Why won't "Trickle Down" Economics Die?

I was watching "Meet the Press" this morning, and the first topic of the show was, of course, about the economy and Obama's stimulus package. David Gregory had a round table discussion with former Congressman David Bonior of Michigan; editorial page editor of The Wall Street Journal, Paul Gigot; chief Washington correspondent for CNBC and New York Times political writer John Harwood; Vanity Fair contributing editor Bethany McLean; and chief economist of Moody's economy.com Mark Zandi.

It was clear that Obama is already on the offensive, marketing his plan, and getting the public acclimated to this stimulus plan. The show didn't offer anything new in terms of analysis. The entire discussion can be summed up as follows:

1. We need to do this, otherwise the economy will be in bigger trouble
2. We need to do something, but we should do something else, like tax cuts
3. How will we pay for this ~ followed by requisite ringing of hands

MR. GREGORY: And what about--Paul, what about the idea of tax cuts as being as stimulative as infrastructure spending?
MR. GIGOT: Well, I think they're much more stimulative if they're the right tax cuts.
MR. GREGORY: Mm-hmm.
MR. GIGOT: I mean, we have a capital strike going on right now. Nobody wants to take any risks, nobody wants to make any investments. Part of it's the uncertainty about the damage that Congress might do, but part of it is also the fact that everybody's frozen. You need the incentives to invest, particularly in the private sector.
MR. GREGORY: Right.
MR. GIGOT: I think a, a tax cut, a big corporate rate tax cut, for example, or an across the board tax cut would be a lot more stimulative than this public spending, which has to come from somewhere.

At what point will Conservatives wake up and smell the coffee - "Trickle Down" Economics is DEAD. The last 20 years of deficit spending and tax cuts under Republican Presidents do nothing but hamper the Government's ability to intervene in Economic downturns, and in fact do more to harm to the economy, causing false bubbles, uncontrollable greed, and recessions.

There continues to be this debate on what spurs the economy. It's a basic fundamental principle that the economy grows as a result of consumption and spending. Capital investments facilitate growth, but capital investments are worthless, if there is no growth or profit to be had.

We need to recognize that the key to growing the economy, is growing DEMAND. Demand for goods and services will continue to exist and grow, as long as people have real income keeping pace. Once Income falls or declines, so does the DEMAND, hence production also slows, continuing a spiral contracting of the economy.

So I don't care how much of a tax cut incentive the government gives, unless there is demand and organic market growth potential for the business, there won't be a need for that capital.

Tax cuts have one small benefit, in that they provide instant relief, and add income for consumption. However, most economists recognize that the dollar return on investments for tax cuts are less than the cost of the tax cuts themselves. It's also clear that Obama will need some tax cuts, to gain Republican support for his plan.

MR. GREGORY: Mark Zandi, as an economist, what's your big question about it?
MR. MARK ZANDI: Is it big enough? Is $750 billion, a trillion dollars enough? The economy is in great trouble. We lost 500,000 jobs in December, 2.6 million jobs in 2008. That's the most since 1945.
MR. GREGORY: Mm-hmm.
MR. ZANDI: Unemployment's 7.2 percent. So is 750 billion, a trillion going to be enough to jump-start the economy, to get the private sector back in the game?

MR. GREGORY: The issue of impact, Mark Zandi, speaks to some of the risk of how long it takes. This is how The New York Times reported it Saturday: "The risk is that Obama and the Congress will weigh down their effort with measures that cost many billions of dollars but may not have much impact on economic activity. Tax breaks, for example, usually produce less than $1" worth "of stimulus for every dollar they cost, economists say. Spending on public construction projects, like highways and bridges, produces the most economic activity--but there's a limit to how many projects are `shovel-ready,' and even those take time to generate jobs and ripple through the economy."

MR. ZANDI: But we, but we have no choice. We really don't. I mean, if we don't do something like this, a stimulus package, a foreclosure mitigation plan, the economy is going to slide away. Unemployment is going to rise into the double digits and we're going to lose tax revenues as a result and the deficit's going to be even larger than otherwise.
MR. GIGOT: But, Mark, don't you think that monetary policy is very powerful here? I mean, Christina Romer, who's the president's economic adviser now, she has written in 1994 that fiscal actions have relatively small effects. The big bang for the buck is monetary policy.
MR. ZANDI: In normal times I would agree with you, Paul, but this--the link between the Fed and the economy runs through the financial system. The financial system is literally broken. There--if--you can provide as much cash as you want; but you don't get credit, you don't get it done.

MR. GIGOT: I mean, if you're borrowing it for aircraft carriers like Reagan did to win the Cold War, you get a big payoff down the road. If you're doing it for tax cuts that really stimulate and drive private investment, and in two or three years' time bring the economy back, great. But if it goes to pork, if it goes to green jobs that may sound good in the short term but may not have a market response or a market for them, then it's a waste.

What still gets me is the ridiculous Republican Talking points that Paul Gigot continues to expound, that Monetary Policy is the answer, and that Tax Cuts (to the wealthy and Corporations) are more effective than any fiscal policy. The real gem was the Paul's glowing and inaccurate description of the benefits of Reagonomics. The fact that the WSJ editorial board seems to only regurgitate Republican ideas and principles, renders the paper virtually worthless, except as a birdcage liner.

Overall, my opinion is that I think Obama has shown his political savviness, in the fact that he already recognizes that most economists believe that the stimulus plan will have to be much bigger, hence it's much easier to start with something smaller and let it grow, as opposed to put something too big on the table that will have Republicans balking. What's ironic, is that after 8 years of deficit spending under a Republican President and a Republican controlled Congress, we suddenly have Republicans growing a conscious about the size of the deficit.

