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Can I get a little help here?

I took Econ 101 in college some 40 years ago
and I actually have a degree in Public Administration
but I am baffled by the continuing adherence by Republicans and "Conservatives" to trickle down economics or Reaganomics.

I need a refresher course in Economics for Dummies
Can anyone help explain this to me
and hopefully arm some others here with arguments to use against their Republican friends?

Seems to me the basic premise behind these tax cuts for the extremely wealthy is this:

1)The wealthy will take that money and invest it in companies that will create jobs and that will then trickle down to the workers as wages increase due to demand for labor.

My problem with this idea is that it doesn't seem to work
Rich people won't invest in companies to build or make products for which there is no demand OR they will invest in companies that outsource production to China

Doesn't it make more sense to give tax breaks to the least endowed of our society and those most apt to spend it? Seems to me:
If we allow those most likely to spend what they receive in tax breaks on goods that will create demand that will make it profitable for investors to fund companies who build or make products to satisfy that demand.
That money will then flow UP the food chain to the coffers of the investors causing a tide on which all the ships will rise.

It would seem as a rule when you provide more spending money for those at the bottom of the economic ladder they will immediately spend that money for things they need or want and that money will work it's way UP the ladder to investors who profit as their investments grow in profitable companies that provide what is purchased.

As a matter of public policy the Republicans are very willing to spend  Billions a month on a war in Iraq that seems to only benefit defense contractors and those who work for them or investors in outfits like KBR/Halliburton or The Carlyle Group or Blackwater et al.

I will offer one example of what I think would be a good investment in our future that spends money where it serves to provide jobs and provide a defense benefit of reducing our dependence on oil.  

What if we spent some of those IRAQ trillions on our infrastructure for the future?
What if we revamped the US Railroad system to provide high speed rail corridors to cut the cost of transporting goods and people across the country moving people and products for dramatically fewer gallons per mile?
This provides jobs for folks building the system and the trains that would move upon it and long term jobs for those who secure, maintain, and operate the system while dramatically reducing our dependence on burning fossil fuels. It's an investment that pays for itself.
If you could climb on a train in Atlanta and arrive in NYC five hours and 850 miles later traveling at 186MPH with very short stops in Charlotte, NC. Richmond, VA. and Washington, DC. for half the cost of an airplane ticket and a fraction of the gallons per mile per passenger why wouldn't you? Europe is rapidly converting to high speed rail everywhere so people can travel from Paris to Brussels, Madrid, Berlin, and other destinations  so why can't the USA do this across the country to reduce our cost of travel and grow an industry that will benefit all Americans?

If Americans invest in transportation systems that use less fuel to cross the country where people can rent hybrid or electric cars to travel the shorter distances everybody wins except the oil people who have made billions over the past 8 years.

This plan should

  1. Fill the cities with rental electric or hybrid cars and delivery trucks
  1. Reduce the cost of transportation and increase the speed of delivery for freight using the same rail and corridors for container shipments.
  1. Reduce the cost of highway maintenance
  1. Reduce dependence on foreign oil
  1. Provide jobs for thousands of Americans and investment opportunity for the wealthy
  1. Allow Americans to travel faster and cheaper without as much risk as air travel
  1. Improves the environment by reducing the output of carbon emissions.

Long haul truckers would be converted to medium haul delivery from the freight rail terminus to locations not on the high speed corridors.  

I'm either very confused or not very smart.
I don't expect we can redistribute the wealth of America but I do think we can reduce the gap between the ultra wealthy and the poor while making life better for all Americans.
I don't get it. Didn't everyone benefit in the days of the Clinton/Gore administration? Didn't the rich get richer while the poor got less poor?
Didn't FDR show us how to recover from recession and depression by wisely investing in public works projects like TVA that served to benefit everyone?

I guess I'm pretty thick since I can't seem to figure out how this isn't an easy sell to rich and poor alike. Anybody out there with the reasons this isn't a good idea or why tax breaks for those most likely to spend the benefit isn't the best way to grow the economy?

