Supply Side 'Trickle-down' economics- does it work?

Supply-side (or 'trickle down') economics has for the past few decades been one of the discreet tenets of Western economy. It's the belief that giving financial benefits to the wealthiest of society (in the way of tax cuts/breaks, regulatory advantages given to big businesses) will inevitably benefit society as a whole, as the wealth will 'trickle down' the economic ladder in the form of employment, pay rises or whatever else of the extra wealth the richest will generously share with the rest of the population.

It's been a policy the conservatives of America has held ever so close to their hearts, and one that has faced much opposition by the lower and middle classes of America.

So how did trickle-down begin?

A turning point was certainly in the 1980s, during the divisive periods when Ronald Reagan and Margaret Thatcher were in power in the USA and UK respectively.
Perhaps never have two leaders either side of the Atlantic been so harmonious- Reagan curiously dubbed Thatcher "the most important man in England", and Thatcher once described Reagan as "the second most important man in my life".
The harmony of the two certainly extended to economic policy; both leaders were strongly influenced by the Chicagoan and Austrian schools of economics, the proponents of which included notable anti-regulation, free-marketers Milton Friedman and Friedrich Hayek.

Trickle-down was one of their most prominent legacies. Thatcher and Reagan carried out drastic economic changes that were designed towards 'supply-side economics' (another name for trickle-down). The most important relevant policy change was that of tax rate changes.
In the USA, the Tax Reform of 1986 saw the top tax rate for individuals drop from 50% to 28%, partly compensated for by an increase of the bottom rate of tax from 11% to 15%. This was the very first time in the history of the USA that the top rate of tax fell at the same time as the bottom rate rising.
In the UK, Thatcher followed suit by dropping the top rate of tax from 80% to 63%, meanwhile almost doubling VAT (Value-added tax) and the amount everyone had to pay to fund the National Health Service. However, she did indeed drop the common tax rate from 33% to 30%.

So what were effects of these trickle-down policies?
Let's remember, the motivation supposedly behind trickle-down economics was that the population as a whole would benefit from the wealthy being wealthier. The idea is that as the national wealth pie grows as a result of the richer getting richer, everyone else's pie would simultaneously grow as a result.
So has it worked?
Well, a certainly interesting effect is encapsulated well in the following graphic:

Comparison of wages of the top 1%, overall wages and productivity.
(Mother Jones) 

Note the real separation point on the graph, where the average income of the top 1% really lifts off- it's after the turn of the decade, through the 1980s- conveniently the decade of Reagan's presidency.

Note not just how the income of the top 1% rises incredibly, that as productivity increases the average overall wages of the population lags behind, barely increasing in relation to the other two factors in the chart.
The meaning of this is pretty unpleasant- the 'pie of wealth' may have increased, but this chart suggests that more prominent has been a relocation of sorts of national wealth.
The wages of the overall population has suffered since the 1980s when it is considered that productivity has boosted- the overall population have not benefited in terms of wages from this increase. Instead the wages of the wealthiest have been boosted far more than before the 80s.
CEOs in 1965 made 24 times more than the average production worker- in 2009, this figure was 185.

It seems clear that wages of the middle and lower classes, contrary to the motives of supply-side economics, have suffered as a result of the policy- meanwhile clearly the wealthiest have benefited HUGELY.

So why haven't most of the population benefited- a key belief of the theory is that it's better for everyone if the wealthy are wealthier, right?

Buffett has been a prominent opponent
of trickle-down economics.

Here there is a great fault in the trickle-down ideology- reduction in the taxes enforced upon the wealth is itself no guarantee of further reinvestment into the economy.
This is because the benefits are being given to people who are not in need of it. Little is in the way of CEOs creating new jobs to further production- most already have the capital available to invest where they see fit.
Warren Buffett (pictured right), one of the wealthiest men in the world, and perhaps the most prolific investor claimed "People invest to make money, and potential taxes have never scared them off". Taxes are rarely a stumbling block for the wealthiest, who are willing to take risks to invest (most entrepreneurs are where they are now as a result of their calculated risks).
Therefore tax cuts to the wealthy rarely open the doors to new investments. Instead it leads to simply a further amassing of wealth by the wealthy. By no means will the wealthy invest everything they benefit from tax cuts, to the gain of the middle and lower classes as the theory suggests. A staggering example of this is how currently the top 1% of wealthiest people in the world control 39% of the world's wealth. This is a clear sign of a broken global system, a large part of which is thanks to trickle-down.

Trickle-down, supply-side, Reaganomics, whatever name it is called, is a lie.

