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To Have and to Hold – The GOP’s plan for the rich
We all remember the extension of the Budget-Busting tax break at the end of last year. The GOP insisted that this was good for the economy.
This idea gives credence to what a board of intellectuals concluded last week. They basically said our elected officials are not smart enough to make effective economic decisions.
I agree.
My intent with this blog is to give three easy-to-understand reasons why the Republicans are wrong.
Reason #1 that the GOP is wrong is the concept of Monetary Multipliers. If you put a dollar into the economy, it gets passed around. Every time it gets passed around, people gain products, services and savings. The government also gets its cut. So let’s look at - A Tale of Two Dollars.
Dollar #1 is given to a wealthy person who invests it in the stock market where it sits. Now assume a generous return of 20% and a tax rate of 15% (capital gains rate). At the end of a year, the dollar is worth$1.20 minus the 15% tax on the 20 cents. So, the government got $.03 and the rich person got $.17.
Dollar #2 is given to a poor person. This person buys a loaf of bread ten minutes later. The store pays the baker who buys gas and so on and so forth. This dollar is really moving. Every time it moves, someone gains a dollar and then pays income tax at 30%. Let’s assume the dollar changes hands once a day. In a year, that single dollar would have resulted in $365 of economic value and the government would have collected about $121 in taxes.
In one case, the dollar generated a dollar of activity and $.03 in taxes. In the other, it generated $365 in activity and generated $123 in taxes.
So, if you wanted to generate economic activity, where would you put your dollar.
I realize these are two extremes. The rich buy gas and the poor sometimes save. However, it really comes down to a concept called The Marginal Propensity to Save. This is a measure of how much you save if you were given an additional dollar. If someone saves, 25% of that dollar, that gives them a MPS of .25. The higher the savings rate, the higher the MPS and the slower the money moves through the economy. The poor have a MPS near zero which means they save almost nothing and thus, the money given to them flows freely into the economy. The rich have an MPS of near one which means they pull money out of the economy because the dollar had no impact on their spending patterns.
Reason #2 that GOP is wrong is due to Push or Pull manufacturing.
It used to be that all manufacturing was “Push”. This means products were created with the hope that someone would buy them. Take a book store for example. They buy books and stock the shelves hoping someone will buy them. This type of way of doing business is long gone. Take a look at Borders Books. They are going bankrupt for just this very type of strategy.
In today’s competitive market, companies don’t build stuff hoping you will buy it. Instead, they are very good at making it as quickly as you buy it. Take Amazon.com for example. The book you order today may not even exist at the time you order it. When you place your order, that causes a book to be printed and shipped. This is called “Pull” manufacturing. It is vastly more efficient. Companies don’t have to carry huge inventories and never over produce.
The Republican idea of giving tax breaks to the rich it the same as “Push” manufacturing. They are saying the rich will use the money to build stuff. When they build it, they will pay wages to people who will turn around and buy other stuff.
This may have worked 30 years ago, but not today.
Today, give company money and they will hold onto it until someone buys something. Then they make it. No wages are paid until an order is placed and no order is placed because no buyers have money.
Today’s economy and manufacturing dictate that you must have the buyers first. Let me say that again…There must be buyers first. Giving money to the rich creates the capacity to build with nothing actually being made.
You need to create buyers first. (This statement alone should get me the Nobel Prize for economics but alas…as a superhero, I am not eligible.)
Reason #3: It didn’t work the last time they tried it.
So there you have it. Every economist in the world will agree with me (except those paid by Fox News to disagree).
So, the GOP wants to cut spending but they want tax breaks for the rich but they want to buy jet engines that no one wants because they are built in the Speaker’s home state, but they want to lower the debt.
Not a very well constructed sentence, I know, I just wanted to see what it looked like - the GOP policy all in one statement.
I can only shake my head.
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(note: the dotted lines indicate where you can cut and paste this when you send this to all your friends)
Some of you know that I like to write. There is a difference between reality and fiction. Fiction has to make sense. Reality…not so much.
Alas…
Sometimes it can be hard to save a world bent on killing itself.
And yet, I still feel compelled to try. As a superhero, I took an oath to do just that.
Up, up and away…
jim
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