The Extinction of Trickle Down Economics
Trickle Down Economics or Supply -Side economics has been a common theme in the Republican party since the 70s. However, both parties have been known to implement some form of it. There’s been lots of discussion and criticism of it over the years, and for a while there was some validity to the arguments of how it makes the economy stronger. We are definitely seeing lower prices on many goods, and there was a time when employment was going up from it. On the other hand, critics also point out that the wage gap has widened greatly due to it. But, in either case, the move towards the digital economy is going to make it extinct as a valid policy that’s fair or effective at improving the economy across the board for the future.
Why? Because as we are selling more and more digital items as opposed to tangible items. We have moved from a manufacturing based economy to a service based one with more and more services being digitized. In the long run, digital is cheaper to manufacture and distribute, thus jobs will not necessarily increase with demand or additional capital freed up from lower taxes.
Let’s use toys as an example:
Say it’s 1980. I created a new toy in my garage that I’m selling for $5 a pop. I make a batch of 100 in a month, and they sell out quickly. I make another batch of 100 in the next month, and they sell out quickly again. Now, I’m getting pre-orders from the people who got sold out of the last couple of months. After a couple of months of selling like pancakes, I’m backlogged for 500 units. I only have capacity for 100 a month. Nobody is willing to wait up to 5 months for a $5 dollar toy, so I need to hire people to help me build. Since, I made a such a large increase in sales, it’s no sweat off my back to hire 2 people to bring up my capacity to 300 a month to catch up. I have a great toy, so sales keep on rising, to a demand of 1000 units a month during the second year in business. Now, my garage isn’t big enough, so now I am renting a space and paying rent to a happy landlord. I hired more people to keep up with demand. I bought a bunch of manufacturing equipment to increase capacity, and hired some administrative staff to do accounting, advertising, printing, etc. In the third year, I’m selling the hottest selling toy on the market selling 10,000 units a month. I move to a bigger factory, I hire more people to manufacture, I buy more equipment, I hire more administrative folks, more operations and logistics folks, janitorial staff, etc. I hire more companies to deliver and distribute my merchandise, to advertise my product on air and in print, and represent us legally. Since I’m a job creator and make capital expenditures, the government gives me a tax break. Since I’m getting a tax break, and I have demand for my product, I am happy to hire more folks and spend more money.
Now it’s 2016. I created a new toy in my home office. It’s an app that sells for $5 a pop. I put it on the various app stores for a minimal fee of $100 a year, and they take a 30% cut of everything I sell, which leaves me $3.50 a pop. I sell 100 units the first month while doing nothing. Next thing you know, the app increases sales to 500 units a month the first year. I get a 500% increase in sales, without incurring any additional costs. Next thing you know, the app goes viral and I sell 5,000 units a month. Now, I have to hire a couple of folks to handle support calls, a marketing and PR person to handle the new craze for my app, and another developer to do some bug fixes and improvements. The following year, my app is the hottest selling, most popular toy on the market. I switch to a subscription model, and now I’m selling 20,000 units worldwide every month, with a projection of 300,000 subscription payments that year. I promote my support people to entry level development positions, contract out support to a call center, and hire another programmer to complete a small development team to do upgrades and create a new apps. I hire an accounting firm to take care of my finances and put a lawyer on retainer for legal issues. I get offers for office space rentals, but I laugh because everyone in the company works from home. I get solicitation for distribution, fulfilment, and manufacturing, but I laugh because I don’t need any of those since my product is purely digital. The government gives me a tax break because I make capital expenditures and I’m a job creator, except I don’t hire more people or spend more money because I don’t have to. Even if the government gave me an incentive to spend and hire, I may still decline because the cost savings are greater than the tax savings.
Now lets compare the 80s to today.
– In 1980, I had gone from $500 a month to $2500 a month, but it required hiring 2 more people to meet that demand. Whereas in 2016, went from $350 a month to $1750 a month without having to hire a single person.
– In 1981, I went from $2500 a month to $5000 a month, but it required me to hire more folks and get a facility to build in. In 2017, I go from $1750 a month to $17,500 a month, but I only had to hire a few more workers to meet that demand.
– In 1982, I’m making $600,000 annually, but I’m also spending more money on employees, manufacturing, distribution, facilities, and administration than I did in 1981. In 2018, I’m making $1,050,000 while only adding a couple employees and hiring out support services such as accounting, help desk, etc. Unlike the 80s, I didn’t need any facilities, manufacturing capacity, in-house services, or distribution other than app stores to get to this level or meet demand. I can stay lean and mean, and still make a considerable profit.
This isn’t just happening in a made up situation from an unknown blogger. It’s happening in real life. Oculus VR, a maker of virtual reality headsets had only 75 employees, while being sold to Facebook for $2 billion. That’s over $26 million in value per employee. But that’s nothing compared to Instagram which sold to Facebook for $1 billion when they only had 13 employees. That’s almost $77 million per employee. Another example is United Technologies. At 218,300 employees, the company’s workforce hasn’t grown in seven years, even while revenue jumped from $42.7 billion in 2005 to $57.7 billion in 2012. That’s $15 billion not being spent on more employees.
As we move towards greater automation, some of the support services that were once hired out in 2018, would be replaced with software. An accountant may be replaced with sophisticated software that reads all financial data through secure web services, and requires little to no input from the user. The lawyer on retainer could be replaced with software that can create bulletproof legal documents. A new method of distributing apps could make current app stores arcane, and put more control and profit into the hands of the developer. As SEO applications are becoming more robust, you may see less need to hire advertising folks. Who knows what the future has to offer?
Well, I know one thing. More and more products are going to be digital, and the benefits of trickle down economics for economic growth will no longer apply. Technology will help retain profits while improving productivity, regardless of tax rates, subsidies, or bailouts. I’m not saying that we tax the wealthy to oblivion. But, I believe it’s time for us to abandon the supply side economics the US has adhered to for the last few decades. Corporate welfare hasn’t improved the overall well being for the average citizen, while siphoning off resources that could and putting the country into greater debt to foreign entities. Corporate welfare doesn’t promote better business practices any more than social welfare promotes better personal decisions. I know that some conservatives would bash me for saying this, but supply side economics is more similar to communism in that the state is financing and supporting businesses instead of the free market. If we continue down the supply side spiral, we’ll lose the effectiveness of the free market because we ignore the other important part of the economic graph – demand. The long term result will be unnecessary products and services with prices out of line with demand, because government intervention selects winners and losers.
I believe it’s time to shift some of our policies to the demand side to counterbalance the years of supply side policies. I’m not talking about increasing the number of handouts, but giving similar benefits to individuals that we’ve been giving to large corporations for years. A raise in minimum wage, tax credits and rate reduction for working class families, affordable education and healthcare, etc. aka things that will increase necessary and disposable income so that people will invest and consume more. With people spending more, you will see that small and large business can improve because of increased sales or investment. People that could or would never be able to spend or invest will now become new or better customers to various markets. As a result, you’ll see a re-calibration of our various markets now that the people will be picking out the winners and losers instead of the government. Businesses will have a better idea of the demand that is out there and price folks are willing to pay. With that information, they will better compete for our dollars while providing products and services that people actually want.
I don’t think that we should drop the supply side completely in favor of the demand side. I also don’t think a focus on the demand side should be permanent or a long-term strategy. But, I certainly believe that the government should address a crucial side of our economic system that has been neglected for too long.