The failure of trickle down economics

It amazes me how many people are content to blame our current economic failures on those who have no ability to directly affect such.  They claim that we are in such a situation because of the collapse of the housing market which is attributed to low and middle income citizens purchasing houses that they could not afford.  However, I argue that the problem began long before the sub prime housing market was even created, in fact it created the sub prime market for housing and other luxury goods that Americans could not afford and purchased on credit.

Our economy was headed for a down slide when we began to embrace the theory of trickle down economics.  For all of you non-economists Wikipedia provides the following explanation:

“Trickle-down economics” is a term of political rhetoric that refers to the policy of providing tax cuts or other benefits to businesses in the belief that this will indirectly benefit the broad population. Proponents of these policies claim that if the top income earners invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals. Proponents argue economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. Today “trickle-down economics” is most closely identified with the economic policies known as Reaganomics or supply-side economics. Originally, there was a great deal of support for tax reform; there was a dual problem that loopholes and tax shelters create a bureaucracy (private sector and public sector) and that relevant taxes are thus evaded. A major feature of these policies was the reduction of tax rates on capital gains, corporate income, and higher individual incomes, along with the reduction or elimination of various excise taxes.

Based on this definition alone, you see how the majority of our society stood to benefit in theory but not in reality from this policy.  One of the hardest lessons that I have had to learn in life is that people operate in their own self interest and business people are not immune from this. 

Trickle down economics implies that we should give tax breaks and tax cuts to the wealthiest members of our society in hopes that they will pass along the savings through their business ventures which will make stuff cheaper and allow them to hire more workers.  I don’t know about you but something just doesn’t seem quite right about this. 

In my opinion, and I think the state of our economy in the past few years will support this, as the wealthy received these breaks and cuts, they did not pass them along.  Instead they used the money to create a greater divide between the haves and have nots.  They created a luxury market that then used their profits to market and advertise their products/services to entice the rest of America to use credit and try to attain such affluence. They also hired more workers in positions with that could not be supported for the long term.  As we’ve seen in the past year, many of these positions were the first to be cut from major corporations when those profits began to dwindle. 

These savvy business people were put in charge of using those funds to plan for the future of our economy and they were supposed to act as visionaries however they did what most of us would do; live in the present and enjoy the spoils.  The rest of us were lead to believe that we were sharing in this wealth creation, however, our wealth was artificial or based on credit.  Most people failed to understand that credit is not the equivalent of wealth because it is a debt. 

This artificial wealth lead people to buy houses, cars and other items that they could not truly afford to keep up with the Jones.  The Jones, contrary to popular opinion, are not your neighbors who are also heavily leveraged but the ones you see effortlessly spending money using their American Express instead of Visa or MasterCard.  They were the ones with a savings account and retirement account versus just having a checking account that barely covers your expenses.

Although we may bemoan our current economic condition, it is the result of trickle down economics failure in our society.  The position we are in is the result of the artificial wealth that this system created.  I believe everyone should take personal accountability for their situation but we also must realize that there are economic policies at work behind the scenes that impact our perception of money and spending.

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