To many people who are knowledgeable of economics, what I’m going to say will sound pretty rudimentary, but nevertheless, the foregoing content needs to be stated because there seems to be a great forgetting taking place. This forgetting will most likely lead to further destruction of what is left of America’s middle class. And, as the title of this article states, a strong economy needs a strong middle class.
What is this great forgetting to which I refer? What I mean is that the present generation of voters are either ignorant of or have forgotten the lessons learned from the past. The lessons to which I’m referring is the fallacy of “Trickle Down Economics.” Right now, as I type this, Republicans have passed through the house a tax plan that is really just a repeat of Ronald Reagan’s Supply Side Economics (or more commonly known as Trickle Down Economics).
A simplified explanation of Trickle Down Economics (henceforth referred to as TDE) is this — It is said by the proponents of TDE that if we grant tax breaks and other financial benefits to large business and the richest citizens, those people will in turn use that extra money to invest in their businesses, thereby stimulating the economic growth and creating more jobs.
On the surface, that explanations sounds good…and even reasonable. That is until you realize that the tax burden falls on the lowest income earners which are obviously the poor and middle class. When you understand how an economy works, you will immediately see the problem with this arrangement. To put it simply, an economy is really nothing but a series of transactions. Stated another way — the flowing of money in exchange for products, goods and services. The economy functions best when this flow of transactions remain steady. This mechanism is what creates demand in the marketplace, and demand creates a need for more products and services, and that need thereby leads to job creation. Another key factor that you should bear in mind concerning the function of an economy is that one person’s spending is another person’s income. That statement is self-explanatory and I would think that it requires no explanation.
You may be wondering what does the mechanism that I just explained have to do with tax cuts. It is this: There are obviously way more poor and middle class people than there are rich people. Not only that, poor and middle class people also do majority of the spending. Yep…even though rich people have more money, they spend considerably less than lower income earners. When you raise taxes on this group of people, those who do the most spending, they wound up with less money to spend. Keep in mind what we said earlier — it is the circulation of money in exchange for goods and services that makes the economy boom. When that activity slows down, so does the economy. When that happens, businesses will feel the pinch.
With that simplified explanation of what drives the economy, I’m sure that you’ve all heard of the golden days of America’s middle class. Those days when a family could get by on one income. Married couples could buy a home while in their 20’s. A family could buy a new car every few years. Dad received good job benefits, 2 weeks of vacation a year, pay raises and could afford to save money to put his kids through college and forth. Well, the important thing to note is that such an economy existed because more poor and middle class people had money to spend. Companies back then understood that if they paid their workers well, their workers would have enough money to purchase their products. For instance, car manufacturers were probably the first industry to catch on to this and we see how that’s turned out.
Defenders of TDE will say that putting more cash into the pockets of big business and the rich will stimulate the economy and create jobs but on that, I call bullshit. First off, that’s not what happened under Reagan’s Trickle Down policies and secondly, it defies all logic. Let’s put on our thinking caps for a moment in order to deconstruct the argument supporting TDE. As was previously stated, the rich doesn’t spend as much as poor and middle class people. Therefore, they don’t spend enough in order to create the level of demand that would be sufficient enough for businesses to hire more workers and invest in expansion.
Since the rich can’t replace the demand created by poor and middle class people, as was also stated earlier, businesses are gonna feel the pain. So — when there is no demand for a product or service, because those who will most likely spend don’t have as much money as they once did, why would a company hire more workers? That would be a stupid thing for them to do if they’ve saw a decline in the sales of their products and services. In other words, the idea of creating supply before there’s demand is fucking stupid and that’s precisely what purveyors of TDE want us to believe we should do. If anything, businesses will try to find a way to save money by cutting worker’s hours, laying off workers or at the worst, closing their doors.
Conclusion: If you take nothing else from this article, just keep in mind two things. 1) An economy is nothing but a lot of transactions (or, buying and selling). When this buying and selling slows down, so does the economy. 2) In order for this buying and selling to take place, money has to be placed into the hands of those who will spend.
With those two points in mind, you should now see why we need a thriving middle class in order to create a robust economy. When those who are willing to spend have the money to do so, that creates demand for products, goods and services. In order to meet this demand, businesses will need to hire more workers and so forth.
When you understand the point that I’m making, this is why a concept such as raising the minimum wage is not some wild “socialist” idea that conservatives will have you believe. By doing that, again I reiterate, more people will have more money to purchase things like cars, homes, durable goods, furniture, patronize restaurants, and other countless products and services. But, if the middle class is declining and people are seeing not only their wages remain stagnant but more of their money going towards the payment taxes, it stands to reason that they are going to hold to as much money as they can for the purpose of survival. When more and more people do this, this is when the economy slows down. Therefore, the only solution (as I’ve said many times already) is to have a thriving, well-paid middle class who will spend in order to create demand that is necessary for our economy to function.