Originally posted to aurabass on Sat Jun 14, 2008 at 04:25 PM PDT.

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Comment Preferences

  •  Your problem is (14+ / 0-)

    that you're thinking logically.  :-)

  •  Heh. (2+ / 0-)
    Recommended by:
    DBunn, DarkMysteri

    Doesn't it make more sense to give tax breaks to the least endowed of our society and those most apt to spend it?

    I'm not sure how this makes more sense. Granted, the rich won't "trickle down" anything, but if the poor are only spending any such money, then they're not saving and investing either, are they?

    And I don't mean the ponzi scheme that the stock market is, I mean a real investment that will see them real value throughout the years. This could be anything, from a home to a small business to you name it.

    Neither the left's nor the right's answers make much sense. Both are just pandering to their base.

    I don't know what the correct answer is, but if we fail to look past our preconceptions of what that is, we may never find it.

    •  Logic of it (2+ / 0-)
      Recommended by:
      DBunn, Schwa SF

      The logic of it goes like this:

      Demand lowers with price increases. Taxes raise the price of goods, thus lowering demand (and hence economic activity). This is called a "dead weight loss". If you lower taxes you reduce the d.w.l. and raise demand. With this rise in demand, investment will flow in to meet it  (building factories, etc.). This is ridiculously simplified, but that is the gist.

      •  Globalization has changed the formulas (0+ / 0-)

        ... at least as far as the domestic economy goes. Rising demand may cause factories to be built, but today neither the factories nor their jobs are created in the US.

      •  Partially correct (0+ / 0-)

        1.'Trickle down' economics is actually concerned with output, that's why it's called 'supply side' economics, so they're less concerned with trying to raise demand.

        2.Raising income taxes does not cause prices to rise. It's doubtful raising income taxes has any immediate effect on prices whatsoever.

        The theory is more that lowering taxes on the wealthy frees up the 'most productive people' and they will want to produce more.  That too is oversimplified and is stated in a somewhat perjorative way, but then, that's what the theory deserves.

    •  Isn't turnover of dollars up the chain the point? (1+ / 0-)
      Recommended by:

      I'm not sure how this makes more sense. Granted, the rich won't "trickle down" anything, but if the poor are only spending any such money, then they're not saving and investing either, are they?

      The point is that investing doesn't work unless there is demand for something that makes investment pay.
      We want people to spend money.
      The dollars spent for clothing or groceries goes to the store owner, then to the distributor, then to the manufacturer or grower and to those who have invested in the growing or manufacturing.
      What good is investment in a company that produces products that cannot be sold?

      •  Well said (2+ / 0-)
        Recommended by:
        DBunn, aurabass

        A big problem with "trickle down" economics is that it assumes that investment is somehow capital constrained and not demand constrained.

        •  Supply side (1+ / 0-)
          Recommended by:

          The concept behind supply side economics is that a product, once produced, will be priced to meet demand.

          The problem I see with trickle-down is the assumption that capital will be invested in production, when in fact the very wealthy seem more interested in speculation and financial manipulations.

          •  Yeh, but... (2+ / 0-)
            Recommended by:
            DBunn, DarkMysteri

            How the hell do you discourage the gambling, without discouraging actual production?

            I have no problem with discouraging speculation, but I do worry that any half-assed attempt will discourage those things we'd rather have happen.

            •  How to discourage the gambling? (0+ / 0-)

              Short answer: I don't know. I'm not an economist, and even if I were, it wouldn't help because as far as I can see no two economists agree about much of anything ;~)

              That said, it does not appear to me that much of an effort at all is being made to discourage pure speculation as opposed to productive investment.
              Thus, any effort would presumably yield a better result than what we see today.

