NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, October 27, 2008

Turns out that the best return on investment lies with the poor, not the rich.

A Moody’s analysis earlier this year shows the government gets the biggest bang for its buck by spending increases. A whopping $1.73 increase in gross domestic product is returned for every dollar the Treasury spends by increasing food stamps, for example. This compares with a $1.02 return by a nonrefundable lump-sum tax rebate and a $1.26 return on a refundable lump-sum tax rebate, according to Moody’s.

Extending unemployment benefits, increasing aid to state governments and spending more on infrastructure all beat out tax cuts in terms of return on investments across the board, data show.

In other words, investing in the bottom of the pyramid produces more gains that rise to top — so much for trickle-down theory.

Infrastructure spending means more jobs will be created. And that is exactly what people need right now: incomes. The environmental blog Grist points out that if these infrastructure investments are “green-minded” we could also tackle climate change. That’s a double: better economic and environmental defenses.

Certainly during these economic times — to extend the baseball metaphor — no one is going to hit a home run with their economic plans. But we need a better strategy than empowering the rich to spark the economy as Sen. John McCain suggests with his tax cuts and incentives for businesses.

The rich and businesses can afford to horde (look at the government pleading with banks now to loosen their coffers). The poor cannot afford to save. They spend. And when they do spend they don’t waste. They practice basic consumption, not overconsumption. This is where we must take a look at the fundamental approach at how this country is going to deal with the two biggest crises facing us today: economic change and climate change.

Both candidates need to go further in their strategies addressing green-collar jobs. Both candidates need to see the value in strengthening our nation from the bottom up, not the top down. Just take a look at the Moody’s analysis: providing a corporate tax cut gives one of the worst returns on investment, only eclipsed by making the Bush tax cuts permanent and accelerated depreciation.

Trickle up

We can and should start to embolden our society through the literal base of all constituencies: the poor and underprivileged. After all, when you build something — and make no mistake we are nation building right here at home — you start with the foundation, not the roof.

Trickle down economic theory only works if you can count on the trickle. But these days the climate, not matter of which we speak, is changing too much

We need to increase our spending on the needs of the poor and the needs of our infrastructure to fund a stronger tomorrow. Otherwise we are going to be doing the same things expecting different results. Freud called this the definition of insanity. If nothing else, we need sane and sober policies, not “gut decisions” based on visceral reactions.

We do not need a culture of tax and spend. But we certainly do need to spend in the right places. And those places are where the world is hurting most and where the poor live.