That's the first law of practical economics. Everyone knows this to be true, whether or not one has ever taken a course in Economics. Everyone except, apparently, a few Ph.D economists who seem to forget this rule when they are hired by the Heritage Foundation, the American Enterprise Institute, etc., from which they migrate, back and forth, between offices in Republican administrations and these right-wing think tanks.
For these worthies, the "first law" is replaced by the dogmas of deregulation, "trickle-down" and market fundamentalism: impoverish the masses, throw money at the rich who will then invest it, and then "the invisible hand" of the unregulated free market will bring forth a cornucopia of goods and services.
Never mind that there will be few if any buyers for these consumer goodies.
Henry Ford saw the fallacy of such a policy when he raised the wages of his workers. His competitors in the auto industry were aghast. "Why did you do that?," they asked. Ford is said to have replied, "If I don't pay them more, who will buy my cars?"
It took awhile, but Henry Ford was eventually proved to be right. In 1935, in the depths of the great depression, Congress passed the Wagner Act which greatly enhanced the power of labor unions to bargain collectively on behalf of their members. And after World War II, the G.I. Bill allowed millions of returning war veterans to go to college and then to enter the work force as trained professionals. The ranks of the middle class swelled, and as a result of this gain in disposable income, so did the nation's economy. In an ongoing and sustainable economic symbiosis, the investments of the capitalists "trickled down" to increase the worker's productivity, income and purchasing power, which in turn "percolated up" to provide generous returns on these investments. Like the fabled golden goose, this economic arrangement promised a perpetual production of "golden eggs" of shared prosperity.
Then came Reaganomics, which allowed the ruling oligarchs with their insatiable appetites for "more, still more," to dismantle the unions, to cut back workers' salaries and benefits, to ship manufacturing and management jobs overseas, to starve the tax base through loopholes, regressive tax rates, and off-shore incorporations, and to strip the government of its Constitutionally stipulated function of regulating commerce. (Article One, Section Eight). As most citizens have consequently drifted toward poverty and serfdom, and the government has been taken "to the bathtub" to be drowned, the upward "percolation" has been drying up. Rather than protect and perpetuate the economic system that produced their wealth, the privileged class is cooking and devouring the golden goose.
Senator Bernie Sanders reports the resulting plight of the American middle class:
The economy is doing great, except for 90% of the people in the economy. The reality is that we have the hollowing out of the American economy. Median family income declined by $2500 in the last seven years. 8 million people lost their health insurance. 3 million people lost their pensions. This is a strong economy? You've gotta be insane to believe that. Meanwhile, the richest one percent of the population possesses more wealth than the bottom ninety percent. (See also G. William Domhoff: "Wealth, Income and Power").
This is how a once-flourishing economy shrivels up and dies: the few who own and control the nation's wealth refuse to share that wealth with the many who produce that wealth.
Ahead lies ruin for rich and poor alike.
For those with eyes to see, and a willingness to see, the consequences of this unconstrained and unregulated greed are apparent and irrefutable: a constriction of the economy which, unless met immediately with decisive and painful countermeasures, must lead to economic collapse. We can expect no such countermeasures from the Bush ("the fundamentals are sound") administration. With the bursting of "the housing bubble," consumer debt has reached its limit: the national credit card is maxed out. Under Bush, the cost of food has doubled, and of gas has tripled. (Neither food nor fuel are counted in Bush's phony Consumer Price Index, which consequently understates the gravity of current inflation). As the average family spends more on necessities such as food, medical care, home heating and transportation to and from work, "luxuries" simply must drop out. No more vacations. Fewer trips to the movies and to restaurants. Fewer purchases of new cars (the old one will have to do for a few more years). Businesses fail, workers are fired, stocks plunge, unemployment rises, the dollar falls, the cost of imported goods (which means, due to outsourcing, most consumer goods) rise. Still less disposable income to pay for higher priced goods and services. More businesses fail, more workers are fired, etc. Down, down, down, goes the spiral.
"No sellers without buyers." It's so obvious, so indisputable, even tautological. How can anyone doubt this fundamental rule of practical economics, much less promote policies that defy it? Answer: because just as history is written by the victors, political/economic dogma is written and taught by those with great wealth and power. And anti-government, trickle-down, market absolutism are the dogmas of those who own and control the nation's wealth: dogmas that Friedrich Nietzsche called "a master morality," and that John Kenneth Galbraith characterized as a "moral justification for selfishness."
History provides numerous examples of such "justifications" by those privileged with wealth and power. Out of the middle ages came the doctrine of "the Divine right" of royalty to rule in luxury. This was supplanted by the Protestant claim that personal wealth was the sign of Divine grace. In the gilded age of the late nineteenth century, the Robber Barons embraced the theory of "social Darwinism;" their wealth proved their superior "fitness" to survive. And now we have the regressive dogmas of Reaganism, of Bushism, and, let's admit it, to some degree at least, of Clintonism: "trickle down," unconstrained capitalism, the wealth of the few as the key to the wealth of all others. "The rising tide" that lifts all yachts, the regressives assure us, lifts the dingys as well.
The fundamental error of "trickle down" economics is not that it is false, but that it is a pernicious half-truth. As noted above, in a healthy economy, investments do in fact yield results that "trickle down" to the benefit of the workers and the public at large. But as Abraham Lincoln correctly noted in his first inaugural address, "Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if Labor had not first existed." Thus "trickled-down" benefits of investment presuppose the "percolated-up" wealth that is produced by labor. An economic theory that touts "trickle-down" benefits of investment to the neglect of the production of labor and the well-being of the workers, is a theory that must fail in its application.
The doctrines of regressive economics – "trickle down," market absolutism, minimalist government – are dogmas in the literal sense of that word: like creationism and dialectical materialism (Marxism-Leninism), they are believed and promulgated independently of evidence and practical experience. If they are applied and fail, there is always an excuse at hand that does not allow a suspicion that the dogma itself may be flawed. In contrast, progressive economics is empirical, experimental and pragmatic: constant in ends, and adaptable in means. As with numerous schemes in FDR's New Deal, the progressive policy is tried and, if it fails, it is discarded and a new approach is attempted, and so on until policy is found that "works." (For an expansion of this point, see my "Beautiful Theory vs. Baffling Reality.").