              Here's one suggestion: a small tax on financial transactions such as purchase of stocks or foreign currencies. A great many such transactions are pure market plays with no productive purpose.  A small tax (say, 0.5%) would hardly be noticed by parties who had a legitimate productive activity in mind, but would wipe out the financial incentive for most currency speculation, and reduce some of the froth and excess volatility in the stock market. Money that is now devoted to playing those games (I think it's a lot!) would have to find something else to do. Money that still played would at least contribute something back for investment in social capital or infrastructure development.

      •  Investment is a poor word, but I have no other. (2+ / 0-)
        Recommended by:
        anim8sit, DarkMysteri

        The dollars spent for clothing or groceries goes to the store owner, then to the distributor, then to the manufacturer or grower and to those who have invested in the growing or manufacturing.

        Which are invariably in some other country.

        How's this help us as a nation? If that tax money is spent on food, then that man is fed for a week, or a month, or whatever... and we're right back to where we were. He's still poor, and that money doesn't stay in this country.

        I don't know what the answer is, but it's not this.

        Perhaps a tariff on overshore wages, to make them more expensive? I really don't know.

        I really don't like globalization. It smacks of "single failure point" civilization to me. Much better that nations are less connected, so that one can help another when it suffers ill fortune.

        •  Food not so much as clothing (0+ / 0-)

          and you are right the final stage of the turnover of dollars may end up with the workers in China or other countries.

          But along the way it pays the salaries of the store staff and the truckers who got it to the store and the advertisers and the folks at the Office Depot and who sold the business supplies to the companies who provided the store and the transportation.

          so it's not all bad.

          I'm all for trying to shape tax rebates to be spent on American made goods but I don't know if that can happen.

          •  So what? (1+ / 0-)
            Recommended by:

            Along the way, we might see 50% of it go back to workers in the US, who turn around and spend it again, sending it right back out.

            How many times does that have to happen, 50% of the same sum having half taken out and sent to China or where ever? A few cycles, and it's effectively gone. It's better than it being all taken at once... but when we're talking about tax bought "economic incentives", we're basically selling our grandchildren into slavery.

            I want something better done. I would like to hear a way that the poor man you'd spend it on could at least be helped in a more permanent way. But I'm coming up blank.

            •  I don't disagree that better must be done (0+ / 0-)

              but given our choice of tax breaks for the rich
              or for the middle and the poor
              the choice seems clear enough to me

              The GNP increases each time that dollar is spent.

              I've watched the loudspeaker industry disappear from the USA over the past 15 years and it breaks my heart that an industry we once owned and all of the expertise required to build it is now in China or Taiwan.
              But I can't do anything to change that now except to build the speakers I sell in my own garage.

              So I'm not sure what you expect from me in answer to your remarks except my agreement that we need desperately to stop exporting our expertise and jobs to China. The Chinese are winning a war with the USA. They are killing us in the balance of trade.
              How is that in the best interest of the safety of the USA?

              •  Yes, but that's not the choice. (1+ / 0-)
                Recommended by:

                Why is it either a tax break for the rich, or for the poor?

                Why are you only considering these two as options, why is anyone?

                There must be thousands of possible choices in this one decision alone, those being only two.

                That's the part I don't get.

                •  It's the basic choice in the current campaign (0+ / 0-)

                  Obama intends to lower taxes on those making less money while raising them on those making big money

                  McCain intends to keep the cuts for the rich

                  So the argument with Republicans this cycle is over that difference.

                  •  I know it's an election year. (1+ / 0-)
                    Recommended by:

                    But we do need to think beyond that, too. And we can't let the both of them hijack things and give us only two choices.

                    If you democrats believe that Obama really will listen, and really does care about us... then maybe if you didn't just silently accept his answer to McCain's bullshit, we'd really have an actual choice and not the two false options everyone's talking about.

  •  Economics is much different today.. (1+ / 0-)
    Recommended by:

    Most economics teachers, teach the machanics, (supply and demand, welfare does not motivate the poor, and walmart is good)

    All of this is true, however they will also point out, that economics in itself is not about how well a community as a whole does, it seems to weigh heavy on give a bit to much credit to big profits and rising prices are just to cover the R&D however does not consider major payouts to exects and only addresses that by saying that if you are at the top you should be able to get paid whatever.

