Capillary Economics

Conservative-Republicans are almost universally proponents of supply-side economics, often called "trickle down economics." Briefly described, it is the theory that economic growth is best achieved by providing tax cuts or other benefits to businesses and rich individuals, that this will indirectly benefit the broad population.

For example, cutting the corporate tax rate will allow a corporation to increase it's profits, allowing it to invest, expand, and hire more workers. Another example may be cutting the capital gains tax, that rich individuals would be more likely to invest in the market, providing liquidity for corporations to expand.

While it may seem intuitive that supply side economics would work as designed, it is difficult to see any correlation, historically, as seen in the following graph:
(Source: http://www.faireconomy.org/research/TrickleDown.html)




We also meet a philosophical issue, however, when we realize that even when supply side economics works perfectly, the poor do slightly better, while the rich become opulently rich.

In the wake of the 2002 Bush tax cuts, the "income gap," the gap between the income levels of the rich and middle class/poor grow consistently, while purchasing power stagnated. (The rich got richer, the middle class got less middle class, the poor got poorer.)

So.

Is it sound economic policy to expand the GDP by allowing poor and middle class to feed off the detritus floating down from the top tax brackets? Or would perhaps a philosophically better policy incorporate helping the people on the bottom have more prchasing power with which to grow the economy: demand-side economics?

Recently, President Obama outlined his proposed budget for Fiscal 2010. The budget shows a shift away from the previous administration's belief in trickle-down tax policy.

The budget will allow the Bush tax cuts to expire in 2011, raising the tax rate on the top bracket from 36% to 39.6%. It will also increase taxes on capital gains by 5% to 20% and limit deductions and other loopholes. It also lowered taxes for middle class Americans. Demand side economics.

Can economic prosperity trickle up? No. That's stupid. Or is it?

Students of biological sciences know that the tallest of trees can bring water and nutrients from the roots to the very tips of every branch and leaf. It's a very efficient system, relying only on the adhesive and cohesive properties of water. It's called capillary action.

The Obama Economic team is attempting to grow the economy from the roots up.

Capillary Economics. Will it work?
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