If there is one economic idea that should be run through the shredder it's Trickle Down Economics. Let's set aside the example of its abject failure in the mid-late '80s and instead just think for a moment. A capitalist based economy is powered by the engine of consumerism. People buy houses, cars, TVs, computers, beer, clothes, etc. That demand means companies who supply these items need to make more of them and create improved versions. To do this they hire workers to design and produce the items. Those workers get paid for this work and use that money to buy houses, cars, TVs and so on. With me so far? So the corporations make money by selling items to people who have money to spend. The more money consumers have to spend, the more they can buy and the more luxuries they will desire. Corporations make more money by providing these items. As demand rises, they find it profitable to add more factories, hire more workers and produce more. The new workers spend their paychecks on more items, from necessities to luxuries. From food to diamonds. The capitalist version of the circle of life. Simplified, but you get the idea.
Now for the Trickle Down Economics in this scenario. This theory says that to stimulate the economy you should give tax cuts to the corporations and the wealthy so that they will use that money to expand factories and create jobs. What should be obvious by now is that this goes against even the most basic idea of capitalism. Wealthy individuals and corporations don't create factories and the resulting jobs because they have extra cash on hand this year, they do it when there is DEMAND! It doesn't matter how many tax cuts you give them, if there is no one shopping for jewelry, it's unlikely that Kay Jewelers is going to be opening any new stores anytime soon. You can 'trickle' all you want and all you'll accomplish is to make the corporations richer. This is not particle physics, it's logic on par with 1+1=2.
So here we are, two years into a colossal recession. Unemployment is pushing 10% and the credit markets might as well not exist for all the lending that's going on. Bankruptcies and foreclosures are at eye watering levels. The deficit, and therefore the national debt, is skyrocketing as the Federal government keeps pumping money into the economy like a winter driver trying desperately to keep the engine running on a December morning. So what is the plan being pushed by Conservatives? Trickle Down Economics in the form of the Bush administration's disproportionate tax cuts for the wealthiest 2%! They spew forth all sorts of political babble to confuse us into thinking that keeping tax cuts in place for this tiny section of America is vital to reviving the economy.
Nobody seems capable of explaining how this would work in the real world. Don't forget that these tax cuts are already in force and have been for the better part of a decade. All we are debating is if they should expire or be renewed. But to hear Republicans tell it, maintaining these cuts for the top earners will magically boost the economy. Remember that if the rates were to return to what they were before the cuts were enacted in 2001, they would be at the level they were during the economic boom of the 1990s. Hardly a dire situation. In fact, I'd say that generic tax cuts usually have minimal stimulative effect at the best of times. For most of the country the cuts usually only add up to a few dollars a paycheck which is barely noticeable. Certainly not likely to keep a family out of foreclosure or encourage them to spend on luxuries.
If the GOP were really worried most about the deficit and actually cared about being fiscally responsible, they would be the first in line to call for the Bush Tax Cuts to expire. The next best option is to keep them in place for income less than a quarter million dollars and let the rest lapse. This would erase about $800 Billion in projected costs over the next decade. But what are they actually calling for, nay, demanding? Keep 'em all, especially the cuts for the top 2%. They are so desperate to keep the wealthy well looked after that they have gone for a scorched earth policy in the Senate, refusing to consider any legislation until the tax issue is resolved. And by resolved I mean, all GOP demands met. What is so amazing about this is that they can still say the words 'fiscal conservative' without collapsing in laughter. It certainly is a joke, albeit a very bad one.
As I write this, and wallow in disgust, Congress has just passed a deal struck between the White House and senior GOP leaders that would renew the entire Bush Tax package for two more years. What did Obama get for giving in on a stand he and the Democratic leadership have been harping on since before the elections? A stand supported by a majority of Americans, according to more than one poll. Well, he got an agreement for a one year extension of Unemployment benefits and, uh... nope, that's about it. There are some assorted other tax related cuts and such, but most of them were things the GOP liked anyway, so from my standpoint a very lopsided deal. Actually not just from my standpoint. A good number of Democrats are pretty put out by this agreement, as are a few Republicans who seem irritated that Obama didn't just surrender the Presidency outright. Worse, at least for the future of the Obama Presidency, is that it gave the GOP a huge, undeserved victory and inspired the Democratic base to a collective "WTF?!" Most importantly though, it shows that if Republicans pick the right hostage, in this case the long term unemployed, the White House is likely to capitulate. By the way, in a post deal press conference it was Obama who used the hostage metaphor to explain the deal. This is particularly odd since as far as I know, if the hostage takers demand a jet as a trade for the hostages, we usually don't whistle up a Gulfstream 200 and wave goodbye as they depart. But perhaps I'm misinformed on these sorts of negotiations.
There is so much about this deal in particular, as well as Congressional incompetence in general, that leaves me stunned. As far as I can tell, the only real stimulative part of the proposal is the extension of unemployment benefits. This will put cash in the hands of those who not only want to spend it, but absolutely must. Think unemployment benefits are just a waste of money? First, let's remember that these benefits are only for those who have been laid off through no fault of their own. So we aren't dealing with lazy people who quit their jobs. These are the casualties of recession level downsizing. Second, the money these people get through unemployment is often the only thing keeping them housed and fed. Stopping unemployment benefits isn't just non-stimulative, it actually contributes to the recession. Soon after losing this life-line, individuals and families will start defaulting on mortgage and car loans. Going delinquent on rent. Some who have held on as long as possible will finally give in to Bankruptcy. Do any of these things sound good for the economy?
I had a tiny sliver of hope that this deal would be modified enough to be at least vaguely palatable. But that was way too optimistic of me as, despite angry words on both sides of the aisle, it passed both houses of Congress this week. The 111th Congress, from GOP obstruction and the ongoing 'War on Logic' to Democratic incompetence and spinelessness, is a poster child for all that's wrong with our government. And I didn't even mention the Supreme Court's ruling to give corporations many of the rights of individual citizens! I suppose Corporate suffrage can't be far off. We are in tough times, but we are not going to get out of them by shoring up the coffers of the wealthy or of big corporations. Huge corporate profits have not managed to resuscitate the economy thus far. Why? Because it doesn't matter how nice the detailing or how clean the engine is, if there's no fuel in the tank then the car ain't moving. The economic fuel is consumer spending. Everything boils down to this. Without it, we aren't going anywhere. Outside of the unemployment extension, I don't see anything in this deal that will improve matters, though it will spike the national debt to greater heights. Once again political victory brings little help to those most harmed by the recession while continuing to reward the mindset that got us into it.