Weekly Relative Value - Trickle Up

Weekly Relative Value, by Tom Slefinger, Balance Sheet Solutions, takes a look the impact of world economics on your credit union's balance sheet. It is provided in partnership with Alloya Corporate Federal Credit Union. The views of the author do not necessarily reflect those of the Association.

By Tom Slefinger, Balance Sheet Solutions

“You’re kidding yourself if you think cutting taxes is really cutting taxes… We’re simply deferring massive taxes unfairly and immorally putting huge debt burdens on future generations and that is just wrong.” – David Stockman, Former Director of the Office of Management and Budget under President Ronald Reagan

Let me be totally clear up front. I am in favor of reduced taxes. But I also believe any tax cut proposed by Democrats or Republicans should be “deficit neutral.” In other words, if you want to cut taxes then cut spending. Tax cuts – without corresponding deficit reduction – that increase our already precarious debt and deficit levels and are fiscally irresponsible. As Mr. Stockman points out, putting our onerous debt burdens on future generations is just wrong.

Finally, excessive debt is the primary reason why the long-term trajectory of U.S. growth will underwhelm in the years ahead. Recall that the recovery from the Great Recession was the slowest on record. After we exit the next recession (yes, there will be another recession) the recovery will be even slower due to the debt albatross around our necks. Remember that if debt is not self-funding; it is future consumption brought forward. We are currently enjoying consumption and growth that cannot happen in the future. Debt, then, will be a drag on future growth. And the amount of debt the world now has will be a monster drag on future growth.

Trickle down cartoon

 

 

 

 

 

 

 

With that preamble, here’s a little history.

In 1981, David Stockman, the former “wonderkid” and “beltway boy wonder” of the Reagan administration, crafted the trickle-down policy that promised stronger economic growth, higher tax revenue and lower deficits. But trickle-down economics was a wish, not a reality. It never worked. Lower taxes didn’t generate more revenue. They generated lots of debt and deficits for the future generation to pay.

Stockman- the primary cheerleader for ‘trickle down” economics- later stated that trickle-down economics was pure bunk. Shortly thereafter, Stockman was famously “taken to the woodshed” by President Reagan for his statements in 1981 that “supply-side economics” — the backbone of the Reagan economic revolution – was a “Trojan horse” that would ultimately benefit the rich.

Trickle-down economics often has been referred to as the horse-and-sparrow theory: “If you feed the horse enough oats, some will pass through to the road for the sparrows.” In other words, if you help the wealthy get wealthier, they will create more businesses and jobs, and therefore all Americans will be better off.

But, because the propensity to consume is significantly less for wealthy Americans, what if the wealthy simply sit on this wealth? How many homes and cars does a millionaire need? How does that create stronger growth for the overall economy?

And, what if corporations use their tax cuts to buy back their stock or increase dividend payments? Then the trickledown theory fails the majority of Americans. That is how you can have high corporate profits and an increase in top levels of wealth for many Americans. This is what we see occurring today.

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