Wednesday, October 31, 2012

Economic Desertification

Economics can be confusing.  Economics can be difficult.  Economics can be boring and economics can be dry.  As such, the majority of people (not merely Americans) have virtually no understanding of economics beyond their own checkbook balancing.  And as such, we are subject to counterfeit economic theories, like trickle-down or voodoo economics.  When George HW Bush called trickle-down economics voodoo, it was because he understood how an economy functions and it wasn’t by these dubious principles.  Unfortunately, there is enough vested interest in trickle-down economics by those who benefit from it and a clever enough story to be told underneath it, that the theory has managed to manipulate our political and economic landscape for 30 plus years now.   In doing so there has been an extreme consolidation of wealth among the very few and as such an increase in the breadth and depth of poverty.  If you understand how economics work, then you understand these are natural and obvious results.  But like I mentioned, most of us don’t.  So my attempt here is to break this down into an understandable way of seeing economics.
                First of all it is clear to me that the empirics of trickle-down economics are meaningless.  By this I mean that we have seen how they work (more accurately how they don’t work other than to funnel money to the richest) and we hear over and over how they don’t work.  But this message doesn’t penetrate.  I think it’s similar to telling someone what’s wrong with a nuclear reactor.  They may or may not believe you, but the complexity of the issue means that their belief resides purely in faith.  But I feel like if you can create a modest level of understanding, then the belief resides in something more solid. 
                So how do we get there?  I’m going to try and create some simple economic images and metaphors in a hope to relate why it’s a faulty theory.  To start with, we must understand that the money supply, although in constant expansion and contraction based on GDP (Gross Domestic Product) is essentially a finite amount at any given point (there is only so much money).  As such, if a small amount of people have a large amount of money, that leaves a smaller amount of money to be shared among a large amount of people (duh?  I know, but follow me).  So, when a small amount of people have a large amount of money and also don’t contribute to the general welfare then the money becomes stuck.  Why stuck?  Because there is no economic pressure to circulate the money.  When a poor or working class person makes a dollar, that dollar or at least a large percentage of that dollar is spent: buying food, paying rent, bills, entertainment etc.  When a wealthy person makes a dollar, that dollar goes on a pile for it is not needed.  Therefore, the working class dollar creates demand for goods and services.  Demand for goods and services, requires people to be hired to produce, deliver and distribute those goods and services.  By hiring those people to do these things you have more people with more money.  They buy things which creates demand, which necessitates hiring and the cycle builds.
                      When the dollar is on a large pile and no pressure is on that dollar to circulate in the economy, that dollar stagnates, effectively choking the economy.  When large amounts of money become stagnant, then it is difficult for an economy to grow, create jobs and more wealth because the money that does circulate in the economy is too small to feed growth.  As an analogy, look at a rainforest.  In a rainforest, the thick foliage absorbs the rain from the clouds, utilizes it and it evaporates up into the clouds again, where it becomes dense and then rains back down.  This precipitation cycle is equivalent to what an economy gets when the roots of the economy, the working class, have access to money.  If the precipitation is taken from the rainforest, somehow the water is captured, the rainforest dries up.  The symbiosis of precipitation and foliage dies.  When the plants die, then there is no longer a vehicle for the precipitation to circulate.  Once the desert is created, even if you reintroduce the water, the water is no longer useful for creating a rainforest.  It merely dissipates and the desert remains barren.  Now, removing the water from a rainforest is not a likely scenario.  But deforestation is.  And when the rainforest is cut down, what remains?  A desert.  Not because there was not water in the region inherently, but because it is the plant life that beckons the rain.  In the economy, it is the wide spread demand of the working class that fuels the economy.  And when the money all goes to a very small amount of people, then the economic desert encroaches and the ability to repair the situation becomes more difficult.
                Part of the problem with trickle-down economics is that the narrative is compelling.  “Rich people are job creators.”  And “Taxing the rich is punishing success.”  Both of these things have enough logic in them that it’s easy to fall for.  It’s like saying it’s obviously hotter on top of a mountain because it’s closer to the sun.  Or there is no gravity because of helium balloons.  If you don’t understand the nuance of these scenarios it’s easy to be fooled. 
                So, rich people are job creators.  Perhaps this has some merit, but it is not the whole story.  Like with the rain analogy, the clouds are rain producers, no?  But without the rainforest, the cycle becomes stagnant and the rain goes away…desert.  It’s the same with workers.  Workers create the demand for goods and services and as such prime the economic pump.  If people en masse don’t make enough money it becomes and economic desert.   It is also important to note here, that when a worker makes a living wage, they not only create demand for goods and services, but they have the means to create their own industry, invent new business and products.  It is completely false that only the wealthy invent industry and innovation.  But it is very difficult for someone to create when their immediate economic needs are not met or when they can’t afford the startup costs for a business, or when their credit is destroyed by financial tragedy. 
                As far as punishing success, this is the ultimate in insanity for two reasons.  First of all, like the clouds ultimately get the rain back from precipitation, the wealthy get richer from a healthy working class.  Their businesses expand due to the growth in demand.  The problem is that the working class and the poor do better as well and that seems to be some immoral aspect to the voodoo economic pundits.  It’s not enough that they win, but you must lose.  Trickle-down does this.  It’s not better for the rich, but it’s worse for the poor.  So you have winners and losers, which, for some reason, the wealthy want.
               And secondly, taxing the rich is an appropriate expectation.  Why?  Well, if you go to the store and take your kids to school and to the park, you use public infrastructure and domains.  Your taxes help pay for the roads and sewers etc. and the military that keeps you and your kids safe.  But who uses the roads and airports etc. more: you and your family or UPS?  I would think that UPS has many trucks and airplanes using the roads and airports in disproportion to you or me.  As such, they are more beholden to pay for the infrastructure that they benefit from and the military that allows their supply chains to operate unimpeded.  So asking major business to pay its fair share isn’t punishing success.  It is asking for the appropriate contribution to the civilization it prospers in.
                So when you hear that reducing the taxes of the very wealthy will create jobs, don’t believe it.  Not on faith.  Not on empirics, but from an understanding that reducing the taxation of the very wealthy removes money from the economy, shrinking it for the rest to battle over.