    Economics takes the humanity out of life and work. And finding that balance is very very hard to teach.

    "Invest In America, Instead of Iraq. Vote Democratic"

    by manumit on Sat Jun 14, 2008 at 04:37:24 PM PDT

    •  Economics is a political subject not a science. (0+ / 0-)

      I would also suggest that we need to cut the military budget in order to build infrastructure.  We also need single payer health care.  Ending the wars in Iraq and Afghanistan will save a bunch of bucks but still not balance the budget.

      •  Economics is not supposed to be political... (0+ / 0-)

        Its a commerical subject.  Economics teachers see political inflence generally as a bad thing.

        If you are talking about goverment budgets thats a different subject than raw Economics, however they do play together because of goverment contracts to private companies. So neo-cons would see that kind of goverment influence as a good thing.  Many times the goverment works as a proxy to new options.  This is where no-bid deals can hurt everyone in the long run.  

        "Invest In America, Instead of Iraq. Vote Democratic"

        by manumit on Sat Jun 14, 2008 at 04:46:15 PM PDT

        [ Parent ]

      •  Economics is (1+ / 0-)
        Recommended by:
        Adam T

        considered a social science, like sociology or anthropology.

        "Fighting for peace is like screwing for virginity." -George Carlin

        by NMDad on Sat Jun 14, 2008 at 05:10:12 PM PDT

        [ Parent ]

      •  economics is a science... (0+ / 0-)

        that studies the free market and woefully ignores the management of necessary government taxation, spending and regulation.  At least, that was my experience with Econ 101.  Other than allowing me see that trickle down economics was bullshit and that private enterprise health care was bad because it is an inelastic market, I learned little that I did not already know.

  •  The difference between strong and weak economies (0+ / 0-)

    In a strong economy corporations profit short range at the expense of workers.

    In a weak economy workers profit short term at the expense of corporations.

    If for example we have a strong economy with many or most factories not unionized so they can exploit workers labor with low pay and few benefits and government cooperates with few regulations then profits will be maximized encouraging investment and expansion making more jobs.

    If on the other hand we have a weak economy with many or most factories unionized so they can can not exploit workers labor with low pay and few benefits but rather have to pay higher wages and provide good benefits which allow workers to have enough savings they can weather a job change or even decide to go back to school or be self employed and government cooperates with the workers by passing safety and environmental regulations then profits will be minimized to allow the business to be competitive, profits will be minimal, investment will be more cautious discouraging expansion costing jobs.

    Government spending as for example on a permanent military industrial complex with government cooperation that destabilizes other countries creating oportunities for arm sales to the combatents works best with full employment generating more tax dollars.

    In a depression you tend to have a weak economy with minimal government spending and war going in and maximum government spending and war coming out

    Live Free or Die --- Investigate, Impeach, Incarcerate

    by rktect on Sat Jun 14, 2008 at 04:44:55 PM PDT

  •  Seem to me that you don't need a (2+ / 0-)
    Recommended by:
    aurabass, SciVo

    refresher course.

    Right now it's not helpful to try to stimulate the economy by putting a few bucks in the hands of the middle/lower class.  All that does is increase the amount of things manufactured in China, etc. that they'll purchase because we don't manufacture anything.  

    Mass transit is a good idea.  But do we have the capacity to make any of the parts that would be used for it?    

    What FDR giveth; GWB taketh away.

    by Marie on Sat Jun 14, 2008 at 04:45:30 PM PDT

  •  Once you reach a certain point (1+ / 0-)
    Recommended by:

    you look to protect what you have, rather than make more of it.  And when you do make more, it is based on what people owe you for helping them out, rather than what you innovate or create from nothing.

