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Monday, October 27, 2008

Economic Growth from the "Bottom-Up"?

Barack Obama’s proposed economic platform is built upon the belief that we can make America great once again by redistributing the income of the wealthiest Americans to the poor. He hopes to replace the outdated “trickle down” ideology with a new and improved “bottom-up” economic growth philosophy. Is it possible that giving more money to the poor could save our economy and be the key to greater wealth and economic prosperity?

To answer this question, I think we must first have a deeper understanding of money and how it obtains its value. I know of no other piece of literature that so compellingly and succinctly offers an explanation of the value of money than Ayn Rand’s Atlas Shrugged:

Money is a tool of exchange, which can’t exist unless there are goods produced
and men able to produce them. Money is the material shape of the principle
that men who wish to deal with one another must deal by trade and give value for
value. Money is not the tool of the moochers, who claim your product by
tears, or of the looters, who take it from you by force. Money is made
possible only by the men who produce. http://www.capmag.com/article.asp?ID=1826

Income is simply the measure of a man’s ability to produce. So, obviously in a free society those with the greatest ability to produce will have higher incomes than those who produce little. The intrinsic value of that thin piece of paper called the United States dollar rests entirely on the shoulders of those men who have conceived and created, constructed and fabricated, designed and invented, or sowed and reaped the fruits of their labor.

Barack Obama believes that these men, the ones who give value and meaning to our money, need to “share the wealth” by bestowing an even larger portion of their income to those who have the greatest “needs”. His Ivy League educated economic advisors have convinced him that confiscating the wealth of the richest Americans and redistributing it to the poor will spur the economy forward.

As students of economics, we all understand the initial reaction the market will make if the “bottom-up” economic growth policy is put into play. When determining the amount of goods to produce, business owners must now take into consideration the added cost to their marginal production as corporate income taxes are substantially increased. Our economic models show that the government’s intervention will greatly alter the producer’s behavior and result in businesses lowering their production to the point where the new, higher marginal costs are equal to their marginal benefits. Businesses with higher production costs may find the new tax on production to be overly burdensome and chose instead to quit producing altogether to pursue other activities that have lower opportunity costs (like escaping to a country with freer economic policies, entering retirement or becoming one of the recipients of the income redistribution).

The massive transfer of wealth will cause a sudden increase in demand for goods and services by the recipients of the income redistribution, which will inevitably cause an increase in the price of these goods. Of course, this is where Obama’s economic advisors will tell you the “economic growth” comes into play as producers will rush to fill the growing demands of consumers that suddenly have cash to spend. Of course, many producers will ramp up production to capture additional profits and meet the rapidly growing demand, yet I can hardly believe that the increase in production will be equivalent to the pre-redistribution tax levels as we must now take into account that a substantial portion of these profits must be distributed to the government bureaucracy that oversees these new tax programs.

I suspect that the end result will be fewer goods produced at a higher cost to consumers, which means there will be less of everything to go around. I must admit, I am having a hard time figuring out how having LESS is truly the kind of “change” that we all were hoping for, since professor Eubanks always says that in the world of economics, more is always better. Of course, maybe the more sophisticated, enlightened form of economics they teach at Harvard and Oxford somehow illuminates how less really IS more.

In addition to producing fewer goods, I also surmise that the value of the almighty dollar will take a severe beating when one’s purchasing power is no longer linked to their ability to give back to the economic system, but rather their “need” to consume. How do you trade “value for value,” and maintain a stable currency when on the one hand you have an individual who has struggled to obtain his wealth through his blood, sweat and tears, and on the other, a man who easily fell upon his money by virtue of his overwhelming neediness? I agree with Ayn Rand, it is not possible for the “moochers” and the “looters” of the world to “give value to money. Not an ocean of tears, not all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow.”

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