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Breaking Down Trickle Down: Business Plan 101

Posted by politicalpartypooper on August 18, 2010

The thirty year old Conservative plan for the economy is known by many names; Supply Side, Reaganomics, but my favorite name for it is Trickle-Down economics. In case you don’t follow economic theories, Trickle-Down is the practice of giving advantage to the supply side of our economics system, the corporations, wealthy, and small businesses who create jobs, through tax breaks and incentives. The idea is that wealthy people flush with cash save that cash, and those savings are invested, through some means, back into the economy, which then through various ways, trickles down even to the poorest of Americans, either through innovations and efficiencies that make consumer goods less expensive to own, or through job creation due to increased demand.

Historically, this has been accomplished through tax breaks, especially for corporate America. In fact, about the only solution available to Supply-Siders is reducing taxes.

Thankfully, that’s as complicated as Republicans have made it, which makes my job much simpler.  The idea of cutting taxes for corporate America and small businesses is that they will then use that money to create jobs in their own businesses.  Only we’ve been using Bush’ Trickle-Down tax cuts for nine years, and we’re bleeding jobs.  The best that can be said about Bush’ job creation record was that it was a positive record during his two terms.  He averaged 49,000 jobs created per month.  Economists say we need at least 150,000 to keep up with population growth.  So Bush only fell about 101,000 jobs short per month with his Trickle-Down plan.

So much for tax cuts creating jobs.

Now let’s get to the good stuff, and don’t worry, this is easy.  Business Plan 101.  How to make money running a business.

Business A receives a tax cut and finds itself flush with cash.  Wanting to do their part, they immediately hire several staff.  However, after a few months, they realize that there is no work for these new staffers to do; even though they were flush with cash before they hired the new staff, in the end, there was no demand for those new hires to fulfill.  After a few more months, those hires were laid off, and Business A had less cash than they did before they received the tax cut.

Business B received the same tax cut as Business A.  Instead of hiring new staff, though, Business B researched whether there was actually anything for them to do; in other words, they monitored demand, always at the ready to meet it with new employees if it came to that.  But in this case, the demand for their product was no different from before they received the tax cut, so they didn’t hire anyone.  The tax cut ended up not achieving its goal.

Which business is the smarter business?

Tax cuts mean nothing for job creation without demand.  Absolutely nothing, and that it can be described like this, without using any fancy formulas, completely destroys the myth of Trickle-Down economics.  The effect that tax cuts for the wealthy, or for Corporate America have on our economy are long delayed, at best, and meaningless at worst.

Business planning 101 dictates that you don’t hire unless there is work for them to do.  In other words, if demand is not present, neither should any new hires be.  And this is exactly what ails our economy today.  No good, smart business should ever hire someone just because they received a tax break, and the investments that the wealthy make and the subsequent trickling effect are too delayed and minimal to do any good.

Capitalism starts from the ground up.  No product is sold without a consumer to buy it.  This is simple stuff.  I explain it to my conservative friends all of the time, and then they go watch Fox News or some moronic Republican Senator who repeats all of the old anecdotal “facts” about Supply-Side, and I have to start all over again.

I can make the greatest gadget ever, but if there is no buyer for this gadget, I’ve just lost money.  Capitalism’s history is gorged with start-ups that failed because no one wanted their product or service.  President Obama just visited one that teeters on the brink yesterday, ZBB in Menomonee Falls, Wisconsin.

No matter how you roll the economy, it has a starting place, and that starting place is demand, at the bottom.  Tax cuts have no  significant impact on job creation.     Ω



7 Responses to “Breaking Down Trickle Down: Business Plan 101”

  1. […] Breaking Down Trickle Down: Business Plan 101 « POLITICAL PARTY POOPER […]

  2. EdithH said

    Is it that there is no demand, or is it there is no demand for American stuff? There seems to be plenty of demand for Chinese stuff.

    Just thinking our loud here. If $500B in stimulus has been released to date, would you expect to see it in the GDP (or GNP)?
    On the graphs from St L Fed Reserve site, which I may not be reading correctly, it looks like the GNP has increased by $400B since mid 2009 and is near to the level it was prior to the meltdown. Is that the stimulus just sitting there? Why do you think it is not multiplying?

    • politicalpartypooper said

      You have to be careful when considering the GNP. Since Free Trade and the exporting of American jobs, that number has been skewed. It no longer represents goods manufactured here and exported. It is now an amalgamation of data that includes products built overseas by American companies and products made here with parts manufactured overseas.

      As for demand of Chinese products, even that is way down. Economists are now saying that the Chinese economy is headed for a tumble. There is no other reason for that than lack of demand, and unfortunately for the rest of the world, demand starts here in America, at the bottom.

      • EdithH said

        I have no doubt that the growth rate of demand is down but I had the impression that Chinese exports were on the upswing after a tough beginning in February and March so I don’t know if demand is flat. Chinese exports to the world up $117+B in the first 6 months of the year compared to the first 6 months of last year. Chinese exports just to the US up $27B in the first 6 months of this year compared to first 6 months of last year. One of the Chinese websites claims a 10+% increase in Chinese GDP in the first two quarters 2010.

        US imports world wide (not just China but incl China) up $203B in the first 6 months of this year compared to the first 6 months of last year. I realize that this doesn’t distinguish between finsihed goods, materials, services. These are very crude and I had to do a bit of extrapolating. Sources were FTD(US census bureau) and Trading Economy website. I am not asking you to believe me, I am just trying to figure it out myself.

      • EdithH said

        “So here’s more evidence that our stimulus programs don’t work for you–unless, of course, you’re a Chinese enterprise”. Last sentence from an August 20th article in Forbes, by Gordon G. Chang, who writes a weekly column.

        This consequence mentioned in the article apply to some of the general income tax cuts as well. Although I have suggested for months that the stimulus benefitted emerging (low cost production economies) more than America, I was focused on consumer goods . But what I didn’t know was that , in addition, Chinese steel was used in some of the infrastructure projects financed by the stimulus. Why bother, why didn’t the USA just write a check to the China (Indonesia, Mexico, India). These countries should be erecting staues of Clinton, Bush, and Obama. This underscores just how naive and out of touch the political class is when it comes to the “New Economic Reality”.

        The American economy is not a singular, integrated, cohesive, domestic economy and hasn’t been for 20+ years. It is not that the pols are venal,just trapped in a time warp. They are lock step with the FreeTrade interests and dare not defy the herd. In fact academic economists, including Krugman, know the downside of globalization but it is not discussed publicly for fear that the public will over react.

  3. Tony Montana said

    Yea but if I have $2,000 extra from tax cuts I will hire someone to paint my house, or mow my lawn, or buy a new car. If I have to pay more in taxes I cut back on spending and thus demand plummets, which is what is happening now.

    Evolution 101

  4. […] on The Hope Of Americapoliticalpartypooper on The Hope Of AmericaTony Montana on Breaking Down Trickle Down: Bu…Tony Montana on The Hope Of Americastaci on The Hope […]

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