Economics 101 is the axiom that subsidizing stuff gives you more of it and taxing stuff gives you less of it. This is true of everything concrete including subsidizing poverty and taxing wealth. You get more poverty and less wealth. It is so simple even a Chicago Democrat can understand it. We as a nation are now moving into the area of Economics 102. This is the theories that cover wealth creation and the direction of flow (trickle down versus trickle up.) It is much more complex than the axiom of 101. Those who push government giveaway schemes understand that the average taxpayer doesn’t understand the markets, that we will simply cash the checks and believe ourselves lucky to have a little extra money to spend.
Soon to be former President Bush passed out cash earlier this year in the form of the increasingly ill-named “economic stimulus” package where each taxpaying household received between $300 and $1500 depending on the number of people claimed as dependents. President-elect Obama promises even more checks under the same economic theory. He wants to stimulate the economy from the ground up. He takes it one step further and promises money even to those who haven’t paid any income taxes (hereafter referred to as welfare recipients.) He figures that the more money placed into the hands of the consumer, the greater the stimulus on the economy.
The problem with both of these Presidential plans is that they assume consumerism determines economic health.
Stepping back and taking a hard look at the nature of market capitalism, I have determined that both the Bush economic stimulus of last summer and the proposed Obama plan to take from the prosperous and give to the not-as-prosperous didn’t and won’t work. My reasoning is that wealth is created by capital investment and we are conspicuous consumers based solely on the financial ability of our employers to pay us well. Consumerism is a side effect of strong economic growth and not its cause. Wealth doesn’t trickle up. It would be akin to pouring water into the mouth of the Mississippi River to combat draught conditions in Dubuque, Iowa.
Both plans bypass the wealth creation mechanism. We give people money directly from the treasury in sums not large enough to impact anything we manufacture in this country in hopes of stimulating something. Most of this money is borrowed from China. So we take China’s money and purchase Chinese goods with it, plus we don’t even collect a tax on the way out. That piece of the pie we didn’t actually borrow we tax away from the people who actually create wealth. So, economic activity is reduced, tax revenues aren’t collected and the national debt rises. Anyone see an upside here? What exactly does this stimulate?
I believe that the amount of money given to the consumer is not all that relevant. What if instead of the small sums, the giveaways were large to enough to purchase an automobile? What do you think the outcome would be then? I’m fairly certain that most wouldn’t buy a car and of those who did, most wouldn’t buy it from GM, Ford or Chrysler. If the government demanded or required that everyone use the money to buy an American car, it would only serve to reduce the existing inventory of cars the companies have already taken a loss on, increase production to meet the excess demand short term, and leave the automakers with the same failing business model and union burdens they have now. Plus Americans at the Toyota plants would get laid off.
I am sure that those proposing this stuff understand the consequences and impact as well as I do. They assume with confidence that we are too stupid see the implications. What they are doing is attempting to purchase political power from the masses and they are perfectly willing to sacrifice our long term economic well being. All economic solutions in a market driven economy need to be market driven. Government doesn’t create wealth and it doesn’t drive economic growth except by lessening its cost to the markets.
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Government is a drain on free market capital and if they would loosen the money supply and keep existing dollars in the marketplace they could help with economic growth. Nothing they do that involves taking money out of the wealth creation mechanisms helps. I guess our elected officials think it is better to be in charge of a sinking ship than to be just a passenger on a sound one. This is very short term thinking. Thinking we the people can no longer afford to ignore. Of course we will do just that.