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Test Yourself: Whose Economic Policies do you REALLY Agree with?

Test Yourself: Whose Economic Policies do you REALLY Agree with?



Whose economic policies do you really agree with? Your honest answer to one multiple-choice question will tell you.



Here is a simple one question multiple-choice test. Your answer will determine whose economic policies you think work best. It won’t tell you which policies you CLAIM to agree with, based on which party’s talking points you like to repeat. Your honest answer to this single question will tell you which policies you would choose if you were actually thinking for yourself. If your answer to this one question does not agree with your talking points, then this test will tell you that you might not be thinking for yourself when it comes to political and economic issues.


Do you dare try it? One question. Multiple choice. That’s all there is to it.


Are you ready? Here is the question. Read the following introduction, and then pick the option out of the four available options that best answers the question posed in the introduction. Be honest with yourself, and don’t try to anticipate which one matches your political rhetoric.


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Every economic policy is designed to influence the outcome in the economy. In fact, the only reason to even care about policy, and the only reason we even need economic policy, is for the outcome. What matters is the outcome.


You can think about the outcome in terms of things like overall economic growth; the overall standard of living; the number of jobs in the economy; the amount of purchasing power and how it is distributed throughout the population; the stability of prices – those sorts of things.


Keep in mind that a healthy, growing economy requires a lot of economic activity in terms of production, buying, and selling. The more active the economy is on these points, the healthier the economy is going to be. Economic policy will highly influence, on a macroeconomic scale, the outcome in terms of how evenly the distribution of new income will be. You might think, as most people who study economics do, that if income is distributed too evenly, then incentives that create growth and a higher standard of living will be lost. But if income is not distributed evenly enough, then there won’t be enough economic activity to create a vibrant economy – a vibrant economy requires purchasing power throughout many different economic sectors, as well as lots of jobs. Somewhere in between too little and too much income inequality, then a distribution of income will exist that will be of most benefit to the economy. Whatever that answer is, it has to be economically and politically stable in order to work.


Even if influencing the distribution of income is not a goal of any specific policy, there is no denying that it will be one of the effects of policy. A specific outcome in terms of income distribution IS an outcome of policy, whether it is designed to be or not.


The question then, is which distribution of income will be most indicative of a healthy economy?


With that in mind, instead of thinking about your usual talking points about different policies, consider these possible outcomes. The only thing that really matters is the outcome.


Which of these 4 possible outcomes, in terms of how national income is distributed, would work best to create a healthy economy, create economic growth, increase the overall standard of living, and create long term stability? Out of all the income earned in the economy, how much would go to the top 10% and how much would go to the bottom 90% if the economy is a healthy economy? Out of the top 10%, how much would go to the top 1%? Don’t look to your talking points for the answer, just answer the question honestly. The only thing that matters is producing a healthy economy.

  1. Option A: The bottom 90% share 90% of all income; the top 10% gets 10% of all income; and the top 1% gets 1% of all income.
  2. Option B: The bottom 90% share 50% of all income; the top 10% gets 50% of all income; and the top 1% gets 10% of all income
  3. Option C: The bottom 90% share 10% of all income; the top 10% gets 90% of all income; and the top 1% gets 70% of all income.
  4. Option D: The bottom 90% share less than 5% of all income; the top 10% gets more than 95% of all income; and the top 1% gets more than 80% of all income.



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Before you answer, here are some points that you might want to consider. Those at the very top are mostly people like hedge fund managers, corporate CEOs, and people born into wealthy families. The bottom 90% includes almost all of the labor force (the working class), almost all small business owners, most corporate middle managers, the entire middle class, the entire lower class, and welfare recipients.


The higher up an individual is on the income scale, the more money that person will receive that will be available to invest in businesses in the economy. These same individuals also are much more likely to park their money outside of the economy in foreign companies and bank accounts, and will spend a much smaller percentage of their income on products produced in the economy. They are more likely to make decisions based on tax consequences.


The lower a person is on the income scale, the higher the percentage of the income will tend to be spent on consumption goods and services that are produced in the economy – the kind of spending that represents consumer demand. These individuals will have less discretionary income available for savings and investment.


The upper class is an investor class (not necessarily investing in the domestic economy); the lower class is a working class and a consumer class (including consumption from income such as welfare payments and unemployment compensation). The middle class is a diverse class that includes savers, investors, small business owners, and the bulk of both consumption and the labor force provided in the economy.


Now, keep this information in mind, and answer the question. Which of the above options – A, B, C, or D – would work best to create a healthy economy, create economic growth, increase the overall standard of living, and create long term stability? Don’t look to your talking points for the answer, just answer the question honestly.


Don’t look at the answer below until you have given your final answer.
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Answer:



Have you been honest with yourself? Here is what your answer means:


Option A is a strict socialist outcome. The income is equal across all groups. No real difference in income distribution exists. There really is no upper class or lower class in terms of current income. In cases where there are different classes based on prior wealth accumulation, presumably those distinctions would gradually disappear over time. This is what the numbers would look like if income were distributed equally among everybody in the population.


