Roy Fickling is a very intelligent and experienced young entrepreneur and investor. Among his company’s holdings are automobile distributorships, banks, and real estate- the biggest victims of the recent financial collapse. He is very well read and travelled and has a very real and experienced understanding of not just the business world but the underlying economy.
I had shared an articled I wrote and posted on the blog at American Thinker titled Elitist Help for Business. I sent the link to several friends, including Roy. One reader who disagreed with the premise exposed a stereotypically leftist view of the economy. He basically ridiculed “trickle down” economics, said the poor would spend a tax cut on necessities and socially good things and the rich would just buy “yachts and 20,000 square foot Swiss Chalets.”
Roy’s response was a bit long but so well written that I had to share it (with his permission). Part of it follows: (he address issues raised in the quotation marks.)
Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. It is a vicious cycle that most serious economists recognize, including Obama’s own advisory team.
“We know generally the bottom 97% will spend their tax cut…” Actually, we don’t know that. It is a popular catch phrase with the press these days, but there is no proof of that. In fact, evidence points to the contrary.
The Permanent Income Hypothesis (which Friedman earned the Nobel Prize for) postulates that personal spending depends on the average income expected over one’s lifetime, not the income in one particular year. If a person has no expectation that he will continue to receive the new-found money over an extended period of time, he is more likely than not to save a portion of the money. Oops. There goes Keynes’ money multiplier. It becomes a money “divider”. The same is true (in reverse) for top earners and corporations who are currently sitting on tens of trillions of dollars in cash and low risk securities. The point is not to convince the top 3% to go out and buy new rims for their cutlass. The point is to alleviate the fear of the top 3% that their money will be confiscated and that it is OK to go out and take risks by investing their money in something other than T-bills. Even if you believe Demand Side theory and the rich do “buy another yacht, or spend more time on the Riviera, or build another 20,000 square foot ski chalet in the Alps or the Rockies, or buy another play-toy sports venue, etc., etc”, wouldn’t that create they Keynesian effect you are hoping for?
Companies don’t go out and spend money on R&D, new equipment or more important, employees, if they have an expectation that they will not be able to enjoy the profits (the fruits of their risk). Likewise, if they cannot quantify their future government imposed burdens, they are more likely to hunker down to weather the storm. Last year, I could tell you how much an employee cost to hire. It was about 128% of the base salary. Today, neither I nor a fortune 500 company can tell you what it will cost to hire an employee after benefits and taxes. If the goal is to get companies hiring again, we can start by not doing any more harm with this erratic “fiscal policy de jure.”
More of Roy’s response will be forthcoming.