I have been listening a lot to the Republican ads going on about how we need to reduce spending and direct more of our tax dollars to the “Wealth Creators” who will then act to stimulate our economy.
The fact is, we tried that under President George Bush at the start of the financial meltdown. President Bush gave a great deal of our tax money to some of the wealthiest business owners, in an effort to stimulate the economy, to preserve jobs and get our stalled economy going.
His strategy failed – miserably.
Why? Because, in an uncertain economy, those wealthy individuals did exactly what any smart business person should do – they kept the money to invest later. In an interview with Robert Reich on NPR, he explained that of the billions that President Bush gave to the wealthy to stimulate the economy they kept 80% of it. Of the 20% they did spend most went to bonuses to top employees – most likely to keep them from jumping ship if they got a better offer, or to fulfill contractual bonuses that were earned before the economy tanked and had to be paid in the following quarter.
Why did they keep the money and not invest it? Simple. There was no market for their goods. Giving money to a wealthy business person means he can make more products, but if there is no one to buy those products all he is doing is lowering the value of the ones he has already made and is currently trying to sell. By creating a surplus in the market he is damaging his already fragile business. No reasonable business person would do that. Instead they hoard the money, planning to use it when the economy has turned around and there is increased demand for their products.
On the other hand, when President Obama tried to stimulate the economy he targeted Americans with low and middle income for the money. He tried to put even more money into the bottom of the economy but was blocked by a House of Representatives whose mandate was to prevent him from doing anything, at any cost.
So what happened with the billions that President Obama put into the economy? Well the stock market is now close to 13,000. Higher than before the economic collapse. The unemployment rate started to go up but has slowed as a great deal of what the President wanted to accomplish was blocked by Congress.
President Obama correctly judged that the way to stimulate an economy is to put the money into the lower and middle classes. Why? Because they have to spend it. They do not have the resources to set the money aside. Again, according to the same NPR report, over 80% of the money given to the lower and middle income families was reinvested in the economy. As a result there was more demand for goods, and businesses increased production to fill that new demand.
And what happened to George Bush’s solution? When President Bush tried to stop the downward plunge of the stock market from 11,000 it plummeted to about 9000.
So, what is the lesson we can take from these examples? While the national economy might seem a huge and massively complex system, it still operates according to some pretty fundamental rules which are easy to follow.
The first thing is that the Republican idea of “Wealth Creators” and “Job Creators” is hogwash. The only thing that will make businesses increase production and higher more workers is increased demand for their products. Giving them money and tax breaks will not help the economy, and there is a lot of evidence that it actually hurts it.
So, if you want to stimulate the economy, if you want to make the country more competitive, if you want to get people back to work, you must direct your resources to the lower and middle income areas. You must put money into the hands of the people who will spend it. You must put money into basic services, like food stamps, medical assistance, child care. You must invest in infrastructure that creates jobs but more importantly makes it easier for lower and middle income people to get to and from work. This frees dollars for the poor and middle classes which they will spend on items to make themselves and their children more upwardly mobile. You need to increase the size of the middle class in order to fix the economy because the middle class buys the goods which drive innovation and increase demand.
Bottom line: President Bush and the Republican Tea Party Activists got their economics wrong. President Obama got it right, but has not been allowed to go far enough by a stonewalling House..
Food for thought in the upcoming elections.