Let's try "trickle-up" for a change

It's been a wild week in America. One candidate "suspended" his campaign until we have a bailout compromise. House Republicans changed their minds about this bailout bill because their feelings were hurt. And for the first time in comedy history, a VP candidate was spoofed using her own words during a TV interview. (BTW Tina Fey is brilliant). Oh, I forgot to mention the economy. Yeah, what is there to say other than "Oh, crap."

Well, there is something to say. Clearly, we need a whole new look at how we allocate monies in this country. Supply-side economics has ground the economy to a halt once again, and this is not the first time. How about the recession of the early 90's (1990-92, so that can't be blamed on a Clinton) or Black Monday in 1987. But, Reaganomics is operating a country under huge deficits, not just supply-side or trickle-down economics. No, TDE is much older than that. We see how funneling unending money to the richest 5% caused the crash of 1929 and FDR convincing the richest 5% to help us 95%ers out of the depression. We can go back further still. Before it was called TDE the name was the "horse and sparrow" theory in the 1890's. Why? Well, the theory states you feed the horse (the wealthy) and the sparrows (the rest of us) eat what's left over in the manure. No wonder the name got changed. The horse and sparrow economy led to what economists now say was a terrible recession in 1896.

Here's the issue and I hope to explain why the Obama tax plan is the solution.

Let's continue the Nordstrom's example. Now, I'm using Nordstrom's as a symbol for any company that has to make decisions based on windfalls. I don't have anything against Nordstrom's and this may or may not be how they allocate a lower tax investment.

Trickle-down

Let's say Nordstrom's lobbies for a lower tax investment. What do they have to consider when they receive this extra money? They could pass the total their savings onto consumers. But, would they do that? I submit that the CEO at Nordstrom's would quickly be shown to the door if that happened. Why? Because passing savings onto consumers is not the mission of Nordstrom's. Increasing the gains of shareholders is. So, a CEO has to balance reducing these new found profits by discounting prices or passing profits onto shareholders. In addition, Nordstrom's can invest money in domestic and foreign markets. These days I'm hearing that smart investors are moving their money overseas which doesn't benefit the American economy at all. Nordstrom's can also remodel a store or start a marketing campaign or purchasing new cash registers company wide. None of these directly drop prices.

In fact, there is no correlation between pricing and a company's tax obligation. Pricing is based on what the market can bear. Nordstrom's will continue to sell a product at the same or higher price if it is selling well and people aren't buying a similar product at Macy's. It would be unheard of for Nordstrom's to reduce to prices of everything in their just because they a paying less in taxes. This is why economists universally panned a gas tax holiday. People were willing to pay for gas and lifting the tax couldn't guarantee price relief.

Trickle-down doesn't work because the trickle happens far too slowly. The lower wage earners, whose spending boosts the economy, don't see the relief for quite some time. Therefore, less money is coming back up into the economy and lower wage earners are taxed at a higher rate to make for the lower tax investment of the wealthy. The system stagnates when money moves out of the country and stops circulating at the lower levels. Consumer confidence drops and people default on loans and mortgages. Banks in turn start losing money and bam the bottom falls out of the market.

Now, Trickle-up

So, what happens when we funnel money to the middle and working classes? They in turn spend their money in the American economy. Nordstrom' s sees that money because my wife will spend our return on new flats and we may invest in diversified portfolios, including maybe Nordstrom's stocks. The only thing a lower wage earner could do to stagnate the money is to store the money under their mattress. If they pay off their credit cards then those credit card companies can in turn grant credit to more consumers. If they save it, the bank can invest that money in the market. If they spend it, there it goes to invigorate the economy. We know this is what happens because it happened in the late ninties. It happened in the 50's and 60's. Ike and JFK were economic populists. Our boom times came from money going to average Americans so we can spend that money where we want. Nordstrom's will see that relief from us. They just have to work for it a little harder.

I suggest you visit electiontaxes.com. A professor at the University of Southern Maine created a website that will calcute your tax obligation under each candidate. It may be surprising what you find.

JB