The solution lies not in blessing the wealthy with benefits and hoping that it will filter down to the rest of society, but the solution lies in the middle class. We need to make the middle the centre of our economic system, and see middle-out growth that will benefit everyone (yes, including the wealthy).

Middle-out. That is the solution we need.

Sources for this article can be found linked within.

Sorry Taylor Swift, You're Not Entirely Correct

Pop icon Taylor Swift has had a rocky time, to say the least, with the modern phenomenon of music streaming. Last July, she took a stand against streaming service Spotify, when she removed all of her music from the service and branded it as "undervaluing the art" that is music by offering free, ad-supported subscriptions. Swift cited in particular how underpaid artists putting their music onto the streaming service were, effectively making less than a cent per stream.

Many believed Swift's dramatic exodus from Spotify was simply a part of an exclusivity deal with Apple, and their recently announced service Apple Music. But it turns out this is far from the case, as a tumblr post just today from the 25 year old revealed. The post, titled "To Apple, Love Taylor", dealt to Apple what she had dealt to Spotify last year. In an unexpected move, Swift revealed she was not going to allow her music to be streamed on Apple's service either.

Why? Unlike with Spotify, she does not discuss the lack of revenue an artist receives for each stream, rather the effect of the initial three month trial that Apple plans to grant users of the service. Swift called it "shocking, disappointing" that during these three months, Apple Music provides no revenue at all for the artists, as it receives no income from the user. And, according to herself, Taylor Swift is arguing not from her own position as a world-renowned star worth over $200m,  but from the position of "the new artist or band that has just released their first single and will not be paid for its success", "the young songwriter", "the producer who works tirelessly". Essentially, Swift is putting forward the argument that the free 3 month trial being proposed by Apple to customers is putting smaller artists at a loss, failing to reward their efforts.

However, there are areas where I quite disagree with Taylor Swift. Firstly, she is correct about the lack of lucrative music streaming opportunities. It's no secret that despite its massive growth, Spotify has been finding difficulty in creating sustainable and spreadable profits. But is revenue really the priority of an artist, big or small, when they put their content onto streaming services such as Apple Music or Spotify? Swift's own friend Ed Sheeran disagrees with the notion of doing so with income being the primary motive. "I'm in the music industry to play live," he claimed last year. "That's why I put things on Spotify". He highlights his enjoyment of playing live, and indeed playing live is the far superior source of income for the significant majority of musicians both small and large. Sheeran sees the real value of streaming services, in how they provide a platform for artists to promote not just their music, but themselves- their merchandise, their YouTube channels and most importantly their live shows.

Like most artists, Taylor Swift derives most of her income from live shows- six months on the 'Red Tour' in 2013 bringing her an estimated $30m. Justin Timberlake provides another example of how tours bring in far more revenue. In 2013, 39 shows made him over $40m, compared with a paltry $5m from combined streaming and album sales.

For smaller artists, there is a little difference. Streaming services are arguably a little young in this respect, but 'free' media has more than shown its worth for smaller musicians, notably YouTube, from which the likes of Justin Bieber and recently Charlie Puth have found their fame. Apple Music and Spotify, with their ability to feature smaller talent, certainly has the potential to do the same for many other artists, and in that sense provide far greater value than just revenue from streaming.

And let's have a look at the impact of the three month trial in particular. Everyone knows the allure of a free trial. There is no doubt that more people will sign up to Apple Music because of it, and whether or not they leave after the trial is up is not of as much significance as we may think. Three months is quite a lot of time to explore and discover new music, to find new favourites and to support them, whether it's through merch, buying their content or a ticket to their show. Of course, users won't be able to discover everyone in this three month period, but one has to realise that artists will certainly receive more traffic and attention when there is a larger group of streamers available to them- three months of this is better than none.

And let's not forget the power of a free trial to retain customers. Apple has very deliberately set a rather long free trial of 3 months (Spotify's is just a third of this). It gives users time to get themselves hooked. Streaming music, whether from your phone, tablet or computer, becomes part of your routine and three months is ample time for the streaming habit to settle in. Therefore it is very likely that a sizeable portion of Apple Music free-triallers will continue their subscriptions and pay for the service after the trial is up, providing the paid support that Swift wishes for.

It's important to note that Taylor Swift is not totally anti-streaming. She notes in her open letter that everyone knows that Apple "has the money to pay artists... for this three month trial period", and indeed this is true. Apple should cough up for the artists in this three month period.