  •  Laffer Curve (1+ / 0-)
    Recommended by:

    The "trickle down" theory is based on something called the Laffer Curve. The biggest problem politically with it is that it is a half-truth (actually less than half). It is true that lowering taxes does increase economic activity by reducing the "dead weight loss" that taxes create. The problem is that it is not a one for one trade-off. Every dollar reduced in taxes creates (IIRC) 15 cents in taxes from additional activity (when tax rates are not extremely high (>~90%).

    The "Bubble up" version would probably have a better return, but still not properly fund the government.

  •  FDR (0+ / 0-)

    Didn't FDR show us how to recover from recession and depression by wisely investing in public works projects like TVA that served to benefit everyone?

    I agree that without FDR increasing government spending the Great Depression could have been much worse, but by no means did it "fix" the economy. I maintain that the thing that kept the G.D. going for so long was the stubborn insistence of remaining on the gold standard. When times are bad, you need cheap money. This means lowering interest rates. However, to keep the nation on the gold standard at the time, the Federal Reserve had to raise rates. Right at the time when the nation needed to increase the money supply, they were doing the exact opposite, stunting growth.

    •  You obviously don't live in the Tennessee Valley (1+ / 0-)
      Recommended by:

      Where TVA provided jobs and power to spark dramatic economic growth.

      The WPA the CCC the AAA the NRA and the NIRA all combined to provide relief. The GNP was 58% higher in 1940 than it was in 1932.

      The SEC the FDIC the Wagner Act and the Fair Labor Standards act helped end the the Robber Barron era and give working people in the USA a chance to participate in the American dream. Social Security allowed them a chance to retire with something to sustain their lives.

      This all did much to "fix" the economy that remains in need of some consistent fixing to keep the balance between the power of capital and the power of the work force.

      The wealthy don't require any breaks or help. It's the working folks that collectively have to regain some balance in a capitalistic system where corporations only have one rule - profit NOW.

      at least that's how I see it.  

      •  Not arguing (0+ / 0-)

        I'm not arguing any on that. I agree with you. Those programs were all beneficial. Perhaps I didn't phrase it well. I should have simply said that while those programs were helping the economy, high interest rates were hurting it.

    •  Yes but also (0+ / 0-)

      For much of the time the federal reserve did lower interest rates, but the private banks, fearing bank runs, raised their reserve ratios and loaned out less money.  This was one of the main reasons the depression lasted so long.

  •  You understand perfectly. (6+ / 0-)

    So, in order to get poor and middle-class people to vote for being fleeced, they have to use "religion as a wedge and politics as a bludgeon." This election is going to be the dirtiest evar, 'cause they got nothin' -- and everybody knows it.

    I also believe we must impeach Antonin Scalia for protection from his inhumanity.

    by SciVo on Sat Jun 14, 2008 at 05:27:02 PM PDT

  •  The Poor Spend and Don't Buy High Priced Foreign (1+ / 0-)
    Recommended by:

    goods. The most used measure of economic growth is GDP or Gross Domestic Product. It's components are C+I+G+(X-M) OR consumption, investment, government expenditures and exports minus imports.  Consumption is by far the largest component at about 70% of GDP. That why you heard Bush tell everyone to go shopping and why we had the rebates this year. Consumption is spending and the poor/middle class spend a higher portion of their income than the rich, who save more. Going back to the components of GDP, they are all consumption, but by different entities. Investment is business purchases or consumption. Another point is that the when income gets too concentrated in the hands of the rich as it has during the Bush Ad, it hurts the (X-M) component which is trade. The rich buy the expensive foreign goods such as cars, and clothing, jewelry et cetera. Yes, Wal Mart imports goods form China and the poor buy them, but they don't prosper from it, the WalMart heirs do.

  •  I'll try to explain (0+ / 0-)

    "Economics" when spoken by rich people, by business people, and by Republicans doesn't mean simply "Economics" but it also entails keep the following points in mind when they say "economics":

    --Status Quo of a small elite at the top who keep the rabble in line, otherwise complete chaos and the end of civilization will happen.