It's the Economy Stupid!

As I look at the state of our Economy, it’s incredible how much has changed in 8 years, and not for the better. This is not only my opinion, but the opinion of countless Americans. From the various polls that have been mentioned and discussed, we know that a majority of Americans believe the country is headed in the wrong direction. In fact, when it comes to the Economy, more Americans believe by a significant majority, that Obama is more qualified to tackle the issues on Economy, Taxes, Health, and Energy (Gas).

The economy is an important issue facing Americans today. It impacts them on a micro level – personally, in terms of their ability to literally have a home, to buy necessities, and save.


From the Wall St. Journal, we can see the declining trends in income, during the Clinton Administration, we saw a real (inflation adjusted) and steadily increasing rise in income. But in 6 years since Bush has taken office, we’ve seen a drop in income for median Middle Class Income.

And while Bush has lowered Taxes, the middle class has seen the value of their tax cuts being eaten away by inflation, represented in higher food and fuel prices. Furthermore, it’s visibly shocking to see the decline in National Savings Rate. So Americans are consuming, but using debt to drive consumption!

In addition, I had mentioned in an earlier posting, that the Tax Cuts that the Bush Administration has put in place, effectively benefited the top 1% of the earners more than the middle class.

To give you an idea of what that means, we look at the 2006 income distribution as referenced by US Census Bureau.

Median Income Ranges

1st Quintile $ 0 - $ 26,999
2nd Quintile $ 27,000 - $ 46,999
3rd Quintile $ 47,000 - $ 71,199
4th Quintile $ 71,200 - $109,150
5th Quintile > $109,151
Top 5% Income $191,060 – and higher

Essentially, 22% of the population, on average for 2006 incomes, make more than $191,000.

However, what’s striking to me is 51% of the population, in 2006, made less than $72,000, many having families. Given the rising costs of fuel, food, and housing, it is no wonder that many families continue to struggle. In addition, excluding the top 5% Income, we have, on average ,about 78% of the population making $191,060 or less.

When we talk about our personal economy, we can not ignore the impact of Taxes. Everyone dreads paying taxes, and it is a large factor driving disposable income. So let’s put it all on the table, once and for all. McCain continually puts out false information on who is hurt and benefits between the two candidates Tax Plans. What puzzles me is that Average Americans continue to be deluded that McCain is going to go to bat for them! He doesn't understand nor does he care about the middle class, otherwise his policies would reflect his priorities.

From the Washington Post (a conservative newspaper), they put in a nice chart to compare average impact of the two candidates’ tax policies. This is coming from the Tax Center Policy of the Brookings Institute. I have read the tax analysis, and have come up with slightly different numbers depending on the year 2009 vs 2012.

http://www.washingtonpost.com/wp-dyn/content/story/2008/06/09/ST2008060900950.html

However, the Washington Post does give a fairly accurate comparison.

My one problem with Washington Post's chart, is that it does not further breakout the $603,403 to $2.87 million income bracket, because it gives a false impression that people making $603,403 an increase of $115,974 in taxes under Obama's plan. One has to keep in mind that it's an average, and that of course the incremental tax will be vary for those making $603,403 vs. $2.87 Million.

On a blanket statement, yes we can say McCain’s tax plan does in total give a higher tax cut than Obama. However, the devil is always in the detail, and if you look to see how much the Top 5% and top 1% Earners benefits vs. the middle class, it is very clear that Obama’s tax plan would benefit the majority of the population, more than McCain. McCain provides a disproportionate tax cut to an income bracket, to whom it has less an incremental impact, than to the middle class.

Paul Krugman noted economist, provides an layman’s perspective on the tax hoopla, and the McCain Lies regarding tax-cuts.

http://www.nytimes.com/2008/08/22/opinion/22krugman.html

Why do I care so much about the other people’s income? Simply put, without average American incomes being sufficient to purchase goods and everyday consumer items, I am out of a job. I work for a Large Consumer Packaged Goods Company, we place a lot of emphasis on brand, quality, and performance of our products, but our products are not on an infinite price elasticity curve. At some point, consumers will turn away, and buy cheaper knockoffs.

Henry Ford had it right; he is recognized with being the father of modernizing industrial assembly and production, as well as recognizing the benefits and efficiency of improving the quality of his employees, thereby reducing turnover and improving productivity. Although he can not be by any stretch of imagination labeled a socialist, as he opposed unions, he did however advocate “welfare capitalism”, and had a policy to pay his workers a wage, where they could also afford to buy the very items they produced.

There is a cycle in our capitalistic economy. Wages and Income are tied to consumption rates, and in turn, those consumption rates grow our GDP, and when our GDP and overall incomes rise, everyone benefits.

Obama understands this, this is why his focus is more on increasing Average American's disposable income, and truly growing the economy, rather than focusing on the deficit, which was what Bill Clinton did. Bill Clinton and Robert Rubin, felt that the key to the economy, was to get the deficit undercontrol, and they were right. However, we are in a period of both a recession and an inflation, and the primary focus is the get the economy back on track, and here Obama's Chicago Economics background comes very much in play.

McCain with his "I don't know much about Economics" mentality, has been poorly advised by his economic advisors. But with such people like Phil Gramm famous for castigating Americans as "whiners" and saying the recession is all in our heads, and who sits on the board of UBS, one of the major banks involved in the mortgage and securities investigation, I'm not surprised at McCain's cluelessness.

I’m not done on the subject of Taxes, but we need to also take a look at Macro issues, such as the Deficit!