Saw a mention of Reaganism in the other thread and thought I'd start up this topic based on an article (see here) I read at work today:

quote:

Dean Maki, an economist at JP Morgan Chase & Co, estimates consumer spending grew at a 6.1 per cent annual rate between February and August, the fastest pace in 16 years. And upper-income households, he says, were the primary drivers of that surge. "Other households are getting tax cuts and their spending is rising, but the biggest percentage gains in income and spending are being done by the rich," says Maki, a former Federal Reserve researcher who spent years studying how consumer spending responds to changes in household wealth.

Seems like the tax-cuts to the rich may be helping in some way then.

Essentially, when Bush introduced these tax-cuts, he had in mind the distinctly neo-liberal concept of "trickle-down" economics: that is, if you give tax breaks to the rich, they'll be more inclined to spend more, which means more money in the economy, which means - supposedly at least - everybody wins. Correct me if I'm wrong, but this is one of the lasting tennets of economic Reaganism.

Now, as these figures show, the tax-cuts may be assisting the economy in some way (spending is up, and most of it's coming from the upper-income bracket) but it got me thinking (it was a slow day at work) just how valid this trickle-down principle really was, despite these positive figures.

It's taken as a given that consumer spending patterns are directly related to net income. The more money someone has, simply, the more money they are likely to spend. On the other hand, the proportion of net-income directly reinvested back into the economy becomes smaller the higher up on the income bracket we go (there's an economic term for this - something lag maybe? - that I'd be able to look up if I hadn't sold my Economics text book). If we have a look at real-life examples, this principle becomes demonstrably true. Any extra money the poor receive is spent fairly quickly on items of necessity - clothes, food, bills and so forth. Those in higher income brackets, however, tend to invest a far larger proportion of their income in stocks, bonds, interest-building savings accounts and so forth. This is money, in many ways, that is taken out of the economy.

Or, as the article puts it:

quote:

Economic theory holds that wealthy households, already flush with liquidity that they could use for consumption at any time, are likely to sock away the bulk of any gains from tax cuts into savings. By contrast, theory holds that lower-income households save very little, and instead plough cash windfalls right back into the economy in the form of spending on necessities.

So here we have a situation where high-income tax-cuts have stimulated the economy because - contrary to expectation in many ways - the rich are investing a comparitively high proportion of money gleaned from the tax-cuts straight back into the economy. Instead of just leaving the money in a savings account (which takes money out of the "liquidity pool" - that's the right term isn't it?) they've spent it, reinvesting money into the economy far more efficiently than the government would have been able to had they kept the money instead. But here's where my problem lies:

If "trickle-down" economics can be shown to work in this way, is there any reason why "trickle-up" economics couldn't work just as well? That is, instead of giving the money to the rich to invest back into the economy, we gave it to the poor instead? Firstly, far more of that money will be reinvested back into the economy more quickly than in the case of the rich, by mere economic necessity. Similarly, while the rich would be more likely to spend their money on luxury goods imported from overseas, the poor would be more likely to spend the money on necessities, usually produced domestically. So, low-income tax cuts have two benefits:

1) Higher proportion of these cuts reinvested into the economy imediately.
2) Less chance of importing goods from overseas, which merely passes on the benefits of the cuts to other nations and weakens the domestic currency in the process.

When I think about it in this way it makes sense. Is there any reason why "trickle-up" economics wouldn't work as successfully as "trickle-down" economics?

___________________
http://eschatonnow.blogspot.com/

quote:

Originally posted by Renegade When I think about it in this way it makes sense. Is there any reason why "trickle-up" economics wouldn't work as successfully as "trickle-down" economics?

Well you have to understand the difference is bascially giving (back) to the rich or giving to the poor, and when considering who to give in an economic sense anyways, you have to understand why the rich are rich and the poor poor.

These are a few possible drawbacks I see with giving money (your not taking about tax breaks are you?.. poor don't pay taxes) to the poor;

1. the poor are fairly uneducated, I'm not exactly certain what effect this has on economic spending but I'm sure there is some.

2. the poor are more likely to spend on illegal or criminal goods; guns, drugs, etc... one reason why some poor are poor. Your not going to get your money back if it goes off to Columbian drug lords...

As you said the poor will spend on nessecities, food, tv, and so on (majority NOT made or grown in America). The USA is a service industry you want rich people spending on insurance, banking fees, lawyers, accountants... etc..

3. I believe, the poor are more likely to save then the rich.. but this is just speculation.

By giving to the middle class you face the chance of increased savings, something I don't think the rich or poor would do.

Well thats my thoughs (even not many are PC) on it, but I agee with you perhaps trickle up can work as effectively as trickle down. The only question then is how trusting are you with giving your money to the poor in this regard.. will they really spend it back, and on what?

The poor also don't pay as much in taxes, so there's not as much to 'give back' unless you start giving out free money or tax credits which is just the same as forcing a redistribution of wealth, which is wrong, IMO. Someone is not entitled to more than they contributed.

