Hi There

Me? I blame Reagan.

Don't take it personally, that's just my normal reaction to when something goes wrong in this economy of ours. Blame Reagan. Seriously? Supply side economics? Do people who worship Reagan actually know what this means? It means supply drives demand. Basically, if you produce, people will buy that product. Supply drives demand. When people buy, that money is then paid to the workers which they then use to buy other stuff, and the money spreads throughout the economy making everyone rich. Pretty good deal, right?

It'd be even better if it actually worked.

Here's what really happens: Demand drives supply. I want to buy something, say a car. A car company realizes this, and produces it so I can buy it. Demand drives supply. Then the suppliers use the money I pay them to pay their workers, and money spreads throughout the economy making everyone rich.

End products are the same. Only difference is how we get there. In one, the best thing you can do is give money to the suppliers. In the other, the best thing you can do is give money to the consumers. Some of you may be saying "What's the difference? Everyone gets rich one way or the other." Here's the difference:

Trickle down.

I'll say it again, trickle down. In supply side economics, the assumption is you start at the top and go down. In other words, give money to the top of the ladder (the suppliers) and eventually it'll trickle down to the bottom. After all, the suppliers are producing, people will then buy and you pay your workers who will then buy more stuff, etc... and the money will end up at the bottom. Therefore, the best thing to do is cut taxes for the upper class. After all, they're the producers. Give them more money, they'll produce more and people will get richer.

Or they'll give themselves bonuses. Or spend it abroad. Or save it. Seriously, if you're making $200 million, what's an extra million? Are you really going to do anything productive with that money? Or are you going to go on a vacation to Paris, or some other location? Or are you going to buy a fancy foreign car? Most people would pick the last two. In short, the rich people don't need any more money. After all, it doesn't matter to them whether or not they spend it. Their lives aren't going to change that much.

The poor will spend it. After all, if you're making $20k a year, don't you think an extra grand would mean a lot? Sure, it's not a ton, but it's something. And what are you going to do with that extra grand? Surely you're not going to buy a foreign car. You're going to buy stuff that people produce, like food. You're going to spend that money.

In short, you're going to demand.

So if you're the government, where are you going to cut taxes? At the top, where the people don't really have to spend the money? Or are you going to cut them at the bottom, where the people are going to spend the money as a means of survival? Who do you think is going to stimulate the economy better?

According to Reagan, that first group. Currently, the upper class pay 35% as taxes. In 1980? 70%. That's a 50% drop. For people in the lower class? It's dropped about 5%.

Going along with this is the real income change (income adjusted for inflation) of those people.

In 1980, real income average for the lower class was about $16.68.
Currently, real income average for the lower class is about $16.67.

That's not good, especially because consumer debt is skyrocketing. Right now, it's about 125% of income. So if you make 100k a year, you have 125k in debt. All this leads up to the following point:

We're going to have another crisis.

And this one won't be from the financial market or the auto market or anything like that. This will be from consumption, which happens to be about 65% of GDP. In short, people are going to stop buying stuff so they can afford to pay off their bills, or they'll declare bankruptcy. And when that happens, the goods and services markets are going to go into a free fall. Luckily, this won't be that hard to prevent. Just start slashing taxes for the lower and working class people. Let their real incomes rise and give them time to pay off their debt, especially in this current era of deficit spending. And once they've paid off their debt, let them go back to demanding goods, driving production, making everyone rich.

Of course, to do this, people are going to have to stop viewing Reagan as god. Meaning we're screwed. And when the next crisis happens because consumers don't have any money to spend, people are going to start pointing fingers, class warfare will break out and marxism will take over. Ok, maybe not that. But people will start pointing fingers and blaming each other, like they always do. And people will still fail realize that the best way to economic strength is to have a good base, meaning a strong lower and middle class which can afford to buy the good the upper class is producing. Then the upper class will be able to sell their stuff and get their money. And then everyone would be rich.

You could blame a whole number of people for why this won't happen (inept government, 24 hour news cycles that do nothing but make people angry).

But me? I blame Reagan.


--The Economist