Trickle Up

Vol 1, Essay 1

Trickle Up

It’s the most basic tenet of economics – supply and demand.    Equilibrium is where the two curves meet, and it’s rarely achieved.   When supply exceeds demand, prices drop and the value of the goods & services on the chart decreases.   Look no further than the current housing market to see the illustration.   If demand is greater than the supply, and the goods & services are underserved or scarce, then prices rise.   If prices rise, and demand increases, there is opportunity in a market driven economy to expand production, provide entry for competitors, and grow that particular sector.   Growth, expansion, new business – these are all the buzzwords during the current recession to create jobs invigorate the American economy.   We may be on to something.   Increase demand for products, services, etc., and we can begin to grow our way out of the recession.

In the 80’s, while I was wearing my Zubaz parachute pants and wasting hours watching MTV and waiting for the next Madonna video, then-President Reagan introduced the country to trickle-down economics.  The concept being that when wealthy corporations and wealthy individuals retain their earnings (via tax breaks and tax havens unavailable to the middle class), those wealthy corporations and individuals will purchase goods and services, and in paying for them, the money would trickle down to the providers.   The trickle-down concept was more aggressively pursued about a decade ago when the federal government allowed additional tax breaks for wealthy individuals and corporations, dubbed Bush-Era Tax Breaks by the media, and ascribed as an accomplishment of the first presidential term of President George W. Bush.   Trickle-down economics, as a concept , has merits, but in practice, unfortunately, doesn’t work.

As the economy worsened, in the wake of the S&L scandal of the late-80’s and in the post-housing crisis after the bubble burst in ’07-’08, individuals and corporations simply hoarded cash and retained their savings.  The minimal demands of the 2% of the American population who qualified for the benefits of the tax breaks do not even scratch the surface of the volume of demand necessary to effect growth.   Corporations, now cash rich, do not create demand, they are on the supply side of the economic curve.   The country loses its revenue stream from these tax policies, estimated to be $1.6 Trillion over the past decade, and yet under the tax breaks, the economy has tanked and jobs are scarce.   It appears, actually, to be a downward spiral.  

Corporations are not taking their money and building manufacturing facilities without demand for the products, because without demand, there would be no income to support the investment.   Nobody is building a state-of-the-art electronics plant without proven demand for new products.  The facility would instead be shuttered, jobs would evaporate, and the company would incur losses and suffer devaluation.   There is no surplus of demand in the current economy because money is tight, jobs are scarce, and consumers are not able to purchase goods and services as they’d like to.  

Let me introduce the “middle class” which makes up roughly 75% of the country’s population.   These are the consumers and the drivers of the American economy.    Put income into the pockets of the middle class, and the money trickles up into the market -- they buy houses, cars, groceries, TV’s, computers, & clothes.   They invest in stocks and bonds, and they seek financial advisory services.   They donate to charities, research foundations, and religious organizations.   They take vacations and go to spas, buy hockey equipment and piano lessons, and go out to dinner at local restaurants.  This is the true source of demand in the market economy – the middle class consumer.   The money in the hands of the middle class gets recycled and moves freely through the community.    As demand grows for restaurants, TV’s, and sports equipment, the entrepreneurs and corporations respond appropriately and increase supply, and this supply creates jobs and moves more money into the hands of the consumers, who buy more goods and services and continue the cycle.

 The government has it wrong with trickle-down economics; in fact, it’s 180° off from the basic supply & demand equation.  A  trickle-up option is the stimulus that the economy needs for growth and recovery.    By repealing the tax breaks for the wealthy 2% and the corporations, and giving the dollars to the middle-class consumer instead, the country will experience steady growth, expansion, and recovery.    In a growth economy, even if not fully recovered from the housing-bust recession, America will see job creation.   The tax breaks to the middle class puts money in the hands of the American consumer, and when “consumer confidence” is measured, it always scores higher when consumers have money to spend.    This isn’t rocket surgery, just simple supply and demand analysis – economies can’t recover with greater supply, they need greater demand.