If you picked option A for your answer, you are a strict socialist. You aren’t interested in equal opportunity, but in equal outcome. You probably don’t spend much time thinking about incentives for economic growth and overall increases in the standard of living.


Option B is an interesting hypothetical situation. Nothing like it has ever been approached in the United States’ economic history; and I know of no policies, conservative or progressive, that are designed to achieve such an outcome. It appears to me to be a situation where buyers have as much market power as sellers. This appears to be an outcome that would result from the total absence of market failure– a true market economy. It would be ideal for short term growth. Since this outcome is only hypothetical, and not based on any real-world situation, any analysis – including my own – would be theoretical.


However, where the numbers stand in option B compared to the real-world numbers in options C and D, option B would be extremely liberal compared to the outcomes of today’s policies – extremely liberal, but also most definitely capitalist.


The first thing that you might notice about option C and option D is how close they are to each other, at least compared to options A and B, and how far away they both are from the socialist outcome represented by option A. Yet the seemingly-small differences between these two options represent the difference between progressive policies and conservative policies.


Option C represents an actual historical record. It is roughly where the United States economy stood continuously from the time that statistics have been available (around 100 years ago) up until 1980. The top income brackets gained much more than the other income brackets, but all gained in a rather constant proportion. This is an outcome that you would expect in a capitalist system that rewards risk, investment and entrepreneurship, yet at the same time pays workers for gains in productivity. The gap between the haves and the have-nots is wide, but upward mobility is increasingly a reality which gives those near the bottom hope for improving their economic lot in life.


This is a historical situation of a capitalist economy; there is nothing socialist about it at all. This is also the type of outcome that progressives want to return to. Progressive policies in the United States are designed to move policy back towards this type of outcome, based on the idea that such an outcome worked better for everyone. All gained, not just those at the very top. Workers were paid according to productivity, and workers became buying consumers who kept the economy moving. The middle class was growing. Typical households had more real income with one income earner than today’s households which often have two income earners. Income tax policies were much more progressive than today, which helped to offset other types of taxes, which are largely regressive. Today’s progressive policies use the outcome of option C as a model, not the socialist outcome of option A, regardless of what those spouting political rhetoric are saying.


If you picked option C for your answer, you would be completely in line with current progressive economic policies. Not extreme by any means – if you compare the numbers in option C to the other options, you will see how much further it is from extreme left than from extreme right.


Option D is roughly what the United States economy has looked like since the implementation of trickle-down policies after 1980: high end tax cuts and corporate deregulation. The difference between the numbers in option C and option D is the cumulative effect of trickle down economic policies in effect since after 1980. After 1980, the economy has moved from looking like option C to looking like option D. The difference between options C and D is also the difference between today’s progressive and conservative policies.


Notice that the difference between option C and option D is that with option D the top has gained a significant share of the total income while all the other groups have lost shares. Income has stayed at the top. During this time period, productivity has continued to increase at the same pace as before, but workers have not gained from this increase in productivity. Classical economic theory (Adam Smith) suggests that workers would be compensated with income gains to match the gains in productivity. But that clearly has not happened. Trickle-down economics has not trickled down.


As a result, buying power has decreased, and the top earners are either sitting on their gains (they have no reason to invest in the economy if nobody has buying power) or they are investing in foreign countries. They put more effort into finding loopholes to avoid taxes than in investing in domestic jobs. They spend money financing the political campaigns of politicians who support policies that benefit the interests of the rich. They buy media outlets as an investment, and then use the media to spread propaganda in order to get voters to support the cause of the rich instead of supporting the interests of the average voter (take a look at who owns major media outlets now compared to years past). Statistically, upward mobility has decreased, not increased.


The conservative policies of today are designed not only to maintain the changes in the numbers from option C (reality before 1980) to option D (reality since 1980), but also to increase the share of gains going to the very top. This is done in the name of free market capitalism, under the false notion that giving those at the top what they ask for, at the expense of everybody else, somehow increases the influence of free markets. That is the rhetoric we are being fed, but the reality is that a balance between buyer and seller, with both sides having equal market power (such as the theoretical outcome of option B), is what a true free market is all about.


If you picked Option D for the answer, you are clearly a conservative. But such an outcome is not consistent with long-term growth, job creation, and economic & political stability.


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If the honest answer you gave to this question indicates a conservative/progressive label different from what you proudly call yourself, then there is a very good chance that you have not been thinking for yourself – that you have simply been following the rhetoric based on labels, and nothing else.


This test is based entirely on United States economic history and basic economic concepts. Data from the Economic Policy Institute.


A version of this essay is included as a chapter in the book Sanity and Public Policy: Separating Truth from Truisms by Jerry Wyant. This book is available in both paperback and eBook formats.





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Author: 
Jerry Wyant
Date: 
2014-08-21
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