Yoepus kind of stole my argument. Tax cuts aren't "giving" money to the rich. They are demanding less money from those who pay taxes. Therefore if you want to "give" money to the poor, it's going to have to come from somewhere and that somewhere is increased taxes on those who pay taxes. Don't have much time to talk right now, but tax cuts accomplish several other things besides increased consumer spending. A wrong assumption to take is that money in the bank accomplishes nothing. That is not true. There is a fine balance to walk between the savings rate and personal consumption. The greater the savings rate, the more likely it is for interest rates to be lower, thus increasing the liklihood for businesses to invest in capital. By taxing more, you artificially change the natural savings/consumption rate and you basically push up consumption. This is fine and dandy, but what will happen is that interest rates will be artifically high which will hinder business growth. Crap ... damn work getting in the way of my TA productivity!

___________________
Retro ...

Now that I think about it more ... isn't this just welfare?

___________________
Retro ...

quote:

Originally posted by Renegade Those in higher income brackets, however, tend to invest a far larger proportion of their income in stocks, bonds, interest-building savings accounts and so forth. This is money, in many ways, that is taken out of the economy.

i dont know if i agree with that...
someone who is investing his money in stocks, is basicly helping a company grow, they are paying a little (or a lot) of their money so that this company can advance and make more money. this fuels the economy by allowing the companies to hire more jobs [ie more payrolls (ie more desposible income)]. hopefully the company is successful in growing and makes more money, thus the stock has grown and the original stock holder has more money too.

___________________
If God is the answer, it must have been a very stupid question.

quote:

Originally posted by Shakka The poor also don't pay as much in taxes, so there's not as much to 'give back' unless you start giving out free money or tax credits which is just the same as forcing a redistribution of wealth, which is wrong, IMO. Someone is not entitled to more than they contributed.

It’s not how much tax you pay that matters, it’s how much you pay in relation to how much you earn. In this case, it’s the poor who pay more in taxes and such.

quote:

Originally posted by Spin Doctor It’s not how much tax you pay that matters, it’s how much you pay in relation to how much you earn. In this case, it’s the poor who pay more in taxes and such.

no thats not true, the poor don't pay taxes, so therefore they proportionally pay less then anyone who does pay taxes, say the rich or middle class.

http://www.allegromedia.com/sugi/taxes/

___________________
Retro ...

damn I wish I had a tax burden of -2%

Sorry I just felt to comment on some of your arguments there Yoepus.

quote:

Originally posted by Yoepus 1. the poor are fairly uneducated, I'm not exactly certain what effect this has on economic spending but I'm sure there is some.

Pure speculation. Maybe the level of education does matter, maybe it doesn't, I don't know and neither do you I assume.

quote:

Originally posted by Yoepus 2. the poor are more likely to spend on illegal or criminal goods; guns, drugs, etc... one reason why some poor are poor. Your not going to get your money back if it goes off to Columbian drug lords...

Interesting. Any statistics to back this up? My own personal experience is that that the biggest consumers of drugs (or the biggest groups) are to be find in the middle class. Granted, this would be in Europe, particulary in Sweden.

quote:

Originally posted by Yoepus As you said the poor will spend on nessecities, food, tv, and so on (majority NOT made or grown in America). The USA is a service industry you want rich people spending on insurance, banking fees, lawyers, accountants... etc..

Maybe manufactored/grown in other countries but mostly owned by U.S. companies. Plus, the goods are bought in U.S. stores which means the money is going back into the economy.

quote:

Originally posted by Yoepus 3. I believe, the poor are more likely to save then the rich.. but this is just speculation. By giving to the middle class you face the chance of increased savings, something I don't think the rich or poor would do.

Here it sounds like you are arguing against your self. Is savings good or bad and who are most likely to save?

I would guess it depends on what level of poor we are talking. If you are "poor enough" you wouldn't have any chance of saving, Plus, in general, people who are used to having no money at all and suddenly get any sort of income increase tend to be very spending happy, buying all the trinkets they don't really need but couldn't afford before. Forgetting the whole concept of saving. I've witnessed this a couple of times myself...

quote:

Originally posted by Yoepus Well thats my thoughs (even not many are PC) on it, but I agee with you perhaps trickle up can work as effectively as trickle down. The only question then is how trusting are you with giving your money to the poor in this regard.. will they really spend it back, and on what?

I haven't really seen any convincing evidence that trickle down really works, however my 20 univeristy points in business economics aren't really much to stand on (especially since it's been a few years since I studied it)..

___________________
www.assortedtrance.com
www.facebook.com/assortedtrance
http://www.soundcloud.com/johannilsson
http://www.di.fm

Ok, well here's my more elaborate opinion on "trickle up" economics. Essentially, I think it's not much different from government spending. Yes it will boost consumption and pump more liquidity into the market, however, it is only a short term benefit as the personal savings rate will decrease. A good tactic to pull out of recessionary periods, however a poor long term stimulus. Ostensibly, the money would eventually make its way up to producers and what not, however, the money would simply be sucked out again through the higher tax rate thus the government would still be "crowding out" private capital investments to some degree. Another factor is to consider what would be purchased. The cheapest products, which would likely be imported products, and products such as food or shelter of which is already in great abundance. Therefore it is doubtful that such a surge in consumption in those areas of the economy would spur job growth and capital investment. Trickle up economics looks to me like it is simply a redistribution of wealth plan which I am stringentely against both morally and in my belief that it would aid the the country economically. Improving the economy by taxing citizens and increasing welfare seems like some kind of socialist pipe dream to me

___________________
Retro ...