Orthodox Keynesianism preaches that spending is the driver of economic activity (never mind Say’s Law or Arnold Kling’s idea of PSST). What does such a view imply? Well, the idea is that if people, including the rich, increase their consumption of goods, then it promotes the consumption of goods by all the people in the chain of consumption.
For instance, for Keynesians, it ought not matter who is doing the spending. In a GDP-machine world, spending is spending is spending. So ignoring for the time being of varying marginal propensities to consume across income groups, once someone is consuming the Keynesians do not care who spends it or really on what. Thus, if Baron von McCapitalism wakes up one day and buys a personal jet, he will provide jobs for the pilot, fuel producers, cleaners, painters, seat makers, etc. who had a hand in making that jet. In turn, these people use this money to buy Laz-E-Boy recliners, flat panel TVs, beer, hot-dogs, football tickets and the like. And then the people making Laz-E-Boys, hot dogs, etc. will spend their money on massages, house cleaners, farm products, etc. you name it. Isn’t that wonderful!
Ignoring the economic nonsense of the spending view, consider how such an idea jives with an idea that is regularly and roundly poo-pooed by the elite Progressive class – that “trickle-down economics” is a “deeply damaging ruse” to quote a hard-core redistributionist who has a very short-line to the President right now. Now, many of the more “seriouos” debates on “trickle-down” regard whether “the rich” actually respond to tax changes the way supply siders claim. I do not wish to investigate that now (as if it is up for anyone else to decide how much of my own stuff I am entitled to). If the “anti-trickle-downers” were presented with evidence that tax elasticities for the rich were very high, I would bet you a dollar to a donut they would still come out against it. But if that is the case, I find it utterly implausible that they’d be able to wriggle out of that twisty Keynesian pretzel. So, dear Keynesians, if “the rich” were shown to spend every single dollar of tax cuts, and double their work effort when tax rates were reduced (producing astonishingly high multipliers) would you still, then oppose tax cuts for the rich? If so, what does this do to your supposedly “scientific” Keynesian theory? Does C+I+G+NX only matter for the “bottom” 95% of the population?
I read a story once about a Saudi sheik who didn’t spend the cash that the Western oil companies were paying him for petroleum rights. The sheik stored the money in some bags. Mice got into the bags and shredded a lot of the money. He should have spent it when he had the chance.
We seem to be in a similar situation right now, but who are the mice and where is the money? Can Ben Bernanke print money faster than mice can eat it? I’m observing wealthy people who are sitting on their cash for any combination of the following reasons:
a: They’re waiting for prices to fall further
b: They’re afraid that Obama will tax it
c: They’re afraid that future inflation will erode its value
d: Armageddon is nigh
e: They’re pissed about money they lost when the bubble burst and are shy about getting burnt again
f: None of the above
Are we at the point where lowering taxes is like pushing string?
If future tax hikes are a fear, wouldn’t it make sense to spend the money now before its confiscated?
p.s. Who considers themselves wealthy?
Trickle Down is a Franklin Roosevelt expression, later used by others like Al Gore as a straw man to disparage anyone who proposes not soaking the rich. This is not a theory favored by supply-siders in the Reagan administration, although it was shared by David Stockman, Reagan’s first budget director.
The political complexities of the first two years, ’81-’82, are worth a book yet to be written, but part of the story were tax cuts directed to promote investment in productive enterprise, along with an effort to reduce the indirect taxes of regulatory burden.
The tax cuts were phased in over three years, on the advice of Dave Stockman and other Keynesians, which included both country-club Republicans and redistributionist Democrats who mistook supply-side for trickle-down.
But in 1984 the investment outlook was bright with many choices for putting your money to work. No longer was inflation a joke, as it was on Saturday Night Live in 1979. Among other things, people would change their ideas about the non-inflationary rate of unemployment.
Ever since then the Keynseans have fought the notion that supply-side tax cuts worked. One of their polemical techniques is to equate supply siders with trickle downers.
Regarding the Saudi Sheik, he was just plain stupid to store any fiat currency; but it is true that many people are parking their wealth in unexciting places. Among the explanation for this is that they anticipate long-term interest rates will rise, discounting future inflation which will be beyond the control of the Federal Reserve.