The Trickle-Down Theory of Stimulus

[nashville_brook]

http://firedoglake.com/2010/12/12/the-trickle-down-theory-of-stimulus/









The Trickle-Down Theory of Stimulus


With the Great Bipartisan Tax Cut Compromise, President Obama has officially adopted the world view of Republicans.

1. No matter what the problem is, tax cuts are the solution.
2. Government cannot solve people’s problems.

Our current problem is massive unemployment, so the President and his team of bank-loving economic officials preach that tax cuts are stimulus. No matter that tax cuts for the rich have a poor payoff in stimulus. No matter that we are adding massive national debt. No matter that we are endangering Social Security. Tax cuts are the answer.

Stimulus that has real bang for the buck comes from direct government spending. Paul Krugman estimated that direct spending might have a three to one increase in GDP per dollar of added debt. And when we spend it on infrastructure projects, we have something of long-term value to show for it. The lowest bang for the buck comes from tax cuts. Obama ignores this fact in his explanations for his Great Bipartisan Tax Cut Compromise, and argues against all logic that this tax cut is necessary to prevent a double dip recession.

Let’s hope it does, because it comes at a very high cost. Obama is admitting that government cannot do anything useful to solve people’s problems, so it outsources the entire stimulus to individuals and corporations. It’s trickle-down stimulus: give the average family a couple of thousand dollars, give rich people massive tax cuts, and hope they’ll spend it on stuff and maybe that will encourage businesses to hire people, and maybe people will go back to work. I didn’t understand trickle-down economics when it meant that giving hundreds of billions of dollars in tax cuts to the top 2% of Americans, and I don’t understand it when it means giving small amounts of money to lots of people on top of hundreds of billions to rich people.

Let’s review. If a family making $75,000 gets a $2,000 one-time payroll tax cut, how likely is it to spend the money in a way that will increase employment? One likely step is to use it to pay down debt, as households have done for the last 10 quarters. The Fed estimates total household debt at the end of October at $13.4 trillion, of which $10.1 trillion was mortgage debt, and $2.4 trillion was other consumer debt. Paying down this massive debt load is a priority for families. Paying down debt doesn’t hire people. Instead, it increases the amount of cash on hand at banks and other lenders, and puts downward pressure on interest rates paid to small savers.

The second likely step is increased accumulation of savings for retirement and other major expenses. Household net worth was estimated at $54.9 trillion, up in the third quarter, but down from its pre-crash high of $65.9 trillion. Households are looking at threats to Social Security and Medicare, increases in costs of education, and economic uncertainty, both as to job security and taxes, housing values and just about everything else. Of course they will try to save. And that will increase the amount of money at banks and brokerages too.

The third possibility is purchases of goods. That might be nice for retailers, but a significant part of the money will go overseas, where many products are manufactured, and where US companies shift their profits to avoid US taxes. Buying an iPad might help Apple’s bottom line, but the iPad isn’t made here, it’s made in Taiwan, and you can bet that the profits aren’t repatriated. Taiwan’s tax rate was recently cut to 17% to compete with Hong Kong and Singapore. Apple will leave its profits there to build new plants and take advantage of cheaper labor.



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more at link

http://firedoglake.com/2010/12/12/the-trickle-down-theory-of-stimulus/

[nashville_brook]

1. Kickee

[DirkGently]

2. At the very least, a bright guy like the President should be emphasizing the facts in this way.

[unblock]

3. republican proposals all share a common characteristic.

they are clearly designed to help ultra-rich bastards but portrayed to help others.
the propaganda campaign to promote the proposal is carefully laced with catch-phrases, branding, and labeling so as to make it sound like something it clearly isn't, often with even the slightest reflection.

tax cuts for the rich eventually help everyone? how transparently idiotic! just help everyone directly!
moreover, everyone knows instinctively that trickle-up works vastly better than trickle-down.

give a rich person money and he'll likely hoard it, invest overseas, buy a company and fire people. if it prompts more consumption, it will be in out-of-whack markets like art collection, which doesn't generally help many people other than the rich.

give a poor person money and everyone knows it will eventually wind up in the hands of a rich person. but republicans hate this because it means that rich people have to actually WORK to get it.



the estate tax repeal helps families of filthy-rich bastards pass on their fortunes tax-free, but of course they only talk about the tiny number of affected estates that are middle class family farms. of course, if that were their only real concern, why not just exempt family farms from the estate tax? because it's obviously not their primary concern.

the tax breaks for the rich have repeatedly failed, and failed spectacularly over the last decade. their feeble fig leaves for naked greed are becoming increasingly transparent. but the propaganda doesn't need to be logical when you own the microphones and you can hire good-looking, smiling, preferably female talking heads to nod approvingly at whatever ludicrous excuse you've come up with to redirect yet more money to those who aren't doing anything productive with the piles they already have.

[DirkGently]

4. I think it works so well because many people are complicit in their own deception. Hope to be rich

and overprivileged themselves someday. Kind of a "lottery" mentality, seems to me. Americans identify with the rich because many see themselves as a rich person-in-waiting. So they spend their lives rabidly supporting the notion that the wealthy have no obligation to contribute, or behave fairly at the expense of everyone else, including themselves.

[unblock]

5. exactly. it's an odd sort of delusion combined with stupidity.

they don't realize that if they're going to be greedy, they should be advocating help for the poor and middle class while they're poor and middle class, and IF AND WHEN they become rich, THEN they can go advocating for tax breaks for the rich.

i once knew a man who my father asked why he was a republican, and he answered "because someday i'm gonna be rich and i want low tax rates then." now this was a man who was less than 5 years away from his retirement, had never earned more than $30,000 a year, and didn't play the lottery or gamble. there was absolutely zero chance of him becoming wealthy.

i guess some people can't let go of the fantasy.