Trickle Down Economics

There is a misconception that there is a magic answer to turning a flailing economy around. There isn't. All economies go through cycles. Some crests are higher than others, some troughs are lower than others.

Now since in the mind of many a Republican spending seems such a big issue, it certainly needs some attention. Do Republicans oppose spending? Or just government spending? Don't answer that. We all know the answer. At the heart of the Republican idea of "spending" or the lack of it, is the notion of "trickle down" economics. It says if you give tax cuts to businesses or rich individuals they will spend the money in the economy by either investing in the business and creating more jobs or by consuming more thus feeding the demand cycle and hence by extension the economy.

Now, first, that's putting a lot of faith in the corporations and rich individuals that they will do the right thing if they are given this money. It's no different than the faith some people may have in the government. And second, the Republican strategy is not a qualitatively different, enlightened one. Democrats think the government is the better agent to do that spending, Republicans think corporations and individuals are the better agents.

There are a few problems with the Republican approach however:

1.  Businesses, like individuals and families and even more so, don't spend more money just because they have it. The cash flow statement of a business includes items like operating activities, financing activities and investing activities. A business spends money carefully, according to a set plan. Any and all operations/expansions are strictly dictated by that plan. Having extra money from tax breaks is good but it does not change that plan. That extra money usually goes into the investing activities. It goes into buying hedges. It goes into buying futures, options, stocks of other companies, other investments... And in this day and age of global financial markets, more often than not the investment may not be made in local markets at all. It could be used in foreign exchange arbitrage or in buying soybean futures in China or steel futures in India &etc. Extra cash is generally invested away from the business to keep it safe and growing. Microsoft, Google has billions of dollars in cash reserve. But they are not necessarily spending.
   
2. A similar argument can be made for rich individuals. A person can only consume so much. Even if you have certain fixed expenses that may increase as you get richer (8 houses instead of 1), the real factor of variable expenses remains quite limited. The extra money a rich person has is not spent in consumption or in business expansion. Just like the businesses, any expansion is planned independent of the cash inflow. So what happens to the money? Just like a corporation, the individuals invest the extra money: in stocks, options, futures, mutual funds, gold.. what not.
   

And those two points bring us to the issue of primary and secondary markets.

The primary market is where the average citizen buys food, pays mortgage, goes to the movies, and makes a living. The well being of the vast majority of the people depends on the primary market. This is the market where goods are produced, sold and consumed.

The secondary market is on Wall Street or it's equivalent. The money stuck in investments in the secondary market is seldom if ever available to the primary markets. There isn't any trickling down. The two markets are water tight. And investments in the secondary market can be whisked away in a matter of minutes to a new bank in China, a new mine in Africa, a new corn field in Brazil etc. 

The money given as tax breaks to the corporations and rich individuals may never come back to the national primary market again. It gets locked up in the secondary market and may be invested somewhere else. When businesses or rich individuals get a tax break, contrary to what some people believe, it does not necessarily help the economy.

On the other hand, if the government retained that money by not giving the tax break, then the money would have gone into the treasury. Now when the government "spends" money, what does it spend on, and where? It spends on infrastructure, health-care, education, &etc. That money is now spent inside the national economy: in the primary market. And if the government spends the money, it must be going somewhere! The money goes back to the people who worked on that infrastructure project, or as a teacher or as a doctor or nurse. This cycle keeps the money in flow inside the primary market. It creates jobs and helps grow the economy.

Democracy is built on mistrust of the government. But where is the similar mistrust of business? Why is it that you must mistrust your government and yet completely trust your corporations? At least the government is elected. In business there are no checks and we have seen corporate greed run amok before. It is one thing to promote entrepreneurship and an entirely different issue to promote corporate despotism. Proponents of capitalism always praise their system ignoring the fact that capitalism is also run by men (and women) who are susceptible to the same vices that politicians are. At least you can change your President, Senators, Representatives and other leaders quite frequently. You have no choice but to buy gas from a handful of oil producers. You have no choice but to buy cars from the handful of auto makers; no choice but to buy computers from a handful of computer manufacturers, and so on. Government you can change, the businesses that you deal with exist for a long time and you are stuck with them.

Make no mistake, Republicans love spending: spending on new cars, new shoes, new yachts, new houses. They just don't like spending on health care. They don't like spending on education. They don't like spending to help the unfortunate members of the society.

It is interesting to note that the word entrepreneur is a French word. The idea of free trade or free market came from laissez-faire, a French phrase. One of the first corporations, and perhaps the first corporation of the world, Saint Gobain is a French company that came into being in the same time the term laissez-faire was coined, in the latter half of 1600s. The country that gave birth to these concepts have moved on to create a different kind of society for its citizens but it seems the US is stuck in seventeenth century France.

At the heart of all these questions lies a far important question: what is the purpose of the State and what is the purpose of society? What is the purpose of being in a community if one will not look after another? Republicans seem to believe in individual excellence. We don't need a society for that. Animals in the wild practise that already. Our Social Contract was made in order to survive together, and excel together.