The following was written by guest blogger Donovan Quinn.
In order to understand Huckonomics, one must comprehend basic economics.
In a nutshell, the science of economics deals with scarcity. If a person were capable of producing everything that he could ever need or desire without any assistance from anyone else, then he would never buy or sell anything. Instead, he would stay at home and live contented with all of his stuff.
The very fact that marketplaces exist is concrete evidence that no man is an island. I need things from other people just as other people need things from me. The marketplace is merely the place where my surplus time and material is matched with your want or need in a reciprocal transaction. In other words, I will scratch your back if you scratch mine.
Sometimes, though, the marketplace does not always work. I may be a wheat farmer with excess grain while you may be a baker who needs grain. Clearly, I have what you need to make your bread. However, if I do not need your bread, then what can you offer me in exchange for my grain? Absolutely nothing! In a complete vacuum, our bilateral transaction could never happen. Nevertheless, if a third person who wants your bread could also provide me with farm implements, then we could create a multilateral transaction: (1) I will give you my wheat if (2) you give him your bread and if (3) he gives me his surplus farm equipment. Basically, I scratch your back, you scratch his back, and he scratches mine. With just a little bit of collective effort and coordination, we all have our needs met by simply bartering our goods and services to each other.
In complicated economic systems where each person needs several different types of goods and services, matching supply with demand by way of bartering would be a yeoman’s task. A multilateral transaction with scores of people scratching each others’ backs in one giant circle might be necessary to supply just one good or service. Moreover, the coordination for such a transaction would make going to market a prodigious chore. Beyond this, each person would have to multiply his or her efforts a hundred times over in order to meet his or her other needs. Therefore, the marketplace needs a means of exchange where goods and services may be converted into a universally accepted unit. Fortunately we have that… its called money.
Our present economic system works this way. The wheat farmer needs farm implements, so he borrows money (i.e. obtains credit); he then spends this money on the equipment he needs. His supplier needs bread, so he uses the money that he got from the wheat farmer to purchase loaves from the baker. The baker needs wheat in order to make bread, so he uses his money to purchase grain from the wheat farmer. The farmer, in turn, repays the bank with interest. The cycle is completed. Like an electric current, money has gone around in a circle meeting the needs of every person it touches.
In a way, money is just like electricity. The electrical engineer tells us that current moves one way while the electrons move the other way. Similarly, money goes one way while goods and services go the other. Moreover, if the economic current is ever broken, just like a flipped switch turns off a light bulb, so will the broken flow of money stop the flow of goods and services. When that happens, surplus goods and services are wasted by one person while needs are left unmet with another person. Accordingly, unnecessary barriers to obtaining credit must be eliminated in order to preserve the economic current.
With that said, however, just as electric currents need some resistance, so do economic currents. If too much electricity flows across a wire, the wire will overheat, possibly causing a fire which, in turn, will destroy the circuit. Likewise, if too much money flows into an economy, inflation and/or devaluation will occur.
Put in the simplest possible terms, too much credit (i.e., borrowed money) will destroy an economy just as quickly as too little credit will. If the farmer cannot obtain credit to buy farm implements, he will suffer, as will his equipment supplier as well as the baker who purchases his wheat. The farmer’s grain will rot in the fields, the equipment dealer’s inventory will rust, and the baker will sit idly by doing nothing. In other words, supply will outpace demand as money becomes scarce, and the economic circuit will break.
On the other hand, if the farmer borrows too much money, he may purchase more equipment than he could possibly use on the plot of land he farms. When he does this, his supplier may use his extra money to purchase more bread; this, in turn, will cause the baker to place an order for grain that the farmer could never fulfill. As demand finally exceeds supply, money will become worthless and the economic circuit will short-out.
In the final analysis, an efficient economy needs a stable money supply where buyer and seller alike is able to enter the marketplace with confidence, knowing full well their excess supply will be met with the goods and services that they demand.
This is where “Huckonomics” is different from other economic models.
Up to now, there have been two basic schools of economic thought, to wit: (1) supply-side economics and (2) demand-side economics. Supply-siders look at a dollar and see what it has produced; demand-siders look at a dollar and see what it can purchase. For example, if a farm worker earns $6 per hour while picking 300 heads of lettuce, then every dollar that the worker earns represents 50 heads of lettuce to a supply-sider; this is what the worker is trading when he goes to market. On the other hand, if a dollar can purchase a 20 oz Coca Cola, then every dollar that the worker earns represents a cold drink to a demand-sider; this is what the worker can purchase.
Along these lines, supply-siders endeavor to create more goods and services. Supply-siders believe that the government should give people more incentive to produce. By giving tax breaks to the wealthy—particularly business owners—the government will stimulate the economy. When business owners have higher profit margins, they will have more incentive to produce. As such, they will place more capital into the economy, creating jobs and prosperity from the top down. Hence the moniker “trickle-down.”
Conversely, demand-siders operate from the opposite perspective; they believe that the government should give people more incentive to spend. Each dollar is, in effect, a vote for what goods or services should be offered. As greater votes are placed for a new item, businesses will have greater incentive to produce such an item. Demand-siders believe that economic growth comes from the bottom up. To demand-siders, increased spending—particularly increased government spending—is the best stimulus for economic growth. After all, if there exists no demand for a given product, no tax cut will make that item more appealing to the general public, or by extension any more profitable for the business that produces it.
Huckonomics is a hybrid of the two schools of thought. By replacing the income tax with a retail-level national sales tax, businesses will have greater incentive to produce goods and services. Since business income will no longer be taxed, and since businesses will not be taxed for anything it purchases for resale, business owners will see their tax burden lifted. Accordingly, businesses will have greater incentive to produce goods and services along the lines of the supply side model.
By this same token, the demand-side model is also implicated. At first glance, one may think that leveling a national sales tax would create barriers to trade. (Certainly a 23% sales tax seems prodigious.) However, with businesses no longer passing on the costs of payroll taxes and other imbedded costs to their customers, retail prices will drop. Moreover, with an across the board sales tax in place, every good sold will be on an equal playing field with every other good sold; as such, every good will have an equal chance of receiving a dollar vote. (Right now, this is not the case; some items for sale have more imbedded costs than others.) Beyond this, businesses now with surplus income resulting from having to pay little if any taxes will make larger purchases, particularly at the wholesale level. This, in turn, will stimulate the economy from the bottom-up, along the lines of the demand-side model.
Since Huckanomics does not favor the supply-side over the demand-side or vice versa, Huckanomics will not favor inflationary—or for that matter, deflationary—monetary policies.
The logical extension of a pure demand-side policy is to inflate the economy with excessive government spending, creating a weaker dollar and ultimately breaking the economic circuit. Conversely, if marginal tax rates are cut (as supply siders desire), businesses will have greater incentive to produce goods and services. However, if government spending is cut (as supply siders also desire), demand for these products will drop precipitously since the federal government is the single largest purchaser in the country. Therefore, simultaneous tax-and-spending cuts will create a surplus of goods and services, causing recession, and ultimately breaking the economic circuit. Either way, no economic policy can be purely supply-side or demand-side.
In the final analysis, Huckonomics does not favor business over labor, nor does it favor labor over business. Neither the commodities of supply or the instruments of demand are favored. Rather, Huckonomics brings together the supply-side with the demand side. Huckonomics recognizes that we are all in this together. And if we stick together, the rising waters of economic prosperity will lift all boats—for the rich and poor alike.
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