Question about Supply Side Economics/Trickle Down Economics/Horse and Sparrow theory

[CoccoBill]

How is Warren Buffet having $1M in the bank better than a million people having $1 in the bank?

When a poor person spends a dollar, he is increasing demand, therefore making it possible to increase supply, creating wealth, right?

When a rich person puts a million on a Swiss bank account or invests it in a shell company in the Caymans, he isn't doing much for the economy, right?

[wufwugy]

How is Warren Buffet having $1M in the bank better than a million people having $1 in the bank?

The way in which this would affect the quantity of excess reserves used for loans the bank has is in costs associated with the different makeup of customers. I don't know which scenario would be more costly. In general, the more excess reserves a bank has the more able to pursue the next marginally beneficial loan it can.

When a poor person spends a dollar, he is increasing demand, therefore making it possible to increase supply, creating wealth, right

One of the factors that affects a demand curve is the perception of wealth. When there is an increase in perception of wealth, the demand curve can shift to the right (that's an increase). The increase of wealth is a cause of the demand curve shift, not an effect. The effect is producers increasing quantity supplied (this is different than supply) to meet the new quantity demanded of the increased demand curve. The increased demand curve raises the price and quantity of goods/services in the market.

A change in demand doesn't affect supply. Supply changes for different reasons, like a change in price of raw material or labor used to create the good/service in the market. When supply increases, it also yields an increase in quantity like a demand increase does, but it does one better by decreasing price instead of increasing it, thereby increasing the amount of goods/services possible to consume at the same income. This is akin to a wealth increase, though I don't know if it technically is. It does, however, function as a prosperity increase.

As you can see, from this is makes sense why lots of economists are big fans of supply side reforms. You get more bang for your buck by increasing supply than by increasing demand. Granted, that isn't the only concern, so it isn't always the most proposed solution. "Supply side" or "demand side" economics/economists are in my estimation misnomers. For example, the economists I agree with the most are called supply-siders yet they have what I think is the most coherent explanation for why demand has lagged and how to increase it. Does that make them demand-siders? Sure, but really the labels are just dumb in the first place.

When a rich person puts a million on a Swiss bank account or invests it in a shell company in the Caymans, he isn't doing much for the economy, right?

Switzerland does very well in part because of this. Economies do benefit from this behavior, it's just sometimes a question of which. The reason this topic gets a lot of play in US politics is because the perception is that the US economy loses out by offshoring capital. I don't actually know if that would be true if there was truly free trade, but if there is not truly free trade (there isn't) then it probably is true.

[CoccoBill]

The way in which this would affect the quantity of excess reserves used for loans the bank has is in costs associated with the different makeup of customers. I don't know which scenario would be more costly. In general, the more excess reserves a bank has the more able to pursue the next marginally beneficial loan it can.

Undoubtedly any costs incurred by the clients would be compensated in service fees. So I suppose if anything, having more smaller customers would generate more business, turnover and most likely profits for the banks, if compared to one large one.

Sounds to me that from this aspect, handing out money to the poor would probably be the same or better for the economy than giving it to the rich.

One of the factors that affects a demand curve is the perception of wealth. When there is an increase in perception of wealth, the demand curve can shift to the right (that's an increase). The increase of wealth is a cause of the demand curve shift, not an effect. The effect is producers increasing quantity supplied (this is different than supply) to meet the new quantity demanded of the increased demand curve. The increased demand curve raises the price and quantity of goods/services in the market.

I meant an increase in wealth/profit for the producers, not the consumers.

A change in demand doesn't affect supply.

I'm sure you meant to add "directly". Increased demand surely affects price, number of suppliers, R&D investments etc. which all can affect supply indirectly. I might even argue an expected increase in demand will directly increase supply by producers ramping up production anticipating the coming price increases.

As you can see, from this is makes sense why lots of economists are big fans of supply side reforms. You get more bang for your buck by increasing supply than by increasing demand. Granted, that isn't the only concern, so it isn't always the most proposed solution. "Supply side" or "demand side" economics/economists are in my estimation misnomers. For example, the economists I agree with the most are called supply-siders yet they have what I think is the most coherent explanation for why demand has lagged and how to increase it. Does that make them demand-siders? Sure, but really the labels are just dumb in the first place.

If there's no demand, any added supply is wasted, leading to price drops and losses for the producers. If there's no supply but there's demand, the market will deal with generating supply, that's what it's good at.

Switzerland does very well in part because of this. Economies do benefit from this behavior, it's just sometimes a question of which. The reason this topic gets a lot of play in US politics is because the perception is that the US economy loses out by offshoring capital. I don't actually know if that would be true if there was truly free trade, but if there is not truly free trade (there isn't) then it probably is true.

So let's try to sum this up.