    --Workers must be kept poor or they will have too many children and overpopulate the world and ruin everything. Even though this theory has been discredited and even though Capitalists operate under a theory that dates back to the 18th Century, formed under 18th Century conditions..........

    --"La La La I Can't Hear You" with fingers sticking in their ears = their reaction to being presented with facts contradicting their assertions about economics and especially when confronted with a squeak from below.

    -- And the unwritten rule of Economics they follow but dare not utter outside their own circle:  "Build a Better Mousetraps AND Break the Competitor's Legs"

    Full disclosure: former senior executive.

    Best Diary of the Year?

    by LNK on Sat Jun 14, 2008 at 08:54:18 PM PDT

  •  OT, here's a rare LEFTIST economist (1+ / 0-)
    Recommended by:

    The photo doesn't do him justice. He has a weekly radio show on WBAI Pacifica radio:
    Doug Henwood's radio programs archived:

    Note: I poke serious holes in his guest Glen Ford on Obama, but that's another topic.

    "Left Business Observer"

    Sample articles:

    Best Diary of the Year?

    by LNK on Sat Jun 14, 2008 at 09:03:54 PM PDT

  •  4th year ecomomics student myself (0+ / 0-)

    I'd like to address a couple points brought up by you and in the comments.

    1.There was a sea change in macro economics theory about 30 years ago.  This was when mainstream macro economics theory shifted from Keynesian to Monetarist.  The shift was caused due to the stagflation at the time.  Keynesian theory held that government spending could boost long run GDP through the 'multiplier effect'.  That is $100 billion in government spending would circulate through the economy and get respent several times over.  If respent 5 times over in a year, it would boost GDP by $500 billion ($100B *5).

    The Monetarists led by Milton Friedman showed that, if the economy was operating at or near capacity, all that would happen with that new money is that it would be inflationary and that in the long run, GDP would be unchanged, except with higher inflation.  His work in this field is known as the "Inflation Expectation Hypotheis".

    2.The general consensus that Friedman was correct led most economists with interest in public policy to forget about trying to boost the economy in the short run.  Most of the responses to your diary seem more interested with short run growth.  That is understandable given that the U.S may now be in a recession and therefore not operating at capacity.  At such a time, government spending, or tax rebates, can still give a short term boost to the economy and not be inflationary.

    However, the more common concern is with ways to boost the economy in the long run.  So, it's important to keep in mind, there are two different parts to growth: short run and long run.  The equilibrium of short run supply and demand is GDP, which is current spending.  The long run supply (LRAS or Long Run Aggregate Supply) is capacity.
    Wikipedia provides a good explanation of LRAS and also covers what I mentioned above, where Keynesians went wrong in trying to boost short term demand:
    Increasing LRAS is what most economists now focus on.  It is referred to as increasing capacity, improving productivity...

    In regards to your diary, those recommendations of yours would increase LRAS by increasing the productive capabilities of the economy.  

    this provides jobs for folks building the system and the trains that would move upon it and long term jobs for those who secure, maintain, and operate the system while dramatically reducing our dependence on burning fossil fuels. It's an investment that pays for itself.

    LRAS isn't really worried about the short term construction jobs created, or even the long term jobs.  What it focuses on is, in this case, high speed rail is an investment that would decrease the costs of businesses that would use it.  That is, it improves productivity.

    In terms of the economy as a whole, the question would be whether government spending in this area is a better use of money than leaving the private sector to spend it.  That is, does the government spending boost LRAS more than the private sector would.  That is one of the main arguments between the neo Keynesian liberals (or whatever it is they're called) and the supply siders.  Supply siders argue that pretty much all government spending is more wasteful than private sector spending.  I naturally disagree.

    Focusing on increasing LRAS as opposed to boosting short term growth is one of the main tenants of the so-called 'third way' politicians like Bill Clinton and now Barack Obama and is put forth as one of the main differences with the older type of liberalism.

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