Main Street vs. Wall Street
December 18th, 2008
Main Street and Wall Street have become polarizing catchphrases to describe the ongoing argument between top down and bottom up economics. The politicization of these terms has become so rampant that we each take sides, completely disregarding the fact that it is the environment that defines the strategy, not the other way around. In both boom times and lean times it behooves us to carefully consider all the present influencing factors, and choose the appropriate strategy based on that regardless of political leanings. Top down and bottom up approaches have their place, but you have to be smart about choosing which to use.
It’s fairly common for politicians to convert extremely complex topics into sound bytes. We’ve seen it happen- so and so will take their opponent’s economic policy, pull it apart looking for the slightest thing that might motivate the opposition, and then use it like a hammer to completely discredit their opponent. So has it been with the claims of the 45-day old election propaganda (does anyone still remember how much they cared back then?), so it will be with any and all upcoming elections as long as this firebrand strategy pays off.
One personal pet peeve of mine has been the Main Street vs. Wall Street debate, a catchphrase so overused that it’s rivaling Britney Spears for airtime. These five words attempt to turn two fundamentally different economic management systems into a bullet point, and allow anyone to repeat them in an argument while fully absolving themselves of actually understanding what’s going on. It’s easy, we’ve all been guilty of it: What’s more important? Main Street or Wall Street? The former of course. Why? Because it’s more relevant to more people.
Wrong.
The actual discussion is far more subtle and complex than that, and is rooted in the core difference between two economic management systems: Top Down vs. Bottom Up Capitalism. Fundamentally, these theories attempt to place a framework of understanding around economic activity, so as to simplify an incredibly complex system enough that it may be managed, encouraged, and in limited cases predicted. In other words, we understand that a country’s economy is so complicated that we don’t have a clue what’s happening, but we’ve got a sortof vague idea and theory and based on that are going to see if we can prevent it from getting out of control.
Amusing, isn’t it, that “Wall Street” is a simplification of Top Down Economics (Main Street likewise)…. which is a simplification of something we don’t really understand to begin with, but I digress…
To really set the stage for this discussion however we have to set some common ground.
The heart of a capitalist society is the Individual
While some call this person the “Consumer” while others call this person the “Worker”, fact of the matter is that it’s the same person. The Individual is an economic entity unto itself, and through his or her labor produces value which nets them currency from the market, which is then subsequently reintroduced into the market to support the activities of said Individual. In short the Individual is a unit designed to generate and spend wealth, which allows us to define “corporations” as Individuals within a market. In fact, Corporations and Businesses are usually seen as individuals for legal reasons, so at least there we have some backup.
The economy is measured by the movement of money, not the amount of money.
Let’s get one thing straight: If you have a lot of money in your mattress, it’s paper. It is not being used, it is not increasing or decreasing in value (Well, barring in/deflation), it is not helping you acquire goods and services, and it’s not getting registered on any beancounter’s analysis spreadsheet. The economy is defined by the transfer of money through purchase or other means. If the money doesn’t move, it’s worthless.
A single dollar is valuable
While to you or I a single dollar bill might be fairly trivial in economic terms a single dollar has an incredible impact because it is multiplied across millions of Individuals. Provide a $0.25 tax break to everyone in an economy and you suddenly have millions in surplus capital. Similarly, if you provide a $50 Million tax break to one individual (easier done with companies) you have a similar effect. The scale of either action does not matter, because from the side of the entity offering the tax break it all looks the same. In other words, economic actions may be performed regardless of scale, because a single dollar has value no matter how you slice it.
Competition makes the world go round
The true free market advocate (of which I am one) believes firmly in the rules of fair and equal competition. If the playing field is equal (that’s a completely different argument), then the best company should succeed. Notice how I didn’t say “win”- as with any real life simulation, the idea of winning and losing becomes largely meaningless, because we are not playing on a terminated field: The dice keep rolling, the clock keeps ticking no matter what you do. It is in this environment that those companies capable of making the best decisions succeed, while those that make the worst fail, and through that competition we see the ebbs and flows of today’s market.
