Thursday, October 25, 2012

Top down economics = FAIL

Top down economics does not work.  If we give more money to the wealthy, or big business, they are not going to immediately turn around and hire more people, nor will they immediately spend it.  They may spend some of it, but they will choose to save or invest a significant portion of it.  Why is this?  Because the wealthy have most everything they could want or need.  Money that is being ‘saved’ does not grow the economy.  Companies do not hire people simply because they can afford to; companies will hire people when they feel they can no longer meet their customer demand with their existing workforce, and therefore decide hiring more people would increase their income.  Companies like making money.  They will not hire more employees for no reason.  It’s all about maximizing efficiency.

On the other hand, if we have a tax system that gives more money to the lower and middle class, they will most assuredly spend the vast majority of it.  If I give more money to a family making $40,000 per year, they might use that money to buy a new car or appliance.  They might also get a gym membership, or subscribe to cable TV or another service that they couldn’t previously afford.  When they purchase these goods or services, the companies providing them will see growing demand.  Eventually, the growing demand will put them in a situation where their existing workforce cannot meet the demand.  When that happens, the companies will hire more people so that they can continue to grow.  This is how we grow the economy.  It doesn’t happen overnight, and we have begun to see progress of this in the past few years.  Making changes to our tax code that favor the wealthy at the expense of the lower/middle class will move us back in the wrong direction.

Think of it this way.  Imagine that you are a single person with $5,000 per month in after-tax income, and you’re looking for a place to live.  You have nobody living with you, no pets, and are uncertain what your income is going to be in 5 years.  You find two places.  One is a 5 bedroom, 4 bathroom home for $3,000 per month.  The other is a 2 bedroom, 2 bathroom home for $1,000 per month.  Based on your income, you can afford the $3,000 home.  But chances are you will choose the smaller home.  You don’t see the reason to spend an extra $2,000 per month, for 4 bedrooms and 3 bathrooms that you will never use.  You are thinking about the future, and so you decide to take the smaller home so that you have an extra $2,000 per month to play with.  You put $1,000 in savings each month, and use the other $1,000 to buy some toys for yourself.  Companies think the same way.  If they need 20 employees to complete the work required, they are not going to hire employee number 21 simply because they can.  Just like you won’t upgrade to the 5 bedroom home until you have enough family members to fill more rooms, the company won’t hire more employees until there’s work for them to do.

Now let’s look at two people.  One makes $1,000,000 per year, and one makes $30,000 per year.  If I increase the income of the wealthy person to $1,001,000, it is not likely that they will run out and spend the extra $1,000 each year.  $1,000,000 is plenty to meet his/her needs.  If I give an extra $1,000 to the person making $30,000, however, it is almost guaranteed that it will get spent.  When someone is living paycheck to paycheck, he/she has chosen to forgo certain products or services.  That extra $1,000 will enable that person to purchase something that he/she has been holding off on.  That extra spending grows our economy.  A wealthy person sitting on another $1,000 does nothing.

On the other hand, making a tax change that hurts the lower/middle class has the opposite effect.  If we decrease the take home pay of someone making $31,000 per year by $1,000, that's $1,000 immediately removed from our economy.  If we give that $1,000 to a millionaire, there's a good possibility that $1,000 will sit in savings, further shrinking our economy.

Raise the taxes on the wealthy to benefit the less fortunate.  In doing so, we will take money that is sitting idle and give it to people who will spend it.  The spending of this money will grow the economy, and thereby promote job growth.  When people, or businesses, have more money than anyone could possibly ever need, and choose not to spend it, this cripples our economy.  Give the money to those who will use it.  Let’s get our economy growing again.

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