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The Trickle Down Effect



Editor's Note: Minyanville is about stimulating discussion, sharing opposing viewpoints, and looking at both sides of the issues. Along those lines, we share the following instant message discussion that developed out of John Succo's 1:52 p.m. post on the Buzz & Banter

Original post:

01:52:57 PM
By John Succo

Here I go into politics (but not really), so please be gentle with me.

Actually, since I am no economist, I will pose this as a rhetorical question.

Speaker Hastert has indicated that $70 billion in tax cuts will be approved by the House.

Supply-side economics is supposed to release capital for investment. As the rich use the tax cuts to invest in businesses, the added jobs will trickle down to the middle class and the poor.

I can understand in a more under-developed economy where there are capacity constraints, where there are easy opportunities (building a grocery store on the corner because it is needed), supply-side tax cuts would stimulate investment.

But in a more developed economy, where there is over-capacity and over supply, where there are few easy opportunities ex new technologies, how effective is cutting taxes for the rich in trickling down to the poor?

And as the richer get richer, the propensity to risk capital goes down. They become defensive.

With the rich (.5% of the population controlling over half of the net worth in the country) so rich, are they not likely just to buy bonds with their tax cuts?

Is this sense too common?

From John's Buzz post, the following Instant Message conversation with Scott Reamer took place:

Scott: John, theoretically, I disagree 100%; if the alternative is between the gov't spending the money or the rich, theory and history suggest that private individuals ALWAYS make better spending decisions (because they are not coerced and b/c those spending decisions take place in a voluntary way to ostensibly serve the needs of the market). Supply-siders are wrong b/c they give money back AND still increase gov't spending thereby (1) cementing the rent-seeking relationship between them and big business and (2) taxing everyone by continuing their monetary inflation to actually pay for their gov't spending (deficits). They aren't wrong b/c of the give money back part. They are wrong b/c they do so and do NOT change their spending. Gov't spending is the culprit here: private citizens' money - even if they are rich - is their own money. You, I, and anyone else - if you believe history is a guide for fairness and overall economic growth - have no right to take their money forcibly for any reason. There is no in-between: there is no practical difference between communism (full gov't control of capital and labor) and socialism (Europe) or mercantilism (what we practice here in the US). Each are simply varying degrees of gov't control of wealth and labor. Only the purely libertarian/Jeffersonian position of massively limited federal control over capital and labor is consistent with both the philosophy of maximizing the happiness of all citizens and with the history of economic development.

John: Well we disagree. I think you may be right if we are talking about a theoretical economy. But every economy has socio-economic inefficiencies and there is a tendency to hoard money by the rich. These inefficiencies create inequalities to the extent that there will be some element excluded. There must be some transfer of wealth. The degree of which is the only debate.

Scott: Yes, that is true: every economy does have some socio-economic 'inefficiencies', Man is flawed, original sin etc. But gov't institutions are the WORST institutions for the remediation of those inefficiencies. The entire path of history suggests as much. Private institutions: churches, social groups, neighborhood associations, etc. are the right solution for those inefficiencies. Sadly, as gov't institutions have systematically displaced these institutions of civil society, the vacuum left has been filled by various gov't institutions in a massively inefficient and coercive way. On your wealth hoarding comment, there is absolutely no proof whatsoever that there is a tendency to hoard money by rich in a free economy. Hong Kong pre China is a great example. So is Singapore. The capital that the rich 'hoard' - almost all of it - directly or indirectly - makes its way into the capital markets and by extension acts to develop real capital and thereby increase productivity, which, in the end, is the ONLY thing that increases the living standards of ALL people in an economy. There is no theory about it at all; that is the reality and history demands such a conclusion.

John: In general I agree with you (lower taxes are good), but I do believe that on the margin as an economy's problem becomes over-capacity, where deflation is a problem, and the definition of deflation is reduced desire for risk (hoarding cash), the rich have a lower propensity for risk and tax cuts lose effectiveness, at least relatively. And I also believe that there needs to be some transfer of wealth at some level because of inefficiencies in socio-economic structure. Otherwise we risk revolution, besides the fact that we should have compassion for poor who no matter what will not benefit. And I fully agree that smaller government that limits their role is better and that the main problem is spending.

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