How Trickle-Down Does-Not-Work
but What Does
but What Does
By Karl Smith | Most Americans believe we should have widespread opportunity and prosperity, but many Americans are left behind while wage and wealth disparity increase. From fundamental principles we can understand how trickle-down economics does not work but how bottom-up economics does work to create the prosperous economy that works for us all.
Tax cuts on the wealthy and big business or trickle-down economics do not work to create long-term growth, wage increases and offsetting tax revenues from a sufficiently expanding economy as touted by Trump and the GOP.
Granted, it can seem pretty good for a while living it up on the credit cards until the bills come due. However, mostly the rich get richer, and the middle class and poor get left behind while driving up the national debt and not investing in what actually does pay back.
The GOP thinks these tax cuts will encourage businesses to hire-and-expand driving up wages and growing the economy. The problem with this argument is that wages and purchases are expenses to the businesses which ultimately are at a 0 percent tax rate. A lower income tax rate is an incentive to take money out of the company and not reinvest it in the company. That is why you see companies buying back stock and increase distributions to owners.
Growing the economy means speeding up money in the economy. More money for the wealthy slows money in the economy for two reasons:
• One is that if you have a lot of money, you do not want to lose it, so you invest carefully and slowly. You have the luxury of time to look at a lot of deals before deciding to invest or not.
• Another reason is that you tend to have few immediate needs. Again, you have the luxury of time to compare and purchase or not.
The wealthy and big business spend and invest money slowly not because they’re bad it’s just human nature.
With trillions on the side, the wealthy and big business could have prevented the last recession or pulled us out at any time. But they are risk-averse. The wealthy and businesses hire and invest when they know there are customers with money. If we want these crucial Investments in our economy, we just need to create more customers with more money.
What Works: Bottom-Up (trickle-up)!
Businesses exist from opportunities created from three necessary conditions: customers with money, our Basic Public Investments (BPIs), and sufficient laws and regulations.
People, businesses and government have lots of needs for products and services which makes them good customers if they have money.
Creating more customers (of all types) with money starts with valuing all of our workers which includes a livable minimum-wage, equal pay for equal work and worker’s rights.
• The minimum wage sets the bottom for lower-end end wages up to the middle-class. The minimum wage was a third higher in real terms a few decades ago, and we had good economic growth, low unemployment, and less income disparity.
• Equal pay for equal work is not only morally right but will increase the buying power of many citizens.
• Worker’s rights move many of our families up to the middle class with increased buying power.
In a 75% consumer-based economy it is we the people that are the job creators. Increasing the buying power of our lower-wage earners to the middle class puts more money in the pockets of our citizens that will spend the money quickly speeding up the economy.
Increasing the buying power of people that have a lot of immediate needs creates more customers with more money which causes businesses to hire, expand and invest. That hiring, expansion, and investment creates even more customers with more money which causes more companies to hire, expand and invest. This cycle is a positive feedback loop that that creates a necessary condition for business investment: customers with money.
There are additional positive effects like less dependence on government services and safety net programs and more tax revenues from an expanded economy. These impacts with modest tax rates allow our local state and federal governments to purchase what our people need to thrive and businesses need to exist.
To exist, most businesses need healthy and educated employees, infrastructure, safe communities, community development, research, and safety nets. These Basic Public Investments (BPIs) are another necessary condition for the existence and success of our businesses from Main Street to Wall Street.
BPIs are not only vital to our businesses but are essential for our citizens to thrive. We all need health-care, education, infrastructure, safe communities, community development, research, and safety nets.
After World War II we invested in all our BPI’s, and it paid off huge for our citizens, businesses, and economy.
Our BPIs not only have an immediate stimulus effect on the economy but continue to expand the economy over many years and decades from healthy and educated people infrastructure research and the rest of our BPIs. Our BPIs cause local, state and federal tax events that immediately start offsetting the costs of the BPIs. Then our BPIs make a profit for taxpayers over years and decades from the result of the BPI (healthy and educated people, infrastructure, …) and other multiplier effects including pulling in business investment.
Democrats strongly support our BPIs and valuing all of our workers but have not put it in this nutshell that explains how bottom-up Economics works.
The third Factor for the existence of our businesses is sufficient regulation to enable them and create fair competition while being responsible to their customers and employees, our rights, the environment, and the future.
Laws and regulations create order out of chaos providing businesses opportunities, predictability, and ways to develop products and services as well as interactions with customers, other businesses, financial institutions and so on.
Without specific laws and regulations to the contrary, unscrupulous businesses will cut corners and create unfair competition with responsible companies. Unscrupulous companies hurt and sometimes kill customers and employees, pollute our water and air or in other ways hurt our environment, or hurt our communities and even our economy and future. Yes, we need to be vigilant in eliminating unnecessarily onerous laws and regulations, and refining our rules to work without unintended consequences. Unfortunately, too many people and businesses will exploit anything where there is not a specific rule against it no matter who or what it hurts. Without such individuals and companies, our laws and regulations could be much simpler.
Without our laws and regulations, we would not be the most powerful economy in the world. Democrats work to have sufficient laws and regulations for our people, businesses, economy, and environment to thrive.
Democrats are not about giving money to the takers as the GOP would have us believe. Democrats are about making the investments in policies and services that create opportunities for our people and businesses from rural to urban across the US and in every community.
People left behind are not struggling because of their tax rate but because their real income has fallen. It is the GOP that has blocked valuing all of our workers and properly supporting our Basic Public Investments.
Based on the fundamentals of how our economy works and how our people and businesses behave, Democrats are on the right side of policies that will create the shared and prosperous economy that we should expect in the 21st century!
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