I feel I must give a disclaimer. I am an internet troll. I don’t peruse 4chan, or reddit, or any of the common troll sites. No, I troll Facebook. The people I troll are people that I actually know, or at least have some rudimentary connection as they are willing to call themselves my “friend.” Nothing in life brings me more joy than seeing someone tie the noose around their own neck intellectually, but instead of letting them hang themselves with stupidity, I give them a helping hand kick the chair out myself. My justification is simple: they will either become educated, or they will recognize their ignorance while choking on stupid, turning purple and become reticent to spout nonsensical garbage. Or they will “unfriend” me. Win, win. . . win, I guess. I call it The War on Stupid, and I am Sun Tzu waging it through superior intellect.
That being said, I have noticed several disturbing trends emerging this election cycle that I feel need to be bathed in the harsh light of logic and reality. A loose-connection Facebook “friend” of mine, a Facebook “buddy,” to differentiate from an actual friend, recently posted, “Thirty years of Reagan’s trickle-down lie hasn’t worked.” Hmpf. That’s a strong statement. So, I started thinking in terms of C, G, and I, (see further for explanation) and how I could relate all the problems with that statement to someone who likely stares blankly at the mention of C, G, and I. Instead of beating my brain against someone who would likely tune out at word one, I decided to come here and start my posting career with BQ.
In the spirit of holistic learning, gross domestic product (GDP) is measured by adding private consumption (C), government spending (G), gross investment (I), and the difference between exports (X) and imports (M). The formula looks like this:
GDP = C + G + I + (X – M)
Basically, our economy is measured by the amount of money we spend and how we spend it. The theory of Keynesian economics says governments can manipulate this formula to their advantage (and, of course, to the advantage of all of its citizens) by increasing G. What Lord Keynes failed to mention is that G has to come from somewhere. Another problem with Keynesian theory is that deficit spending during a sluggish economy must be offset by decreased spending during surplus, a feat no government on Earth is self-disciplined enough to perform. This is basically all you learn in Econ 201.
Unfortunately, the theory of Trickle-down economics is essentially Keynesian. Now, before you go all “Reagan wasn’t no commie!” on me, I qualified that term with “essentially.” Essentially, Trickle-down is a distribution from G into I in the form of a tax break that will likely be used for reinvestment. It is not Keynesian in the sense it does not require deficit spending, even though it may indirectly create deficits through the loss of tax revenue in the short term. The major glaring difference is that deficit spending on G goes to fund the government, a net taker, whereas a negative offset of G that gets added to I goes to fund industry, a net giver in economic terms. A burst of cash from the government may have a nearly immediate effect and can be helpful to kick start a bearish market, but the gains will necessarily be temporary and will eventually have to be paid for, either through inflation or interest on debt. It is inefficient, expensive, and not good in the long term to simply magic money up out of thin air just to give it away.
Here’s where it gets really interesting. When we examine the stimulus (The American Recovery and Reinvestment Act of 2009. Yes, that stimulus), we see a double dip. Government spending, G, was radically increased and moved to investment, I. On paper, it looks like two critical components of the economy got kicked up a few notches. The economy should be screaming now, right? Unfortunately, the $700 plus billion can’t really be counted twice. It’s not a $700B add to the G column AND a $700B add to the I column because it’s one lump of money. The stimulus was, in essence, trickle-down economics (an increase to I), only with the government picking winners and losers instead of real people with their own skin in the game.
This is the real difference between Reaganomics and Obamanomics. In the classic trickle-down approach, there is no detrimental effect to G; some monies remain in the economy and move over to the I column, not removed from the economy in the form of taxes, and those monies do not cause inflation or debt service. Ideally, this would come with a commensurate decrease in government spending, temporarily, until the money multiplier goes to work in the investment stream, but we all know what really happens: G never decreases. Never. This does cause inflation and/or debt service. So what do you think happens when the government opts for deficit spending, just so they can do what private investors want to do for themselves?
If you are one of those who believe “Reaganomics doesn’t work,” just know that the stimulus package was founded on the exact same principle, only much, much less efficiently carried out. Instead of letting “the rich” (the topic of my next blog, me thinks) keep their profits to reinvest, the government took everyone’s money, including yours, and gave it to campaign backers. Quad erat demonstrandum, facebook buddy.