But even if it doesn't pay out, it's not entirely correct to argue that musicians, big or small, will not benefit at all from streaming, whether it's Apple Music or Spotify. For the value of all types of music streaming clearly lies not in its money making capacity, but rather it's ability to promote, to introduce artists and their work to vast amounts of new audiences. These new audiences, and the money that they spend buying merchandise, albums and live tickets are the most substantial, long-term rewards that streaming, free or paid, brings to artists.

So Taylor, making massive amounts of money from Apple Music or Spotify, as you know well, is probably a futile effort for most artists. But that doesn't mean there's no value, nothing to offer to artists, in these services.

What Has Happened To The Greek Economy?

 The recent decade has seen turbulent times for economies all around the world, and perhaps the most notable of such sufferings have been witnessed within Southern Europe. Spain, Portugal and Italy have fallen into economic turmoil, but one could argue that these problems pale in comparison to those being currently faced by Greece, a country where the last 6 years have seen unemployment triple, public debt ruthlessly pile up, and the economy shrink by a quarter. The lack of money in Greece's financial institutions is such that citizens are being warned of banks shutting down their ATM services, simply because there is not enough cash to give to people who want to withdraw from their own accounts. In 2012, the situation got so desperate that the government had to secretly ship in cash from abroad to prevent a shortage.

But where did it all go wrong? Why is it Greece in particular that has gone through even tougher times than the rest of Europe?

Well, from the onset you can see that the deadly nail in Greece's economic coffin has been its borrowing from other countries and organisations such as the IMF, in order to finance public spending.

Greek public spending during the 2000s was incredibly high, especially in relation to the size of the economy and its productivity. Spending on the public sector (as a percentage of total public expenditure) was higher in Greece than anywhere else in the OECD, yet according to Paul Belkin, Derek Mix and Rebecca Nelson, there was "no evidence that the quantity or quality of the services were superior". Indeed, the nominal output of the Greek economy had grown by 40%, and tax revenues 31% between 2004-2009, yet total government expenditure grew 84% during this period. Some
argue that the Greek governments of recent decades have been 'bribing the electorate', providing public sector jobs that are overpaid in order to maintain popularity among the public- at the cost of long term economic stability.

Spending also came in forms other than public sector employment. The 2004 Olympic Games, for example, put a crippling burden upon the government of $8.6bn, contributing to debt by 2005 amounting to €50,000 per household.

What further compounded the economic struggles was the outbreak of tax evasion Greece has seen in the past decade, particularly since the financial crisis of 2008. According to a Greek Finance Ministry Report, during the initial period of crisis, the state had only taxed a third of its citizens' officially declared income. More recently in 2013, it was revealed that the state collected only half of what was due in 2012. Such tax evasion activity has been estimated to cost the treasury over $20bn a year, and it has landed Greece the rather unenviable positions of having the lowest tax revenues per capita in Europe, and according to the 2012 Corruption Perception Index, being the most corrupt country in the EU.

Greek Debt, visualised in trucks of cash.

The consequence of such public spending in spite of a lack of revenue for the government has resulted in a colossal amount of debt being collected in Greece. As of now, Greece owes €360bn to the IMF, the ECB, and numerous lenders throughout Europe, notably from Germany, France and Italy.

Theoretically, lending and borrowing usually works out for both parties. The general idea is that a country can borrow from another, and use that money to be productive and make more money, allowing them to pay back the lender and also make a profit.

But Greece's situation is far from theoretical; despite efforts by the European community to reduce its debts (in 2011, the banks had to agree to half Greece's debts to them), the outlook is not rosy for the Mediterranean nation. Its newly elected leaders, the Syriza government are being brutally honest about how they see the future and fears are escalating that they will have to default on their debts, a move that will accompany an exit from the Eurozone and no doubt a long ensuing period of turmoil and instability, not just for Greece and its citizens, but for much of the rest of Europe too.

Small Business Serial Killers- Why do businesses fail?

‘Small businesses fail because they run out of cash’ is just as helpful a statement as a doctor saying ‘The patient died because they stopped breathing’.
According to the latest Bloomberg research, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. A whopping 80% crash and burn. But why? Why do small businesses fail?

Here are five of the most common mistakes I've seen small business make that inevitably cost them their success.


Poor Management

Poor management is often cited as the number one reason for failure. Business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring, marketing and managing employees.

Dysfunctional leadership trickles down and affects every aspect of a business’ operation, from financial management to employee morale, and once productivity and morale are hindered, failure becomes inevitable.

When it comes to this issue, the first step to solving the problem, is admitting there is a problem. None of us wants to admit that we suck at managing our own businesses and teams, but unless we do, our businesses are doomed. Learn, study, find a mentor, enroll in training, conduct personal research – these are all things that can be done to improve vital leadership skills.

