Tuesday, March 22, 2011

Supply Side Economics: The Fatal Assumption

Some of us have been saying this for nearly 30 years... and we're still right.

But remember, it required Shock and Awe to put any of these siphons in place. Walker is doing exactly this, again.



Supply Side Economics: The Fatal Assumption | Norbrook's Blog

Back in the late 70′s, there came the idea of “trickle down economics.” The basic idea, at least as it was put to the public, was that by reducing the tax rates on the rich and corporations, they would have more money to invest, which would create more jobs and economic activity farther down. In other words, by the government taking less from the wealthy, the benefits would “trickle down” to the rest. As more businesses and jobs were created by this, pay scales would rise and with it, the government would receive the same – or more – tax revenue than it would have had it continued with the previous tax schedules. As a theory, it sounded good. In practice, it has been a miserable failure. It turns out there was a core assumption being made, that in practice turned out not to be the case. An “implied contract” that was broken.

What was the core assumption? That the increased money from tax savings would be invested in this country. It was assumed that businesses would use the extra money to increase manufacturing facilities and hire new workers. The wealthy would use their additional funds to invest in new businesses, and increase their purchasing. Instead what happened was first a round of acquisitions and mergers, resulting in a series of lost jobs, followed by the use of those funds to invest in moving manufacturing and jobs overseas. It was a terrific policy in terms of generating jobs and economic activity - for other countries. In terms of this country, it’s been terrible, unless you’re wealthy.

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