Trickle Down or Trickle Up?

Keynes and his followers -- which includes nearly everyone on the left of the political spectrum -- claim that supply-side economics is a fallacy. They derisively refer to supply-side economics as "trickle down".

The logical implication is that there must be some sort of "trickle up"system of generating economic activity and prosperity.

But that raises the proverbial "chicken or egg" paradox. What causes income to trickle up? The Liberal's answer is that the government stimulates a depressed economy by borrowing or creating money and spending it. The money then filters through the economy creating jobs and prosperity. Pardon me, but isn't that the same process as providing private investment that then filters through the economy creating jobs and prosperity? Except for the source of the money, both methods involve putting money into the top of the spigot and then it uses economic gravity to give people money to spend and to thereby create jobs.

But when the government borrows money, it is paid back by taxpayers in the form of taxes. The actual repayment can be delayed almost forever, but in the meantime, taxes are being used to pay interest to the lenders. If the government creates new money by selling its debt to the Federal Reserve, that results in new money in the system and eventually causes inflation. Inflation causes a loss of purchasing power which has the eventual result of confiscating part of the value of any assets. Either way, if the government stimulates economic activity by spending more money, it will have a bad outcome in the future.

So what happens in the supply-side process?

In this theory, there are people who don't spend all of their available income. Like the Chinese, they save as much as possible. Then, in order to secure some income from their savings, they invest their savings in stocks, mutual funds or other investments. Most of that money is used by businesses to buy equipment, land and buildings that are necessary to produce some kind of product or service. That investment results in income for those who help to build the productive assets. Part of the money is also used to hire and train employees to produce the goods or services in the factories.

The money that investors provide to build factories and equipment results in relatively permanent jobs, which leads to an expansion of other businesses that serve the needs of the employees of the factories. And the money that is provided by investors is used by businesses to earn a profit. Businesses that are unable to use the money they get from investors to provide an attractive return to the investors will soon be unable to secure more funds. The businesses that do the best job of earning a profit for the investors will find it easier to secure more funds to expand their business and create more jobs.

Of course, the Liberals argue that the money spent by government also creates jobs. And some of them even claim that the government is "investing" borrowed money (or future inflation) to create jobs. But the government's concept of investing is far removed from the practical approach of the market place. An investment is something that has value as long as it is producing some income or growth in value. Few government projects provide an economic return or can be recovered by selling the alleged investment to someone else. Most government projects are politically motivated to divert money to the supporters of the politicians and to voter blocks that help the politicians stay in office. And when those projects fail to produce the results that were promised by the politicians, they inevitably are expanded and given more money. In a business, a project that doesn't work is closed up.

The free market is a hard task master, but it produces long term results.

Government stimulus is like another drink to an alcoholic or a fix for a junkie. It fees good for a short time but has no enduring benefit.

Vern Jacobs

http://www.vernonjacobs.com

http://www.offshorepress.com