Wednesday, April 5, 2017

Bottom up Economics

Before starting this post, I spent some time researching information found when I Googled "bottom up economics"; specifically I looked for articles that advocated for it using logic and examples showing successful applications, and articles that disagreed with the concept, preferring a supply side, or trickle down economic approach as is generally associated with President Reagan.

As is the case in almost any topic one might want to discuss, there are cogent assertions for both theories, as well as specific examples cited proving each is more correct than the other.  Additionally, there was some comments about a mixed approach, the theory being that neither can work all the time, neither will fail all the time, and, that both can work some of the time.  In other words, there are circumstances where each one can be applied, successfully, to produce positive results.  Which also means that when you see an expert citing the advantage of one over the other by using past examples, that expert MUST detail how the conditions of the time mirror the conditions of today.  Merely citing an example when something once worked, certainly does not guarantee it will work now.

The real trick then, is deciding when to apply one over the other.  I say trick because, with macroeconomics, it is very difficult to easily assess the current conditions while still involved in those conditions.  It is generally only afterwards that a true assessment can be made as to how a change in economic theory and application worked, and even then, it is still only guesswork.

For instance, did the economic bail out of the banking system in 2008 work?  I could argue that based on the fact that since 2008, unemployment has dropped significantly, the stock market is at an all time high, and the dollar is as strong as ever, it was a successful strategy.  Unfortunately, it is impossible to know what would have happened if the Bush/Obama Administrations had not provided monetary relief.  Same with the auto industry.  Would it have recovered on its own, or would it still be recovering, which means those thousands of jobs, both direct and indirect, may not be there today.

If we decide that, all in all, our economy today is better off than it was in 2008, then, despite some assertions that it MAY be better had nothing been done, it seems reasonable to conclude that top down economics in this situation worked.  Large employers were saved from bankruptcy, which meant that thousands of jobs were saved, which meant that more money was spent for goods and services, which ultimately produced an environment where more jobs could be created to respond to that increase in demand.

One might argue, that the depression of the 1930's may have occurred, or one could say been made worse, by the approach at the time to allow the market to operate without government intervention. Now, I know that is only a theory because, again, one does not know if an approach similar to what was done in 2008 would have worked in 1929.  Again, only theory, but certainly some logic to it.

But government provided handouts is not really what top down or bottom up economics is about, even though I found it cited in most of the arguments against bottom up economics.  In those discussions, handouts to the poor in the form of welfare and anti-poverty programs was often cited as the essence of bottom up economics, along with the proof that since the United States has spent billions of dollars in this manner and there are still poor people, then bottom up economics is a failure.

A better explanation of bottom up economics was provided by an author who compared, in generalities, Wal-Mart and Google.  Wal-Mart is notorious for its poor record in the area of providing health benefits and a livable wage, while Google goes out of their way to pamper their employees.
Of course, it is not strictly fair to compare the necessary work skills required by employees of these two companies.  One could easily say that Wal-Mart treats their employees similarly than all other retail employees while Google must offer more incentives to get the best people as do all tech companies.

Still, whether we isolate Wal-Mart and Google or just generalize by referring to retail, fast food, and other service industries when compared to industries that require more educated, and/or more specifically trained employees, the facts remain that a larger percentage of the employees of those Wal-Mart like companies require government assistance for health care, shelter and food, than for those companies more like Google.  Which means the American taxpayer foots the bill so that industries that do not provide basic wage and benefits can maintain their profit margin, and their low prices.  Which also means that those employed in those industries along with other lower wage earners, have little choice but to patronize those establishments, thus creating a perfect circle of low pay, cheap goods, trapped consumers.

While employers who provide better wages and benefits, create citizens who have their own money to spend on goods and services, not government provided money.

For me, bottom up economics has little to do with government handouts, and everything to do with employers who understand that employees work the hardest when paid a livable wage with decent benefits, just like supply side economics is not usually associated with government bailouts but is more about creating an environment where innovators and job creators are encouraged, not stifled.

Jamie Dimon, CEO of JP Morgan Chase & Co, was in the news recently after lamenting that there was something wrong with the United States.  He cited a number of issues, all legitimate, but listed tax overhaul, regulation reduction and infrastructure spending as solutions.  But what he didn't say, to me, was the problem.

Income inequality, especially when we examine the wages of those in the top 5% as compared to those in the bottom 50%, must be addressed.  The median AGI (Adjusted Gross Income) as detailed from the 2015 tax returns of all American households was approximately $35,000.  The bottom 50% of all 2015 returns paid less than 5% of the taxes collected.  As long as we continue to tolerate
non-livable wages, especially as paid by the largest of our employers, our economy will continue to be dependent on artificial stimuli, government provided or otherwise.

Perhaps if Dimon lead by example and took a pay cut, let's say from his current $35 million salary to only $25 million, and then encouraged other CEO's to do the same, and then perhaps if those making only $25 million could get by with $20 million, and those making $20 million might struggle through with only $15 million, and so on, perhaps there would be room to give raises to the everyday people who perform the everyday functions of those companies.  And this goes for entertainers, sports stars, etc, because that same IRA data shows that the top 5% earned one out of every 3 dollars, the top 10% almost one out of every two.  Put another way, the bottom 50% of households earned only one in nine dollars.

Shifting compensation will provide more money for those who earn the least, with little effect on the standards of living of those at the top.  Shifting compensation to those who earn the least will remove some from welfare and other government subsidy programs.  Shifting money to those who earn the least will provide that little extra that may result in a new purchase.

That is what I think of as bottom up economics, and it doesn't require a price in increase on products or services, just a more equitable distribution of salaries.

Bottom up economics, as I see it, has very little to do with government spending and virtually everything to do with private business compensation and benefits packages.  It has everything to do with the belief that the rich, the really super rich, do very little for improving the economy via purchases, as they buy products only meant to convey status or improve an already luxurious lifestyle, when they aren't guarding their wealth, while the everyday workers spend their money in their local economies which improve their communities, and create the need for more employees.  No big corporation or company hires new workers unless in response to the need to increase production, yet it is only when more money is in the hands of the everyday people that more goods and services need to be provided.

Somewhere down the line, I have faith that the American voter will realize that electing rich people will not result in a more equitable income distribution.  Somewhere down the line, business men and women with vision will realize that unless the bottom 50% of wage earners have money to spend, their businesses will see limited growth.  Somewhere down the line, government and business cooperation, not in the form of rigged tax laws and special interest influences, will emerge to create an economic environment that encourages innovation over monopoly, equitable income over greed, and the proper balance that rejects short term solutions that sacrifice our natural environment.

I only hope that somewhere down the line occurs before we have traveled too far in the opposite direction.


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