It’s Time for Demand Side Economics

Here’s a graphic from the Heritage Foundation. I have respect for the organization, and I have friends who have worked there. I am a firm believer in the free market. The realms where we have gutted the free market the most (i.e. higher education and health care), we have seen exponentially rising costs with decreasing value. However, we have been focusing too much on supply side economics in this country. Too much weight is given to an antiquated notion that by reducing taxes and giving subsidies to the top income producers that wealth will trickle down. It doesn’t matter who is in office, Republican or Democrat, we have had varying forms of supply side economics. It did have weight prior to the information age, but now companies can increase their revenue without hiring a single person. Instagram sold for $1 billion with only 13 employees, and there’s many similar examples. The problem with such one-sided focus is that it creates inefficient markets. We are currently in the throes of an inefficiency trend in the market, and the signs are everywhere with too many useless and redundant products, prices not lining up with supply and demand, concentration of wealth, inefficient supply and distribution of labor, increasing corporate malfeasance, and the ratio of cost to value favoring cost.
To re-introduce efficiency back into our market, we need to put some focus on the demand side of economics. I’m not talking about increasing entitlements or government programs, as I don’t think welfare for an individual or corporation promotes responsible behavior. I’m not talking about raising the minimum wage either as that may not be indicative of a current labor market. I’m talking simple tax cuts like many promote for big business. Cutting taxes as an economic stimulus is an old and proven concept, however by focusing it only on the supply side, we are getting marginal returns (another age-old economic concept). It is time that we focus on the demand side until we can realign to a more free market economy.
This is where the graph comes in. The lower 50% income producers pay only 3% of the federal budget. The median household income is $51,939 according to the latest census. In some parts of the country, you can live like a king. But in many parts of the country, especially urban areas, that amount constitutes living a notch or 2 above poverty level unless you’re on the set of Friends. Remember, this is household income, not individual income. Instead of focusing tax cuts on the wealthy, we need to put these cuts in for the lower 50%. If it were up to me, I’d give all families making less than the median income a hefty tax cut or even no taxes at all. I’m sure that if you gave a family making $50K or less a tax cut in a place like New York or DC, every single penny of it will go back into the economy in some form. I doubt that some family barely scraping by is going stash that money away in an offshore account or tax shelter. They will use that money for wellness, recreation, education, durable goods, emergencies, etc. and put every penny of their tax savings into the economy. Even if they manage to save and invest, their thrift would reduce the strain on our safety nets and increase the flow of capital to our markets. The beautiful thing about this is that it will only affect up to 3% of the federal budget, as the graphic from the Heritage Foundation shows. And where will we recoup that 3%? From the millions of people that will inject hundreds of dollars from each pay check to flow upwards to those in the top income brackets
On the flip side, tax cuts to the top tiers have a significant affect on the federal budget, as the chart shows. It’s simple math, 1% of $20 is much less than 1% of $2 billion. It’s apparent in the current hell-or-high-water drive to cut taxes for the wealthiest tier that the only way they can do it is to cut essential services like affordable/accessible health care. Making the lower tiers ‘pay their fair share’ would break our consumer based economy as millions of households would have their buying power reduced with more taxes. Even though the chart shows the disproportionate amount the top 1% contributes to the budget, they are still in the top 1% in the US, which means they are still extremely wealthy even with the current tax situation. However, even if a bottom 50% family gets a 100% tax reduction, they are still living with financial insecurity.
Other than the economic stimulus of a demand side solution, there will be other effects that will stabilize the economy and steer it back toward a truer free market. When consumers have more disposable income, they will vote with their dollars in various sectors as to the products desired and allow businesses to create efficiencies. With a reduction in supply side intervention,aka corporate welfare, there will be less corporate malfeasance and better value for the customer as the market will determine who will get the consumer’s dollars as opposed to who gets their government’s favor. Labor markets will be more efficient as business hire due to increased consumer demand. In those markets where automation or outsourcing has displaced workers, tax relief for the lower tier will allow for more resources towards education and job training in sectors short on labor or provide capital to start a business to meet the needs of the market. With reduced or eliminated tax on the lower income brackets, there will also be less advantage for hiring undocumented workers or incentive to work under the table. With a more efficient labor market, we can reduce unemployment and the need for safety nets, which shrinks the government.
I very much agree that we need tax reform to free up our markets and stimulate the economy. But this time around, it needs to focus on the demand side of the equation.