November 13, 2004

Money, Money Everywhere

Jeff Galley takes umbrage at Magpie's belief that multimillion dollar tax cuts for the wealthy to buy yachts may not be the best way to stimulate the economy. He says:

...Magpie, didn't you read the article? This is proof that tax cuts are putting money into the economy! Liberals like you only focus on the "perks" you see wealthy getting compared to the middle class and poor. ...

I think I recall someone saying "It's the economy, stupid." Yes, and it's not about whining on and on about the perks of the rich.

Jeff, I seem to remember that during the Roaring Twenties and preceding the French Revolution, there were plenty of rich people spending enormous amounts of money on all manner of expensive goodies. In both cases, this failed to result in material improvement in the lives of the average person. In both cases, populist revolts eventually overturned the prevailing systems. Fortunately for the wealthier inhabitants of the U.S., there were ballot boxes handy.

A rule of economics is that the more times money changes hands, the better it is for the overall health of the economy, whereas it most benefits any given individual to hoard it. An indisputible phenomenon of societies with any type of open commerce is that money always flows upward to those who have the greatest ability to hoard it. Policies that reverse the 'natural' flow of money upwards keep it in circulation where it creates greater prosperity, provided that this is not taken to the extreme that it removes the incentive to earn more.

This country prospers because it has a very large class of people whose money tends to change hands almost as soon as they get it, with many of these having some limited ability to hoard it for their own welfare and progress. And out of the cut the government takes of all the money that changes hands, a military, roads, schools, libraries, ports, security, emergency services, and all the other trappings of civilization must be provided for.

These services, including regulatory agencies that create conditions where consumers can buy goods from complete strangers with relative confidence, are the prerequisites for optimal commerce and wealth maintenance. Which as I mentioned, structurally favors those already on top.

Policies that accelerate the flow of money upwards tend to create the sort of economic growth which can hardly be noticed on the lower rungs of society. The financial markets and purveyors of luxury goods have a grand time, but the majority of middle market businesses see a drop in consumption. No amount of free capital will inspire investment in manufacturing when there are few customers to be had.

As an example of where the real power to move an economy forward lies, consider that Walmart is one of the wealthiest companies in the world. They make their money by selling lots of cheap things to people who can't afford yachts. Volkswagen bought Audi, and not the other way around, because many more people can afford to buy Volkswagens.

When the country can allow households making less than $40,000 a year to write off half their rent or mortgage and their transportation to work on their taxes, people like us may quit complaining about perks that allow the wealthy to write off Hummers and luxury yachts. Helping people who need the most help isn't just the path advocated by every major world religion, it makes good economic sense.

Though I don't expect this argument to hold any ground with a conservative viewpoint idolizing business and wealth for its own sake. While businesspeople and entrepreneurs are important engines of the economy, the contempt displayed by the conservative end of the tax debate for the contributions of the people who do most of the work in this country comes through loud and clear.

Posted by natasha at November 13, 2004 12:33 AM | Economy | TrackBack(1) | Technorati links |

I'm often on the _fiscally_ conservative side of debates, which is often not the standard Left side of the debate, but some of this argument does resonate with me. Let's see. Write-offs that are special cases, loopholes, involving more tax paperwork? Inefficient through direct expenditure of time and money. Write-offs that only apply to certain purchases? Distortionary, therefore inefficient again. Get rid of 'em. Loopholes should be removed for many reasons, one of which is that the upper classes can more easily make use of them by hiring accountants, which means that loopholes are anti-equality. See, not all conservative viewpoints involve contempt for workers.

However, I should quibble with the argument that luxury spending has no benefit to anybody but the purveyors of luxury goods who are themselves rich. Manufacturers of Audis and yachts hire manual laborers, janitors, Web designers and so on. An increased market for Audis and yachts make those manufacturers employ more people across many divisions of the company. Trickle-down, when and why it happens and doesn't happen, seems still to be very poorly understood, but I don't think it can be entirely dismissed yet.

Posted by: Lisa Dusseault at November 16, 2004 06:25 PM

"See, not all conservative viewpoints involve contempt for workers."

Well, in the specific context of the Republican party and the conservative viewpoint as publicly advocated, I'd say it involves a great deal of contempt for workers. But there are an awful lot of fiscal conservatives in the modern day Democratic party, and in other industrialized nations, who don't hold workers in contempt.

"However, I should quibble with the argument that luxury spending has no benefit to anybody but the purveyors of luxury goods who are themselves rich."

I wouldn't go so far as to say that there's *no* benefit to anybody but the purveyors of luxury goods, but I'd definitely say that you can't expect that sort of spending to carry the economy. The vast majority of consumer transactions involve people lower down the economic food chain, people who often spend nearly everything they make, and therefore recycle cash into the economy quickly. A sharp drop in luxury consumption could be absorbed without fiscal havoc, but comparable declines in overall consumer spending could bring the economy to its knees.

Outside Mr. Laffer's napkin, I don't think there's been much in the way of serious proof that any trickle-down effect has really countered the gushing-up effect of business as usual.

OTOH, things that have worked over and over again to improve life at the bottom include microfinance, better healthcare and sanitation, well-maintained civic infrastructure, and widely available education.

Posted by: natasha at November 16, 2004 09:24 PM