The most basic concept in economics involves three components: Demand, Supply, and Price. Supply is created by businesses and corporations who are producing goods and services to sell to consumers at a profit. Demand is created by consumers who not only want and need the goods and services, but also have the money to purchase them. Price is the variable that supposedly changes in response to the amount of Demand and Supply that exists. Bigger Demand and smaller Supply result in higher prices while bigger Supply and smaller Demand results in lower prices.
Of course, nothing is that simple and there are thousand of other variables involved, including the fact that the two sides of the equation, Supply and Demand, are not that separate and distinct from each other. For example, in creating Supply for sale to consumers, producers hire individuals which gives those individuals more money to spend, thus increasing Demand.
In American politics, the question becomes what role the government should play in stimulating and maintaining a healthy relationship between Supply and Demand, and thus maintaining a strong and healthy economy. Those who try and tell you that the government should NOT play any role, and that the “Invisible Hand” of a free market will take care of everything probably also still think the world is flat.
The fact of the matter is that, without government regulation of the process, preventing monopolies, unfair business practices, and business practices that defraud and even endanger consumers, there will be no economy – only a very few who have everything and the rest of the masses who have nothing.
In addition to regulating the process to prevent collapse, the government must also take actions designed to stimulate the economy and help it grow. And it is in this area that the argument between Democrats and Republicans has raged for decades. Republicans would have us believe that the only way to stimulate the economy and keep it growing to to give more tax cuts to the wealthy and tax loop holes to huge corporations. They call these folks the “Job Makers,” and tell us these people need the money in order to invest in increased production and added jobs. The added jobs will provide more spending power to consumers and thus the economy will grow. This is Supply-Side Economics, and they call it “Trickle-Down” economics.
This may all sound good in theory, but there is a fatal flaw in this reasoning. The first problem is that, in order to pay for all these tax cuts to the wealthy, Republicans keep trying to cut funding for social programs and assistance to the poor. These programs put money directly into the hands of those Americans who need it the most, and thus are most likely to spend it. And THAT is a direct boost into the Demand side of the equation. The second big problem with Supply-Side Economics is that Supply and Demand are two completely different animals. There is another complete section of the economy, called the banking industry, whose primary purpose in life is to loan money to businesses and corporations so that they can grow their businesses, increase production, and increase jobs. The primary requirement for getting these loans is the existence of a high consumer demand for their products and services. There is no equivalent part of the economy on the Demand side of the equation that is ready to give money to broke consumers so that they can spend it.
So, Trickle-Down Economics is nothing but a big scam. Giving more money to the wealthy and corporations, at the expense of consumer spending power, does nothing except fatten up the bank accounts of those corporations and wealthy individuals. No businessman in his or her right mind will increase production and add jobs if his or her customers have no money to spend on the products and services being provided. On the other hand, if your customers have a lot of money to spend, and the demand for your products is high, but you have no cash in your bank account, your local bank will be more than happy to give you a business loan so that you can increase your production and add jobs. We call that “Bubble-Up” economics.