of cell phones than their parents were. But in 1980 cell phones were in very limited supply and were therefore very expensive. They were the trophy possessions of the super-rich.
The reason why they are now as ubiquitous as key chains is not that government
stimulated demand, but that industry figured out how to supply them far more efficiently. The supply satisfied the demand. Investment in the telecom sector, which came from real savings of Americans, allowed for that increased productivity.
In this example, the savings of the wealthy and the innovation of entrepreneurs combined to create a huge benefit for society. Call it trickle down if you want, but it would be
more honest to simply
call it effective. This is
the system that built this country. Relying on trickle up will surely destroy it.
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