Trickle Down Economics – The Government Version

One phrase I kept hearing during the Us Presidential election was that “trickle-down economics” had failed and middle class America had not shared in the wealth created over the last 10 years.

Here is a definition of trickle down economics;

“For those of you who do not know trickle down economics, as democrats like to call them, or supply side economics as we economists like to call them.  This school of thought argues that economic growth can be spurred on or created by encouraging the production of goods and services which helps money “trickle” through the economy from the businesses to the employees to the customers and back to the businesses thus creating a cycle of the spread of economic growth throughout the economy.”

President-Elect Obama has stated in one of his speeches that trickle down economics had failed America. In fact he said;

“Well now we know the truth. It didn’t work. Instead of prosperity trickling down, pain has trickled up.”

I don’t want to make this a political statement. I want to point out that there is some hypocrisy in all of this with the massive bailouts that are going on around the world right now.

If trickle down economics is dead why are we giving tax-payer money to banks, auto companies car dealer financiers and the like?

In Australia we have a great example of this I call the great car dealer bailout plan of 2008. Our Prime Minister has “pressured ” the big four banks to create a $2B fund to help bailout around 500 car dealers who are finding it difficult to get finance for the cars they have on sale. With GM and GE finance grabbing their ball and going back to the US no one else is prepared to fill the car dealer finance void.

That should be telling us the floor plan debt financing model is dead, or at least needs a serious overhaul. It too was based on  the ever onward and upward march of the economy. We need more robust financial systems for car dealers too.

Anyway back to the tickle down thingy.

This $2B will be given to “selected” financiers. I suspect many will be in some way connected to the banks themselves since they own most of them. Cynicism apart though the plan is for the financier’s who are the winners in this bailout, to then provide finance to “selected” auto dealers.

They are duty bound by our government to only lend to “viable” auto dealers and so must decide the winners and losers in that industry.

Our government knows how tough it can selecting “viable” (the winners) and “unviable” (the losers) car dealers, so to avoid any of the big boys getting hurt financially our government is going to guarantee the principal and interest on any loan below AAA. That’s right they are going to guarantee those most likely to fail. (Isn’t that a subprime disease?)

Even then our government is allowing for the financiers to get it wrong 20% of the time because they are allowing for a loss of up to $400M. This they call a “minor proportion”. That shows a lot of confidence. I think Ronald Reagan once said he had about a 50% chance of being right and he was a President. These guys are going to get it 80% right.

Apart from all the things that are wrong with this plan isn’t it “trickle down economics”? The only difference is rather than private enterprise being involved, the government is forcing the banks to do it and insuring them against failure once again.

As usual we have a head in sand approach to the problem. What if consumers/businesses don’t want to buy a car? Well I suppose we keep some bank employees, financier employees and car dealer employees paid for a few months hoping the market will pick up. But no cars are sold or very few.

If we are in the bailout business, to me it would be far better to “select” all those consumers with cars over 8 years old and give them $30K to go and buy one. Better still run lotteries in 66,666 pubs and clubs in Australia – we’re good at that. That would get people out and spending too.

It would enable 66,666 consumers to go out and purchase a new car. Government can “pressure” consumers to use that money to actually buy a car or lose the money.

1,000,000 cars were sold in Australia for the first time this year. My plan represents 6.7% of total car sales for the year. If that is not a stimulus I don’t know what is.

At least that way the car dealers would have to compete for the business in order to survive rather than being “selected”.

The same with the finance companies. I’m sure they would be knocking on all the car dealer’s doors begging for their business and will take the risk. That is as it should be too.

This way bankers, financiers and car dealers have to work for the business instead of getting a handout which tends to be hoarded and ends up in the pockets of the powerful in any business as they lay of workers. Just ask any recently laid off bank employee.

The main point of this post is that trickle down economics has not gone away. It has just been re-launched but under government control.

If we have to have bailouts, then for a bottom up economy to work give the money to the consumers and then make them spend it.

How does this affect Baby Boomers? The more our governments try to avoid biting the bullet and allow the economic cycle to complete, the longer it will take for the economy to make a genuine recovery. That means your nest egg is likely to take much longer to recover any losses.

In Stock Trading there is a saying, ” The First Loss is the Best Loss”. It means when you have a losing trade you sell when your rules tell you to. If you delay selling, the losses most likely increase and when you eventually sell you realise a far bigger loss. I think it applies to the economy too.

Leave a Reply

CommentLuv badge