Top Down Economics (Wall Street)
The basic theory behind top down economics is that management begins at the top, because as soon as you give an Individual (corporation) with far reaching arms the means to expand its operations it will do so (and vice versa), and the cascade effect of new infrastructure will give the appropriate economic kick in the pants.
There are two problems with this theory: First of all, you cannot easily distinguish between companies whose operations have a global reach vs. a local reach (i.e. you can’t say whether your money is leaving the country), and secondly that you cannot account for pork in the pyramid of corporate power (Like, say, CEO salaries).
Bottom Up Economics (Main Street)
Bottom Up Economics believes that if you provide the small individual with means, they will use it to support themselves and thus encourage the movement of capital through the economy. Furthermore, in search for each individuals capital, corporations become more competitive and thus, theoretically, provide better products and services.
Speaking personally, my own budget has always expanded to consume my income, so I can certainly speak to its effectiveness, but this theory has significant problems of its own. First of all, competition between corporations is as much quality and process (real quantitative moneymakers) as much as it is marketing and message (very qualitative moneymakers). Fact is, you can make crap, have a great sales guy, and shame people into shelling out money. Furthermore, you’re hoping that your individual consumer is spend happy and doesn’t save their surplus.
So which is better?
Both, of course, or neither, depending on the environment. Fact is they both have serious logical holes, and situations exist where, if anything, they’re the worst idea ever. It’s all well and good for you to give money to either the top or the bottom, if they end up behaving the way you expect them to. This almost never happens, but let me give you a couple of drastic situations:
Deflation
If currency is currently in a deflationary cycle, then your average day to day individual will take any money you give them and hold on to it, because they know full well that the special shiny thing they wanted to buy will be cheaper tomorrow… and tomorrow… and tomorrow. In other words, a bottom up economic system will completely and utterly fail in a deflationary cycle, assuming that’s the only factor affecting purchase decisions.
Low Unemployment
If your country currently has the (enviable) problem of low unemployment, then any corporation you give money to is in a bit of a bind. They now have the capital to expand operations, but the local labor market is extremely competitive (and therefore expensive). If they want to expand operations they can choose to stay within your country (at a much reduced effective rate of capital) or they can spend that money overseas for much greater effect. In short, a top-down economic approach will fail in a country with low unemployment, because the money is far more likely to flow overseas.
In both of these cases, the economic theory given completely breaks down, largely because you failed to take into account the conditions in which you’re operating. Other factors could include the level of regulation (more means fairer business practices, less means lower cost of business) as well as corporate/individual taxes (social security/Medicare/regulatory oversight vs. economic capital), and each have some very complex effects on the system.
Expanding this to the real world, let’s take a look at the mid 2000′s: We’re in an economic boom time, and the consumer is flush with credit (if not cash). Business is going great! So why question something that works- We’re going to continue giving tax breaks at the top, keep reducing regulations and continue to deregulate our industries. Business, after all, has proven that they can look after themselves.
And look where that got us. Would a more stringent regulatory strategy have gotten us somewhere better? Perhaps. Would increasing taxes at the top and reducing them at the bottom have kept the field more competitive rather than strangely lopsided? Perhaps. What we do know is that the correct approach to handling the US’s financial and economic matters was not what ended up happening.
Full Circle
And yet we always must have someone who’s right, and someone who’s wrong. Face it, we’re a binary species, and love to be on the winning side. I have many republican friends right now who feel like they’re on the losing side right now, simply because the present administration’s economic policy seems to be to blame for the meltdown that the opposing theory is trying to get us out of. One way or another, we each try to pick one side and go with it, and based on that we win or lose (or rather, we lose the election but we’re still right).
This isn’t a question of us vs. them. This is a question of us actually thinking about the issue, and coming up with the right solution. Intelligence and an open minded approach is the right strategy, and by actually turning off the television and sitting down with a problem by ourselves or as a community, we can easily overcome this problem and solve the issue not just right now, but for future crises as well.
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