- Regarding expenditure and consumption, it makes no difference whether the actor is rich or poor
- Regarding investments/savings, it makes no difference whether the actor is rich or poor, except it possibly being better for banks if they're poor
- Rich people sometimes offshore wealth hurting the economy they are participating in, the poor far less so

So far I'm finding it hard to see why it's clearly better to give money/tax breaks to the rich, not the poor (as in the 90-99%).

[wufwugy]

Undoubtedly any costs incurred by the clients would be compensated in service fees. So I suppose if anything, having more smaller customers would generate more business, turnover and most likely profits for the banks, if compared to one large one.

Sounds to me that from this aspect, handing out money to the poor would probably be the same or better for the economy than giving it to the rich.

If we're talking tax cuts, it depends. Keep in mind that popular discourse incorrectly frames tax cuts that benefit the poor as benefiting the rich instead.

I meant an increase in wealth/profit for the producers, not the consumers.

It would be an increase in wealth for that particular producer but not for the economy because it would be a decrease in wealth for a different producer.

I'm sure you meant to add "directly". Increased demand surely affects price, number of suppliers, R&D investments etc. which all can affect supply indirectly.

A change in demand affects price but not the other two. The other two can be affected if quantity demanded/supplied and output are in disequilibrium. Virtually all non-economist pundits misuse the these terms, typically by saying "demand" when they mean "quantity demanded." A change in demand is a shift of the curve; a change in quantity demanded is movement along the demand curve. A shift in one curve doesn't shift the other, but a shift in one curve does change the quantities demanded/supplied. The curves each shift for different reasons. If we're talking aggregate demand and aggregate supply (different curves than just demand/supply), then some things can shift both, like if there is an oil supply shock, both aggregate supply and aggregate demand curves will shift left (decline).

I might even argue an expected increase in demand will directly increase supply by producers ramping up production anticipating the coming price increases.

You can almost never go wrong arguing for the role of expectations in economic behavior.

So far I'm finding it hard to see why it's clearly better to give money/tax breaks to the rich, not the poor (as in the 90-99%).

I don't know anybody who has argued for organizing tax cuts such that they disproportionately benefit the rich. Keep in mind that most of what is covered by journalists regarding tax is wrong.

[wufwugy]

A change in demand affects price but not the other two. The other two can be affected if quantity demanded/supplied and output are in disequilibrium. Virtually all non-economist pundits misuse the these terms, typically by saying "demand" when they mean "quantity demanded." A change in demand is a shift of the curve; a change in quantity demanded is movement along the demand curve. A shift in one curve doesn't shift the other, but a shift in one curve does change the quantities demanded/supplied. The curves each shift for different reasons. If we're talking aggregate demand and aggregate supply (different curves than just demand/supply), then some things can shift both, like if there is an oil supply shock, both aggregate supply and aggregate demand curves will shift left (decline).

I'd like to add something to more closely address the point you were making.

When there is a change in quantity demanded, producers certainly try to meet it, which can result in a change in production. If it's an increase then it does mean that there is an increase in prosperity, roughly speaking. However, in the aggregate context, this does not mean that a redistribution from the rich to the poor will have that same effect. Nobody knows exactly what happens in that case. The idea that redistribution can increase aggregate demand assumes things not demonstrated. It assumes a market inefficiency that is solved by the redistribution and it assumes the fall in aggregate demand resulting from the detraction of consumption/investment from one area is more than offset by the proposed increase coming from those who were given money. It assumes even more too.

This idea is plausible, but in my estimation (and of lots of economists), it is bad economist-ing. The idea doesn't fall in line that well with economic principles and the empirical evidence is quite inconclusive. The idea's legitimacy among economists is due to derivation from functions that make up the GDP equation. The functions are arbitrary and not agreed upon by all economists. A big issue here is that the functions are wrong and economists can explain why, but none know how to create more rigorous and less controversial functions. This has resulted in some economists treating the functions as if they are correct enough to treat as virtual truth.

[wufwugy]

When there is a change in quantity demanded, producers certainly try to meet it, which can result in a change in production. If it's an increase then it does mean that there is an increase in prosperity, roughly speaking.

I forgot to add that this is only an increase in total production if it comes from something like an increase in wealth. Even if a poor person with a small savings account pulls out of that savings account to consume currently more than he typically does, it's not an increase in total production due to the detraction of saving and all that goes along with that. In some cases -- I think in most cases -- that would actually result in a decrease in total production.

[CoccoBill]

I forgot to add that this is only an increase in total production if it comes from something like an increase in wealth. Even if a poor person with a small savings account pulls out of that savings account to consume currently more than he typically does, it's not an increase in total production due to the detraction of saving and all that goes along with that. In some cases -- I think in most cases -- that would actually result in a decrease in total production.

Doesn't this depend entirely on what type of goods we're talking about? 1000 poor people probably use more toilet paper than 1 rich guy, but the 1 rich guy probably always buys more private jets. Coke and bitches might be a toss-up.