Friday, January 2, 2015

Wealthy People Don't Hire Just Because They Have Extra Money.

The debate over so-called "trickle-down economics" will probably rise up again with the change of control in Congress.  The argument in favor of trickle-down, in it's usual sequence, is that, 1] the economy will be stimulated by, 2] the increased hiring that, 3] wealthy people (and businesses) will do if, 4] they have extra money, and they'll have extra money if, 5] their income taxes are lowered.  On the surface, that argument seems sensible and has a certain allure, especially when presented in that sequence.  The problem is, it doesn't work.

Remember this:  Wealthy people and businesses do not increase hiring simply because they have more money.  The only reason wealthy people and businesses hire is because they see a potential return on the investment.  That's it.  That's how wealth is accumulated, and that's how wealth is retained.  It is not retained by giving someone a job just because you have more of it.

Now, there was a time when trickle-down might have worked.  That was back in the 50s, 60s and early 70s, when our economy was structured different.  Back then, people at the bottom and middle of the income ladder had increasing spending power that could be tapped to help recover from a recession.  With that kind of economic structure -- where the mass market has the money to buy things and business needs additional employees to transact with that mass market -- it makes sense to cut taxes to stimulate additional buying and subsequent hiring.  But that's not how our economy is structured today.  First, the mass market these days doesn't have more spending power; by many measures they actually have less.  Second, with the level of automation being used today, business usually doesn't need more people to accommodate more transactions.

The bottom line with trickle-down economics:  IT.  DOES.  NOT.  WORK.  And when someone tells you we need it, ask them when it has ever worked.

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