There must be a strong investment in leadership skills. And of course, this is something even people who have been in business for many years, need to work on. Management and leadership techniques are always evolving. So just because a single management style has been implemented for the last 40 years, it doesn’t necessarily mean that leadership is efficient.


No Website

In an age when ‘Google’ is a verb, having a website is a must. Simply put, if you have a business, you need a website. There is no discussion around that. In 2015 every company should have a professional looking website that enables visitors to easily find out what you business is about, what you offer and how to get hold of your products or services.

Businesses who don’t have websites are likely to be losing clients to those that do. And having a website isn’t enough- it has to look good, create a good impression for the business.

Failure to understand customers and prospects

Many jump into business ventures with the idea of what they want to sell rather than what people need or any specific problems they are solving. In my experience, this is the worst move an entrepreneur can make because complete understanding of the customer is imperative to a business’ success.

Just because a business has an amazing idea for a new service or product, it doesn't necessarily mean that people will be interested or willing to pay for it. Customers hold the key to success and unless they are asked the right questions, success will never be found. What is it that they want? What is it that they need? What pain do they experience that you can lessen?

The key to understanding customers and prospects is in the dialogue a business has with them. A good business will ask them questions, carry out surveys and take their feedback on board.


Failure to differentiate between customers

Unless a business has a single service or product, it will have different groups of people interested in different offerings. And even if it does only have 1 product to sell or only 1 service, chances are that people who buy it are still quite different from one another.

A fitness instructor for instance, technically only offers 1 service. However there are people interested in weight loss, others who need an instructor’s services to help them build muscle mass, a third group interested in getting in shape for a specific event. These are all people who use the instructor’s service, but their needs and preferences vary so the way the instructor communicates with them should be tailored to their specific needs.

This is where segmentation comes into the picture. Segmenting customers into groups according to their needs has a number of advantages. Amongst other things, it can help a business to:

* identify its most and least profitable customers
* focus its marketing on the customers who will be most likely to buy its products or services
* avoid the markets which will not be profitable
* build loyal relationships with customers by developing and offering them the products and services they want
* offer more targeted and personalized messages that are likely to deliver better results

A business will think closely about client base and try to separate them in groups. The criteria could be how they use its services, how often they use them, which particular services they are interested in etc.

To find out more about segmentation (and other awesome marketing techniques), check out our Small Business Growth Formula.


Failure to communicate with customers and prospects

Failure to communicate value propositions in clear, concise and compelling fashion is a sure-fire way to bankrupt a business.

Customers can’t do business with an enterprise if they don’t know it’s there. The business must reach out and communicate the benefits of its service. And it’s not just about communication itself either, the mediums chosen and the content of the messages are just as important.

Print media is slowly dying. Radio and TV? Not particularly practical unless you have a huge marketing budget. Those used to be the ways, now social media and internet advertising and the way. Think social, email, mobile, search marketing.

As for the content, well it really boils down to how well a business knows its customers. What do they want to hear about? What do they want to know? What information would be of value to them etc. Content is a huge topic, so head over to our Content Section of InTouch CRM to see how compelling copy can be written, what to write about and what are the most common mistakes people commit with regards to content.


By eliminating these risk factors, a business is well on its way to success without falling victim to the intimidating 80% fail rate of small businesses in their first year of operation.

Do you run a business? What issues did you face that could have cost you your business? How did you resolve them? I'd love to get your comments and hear about your experiences.



About the author: Didi Zheleva is the Content and Digital Marketing Executive for InTouch CRM- the leading sales and marketing automation provider for small and medium-sized companies.

Government Regulation Gone Wrong?

A 2013 report showed France to be quite the bureaucracy- it claimed that over 400,000 directives were being enforced, ranging from how far a postbox is allowed to stick out of a wall to how much boiled egg a kindergartener can eat at lunch time. 

The examples seem petty, but more serious regulation is coming to the cost of small town and village budgets- for example a law enforced making all pavements at least wide enough to allow two wheelchairs to pass. 

Of course, this is not a bad idea in itself, however when Paris enforced this on every French town or village, it becomes a problem- in many cases this blanket ruling is uneconomical, perhaps if there are few disabled people in the area or few people altogether.

According to Michel Therond, mayor of 25 years of the small town Albaret-Sainte-Marie, he gets letters with new regulations or stipulation from every time he opens his mailbox.

In many cases regulation is not as disputed- regulations on the minimum drinking age, or that businesses must hire employees regardless of any disability are largely accepted by society. However this excessive bureaucracy can have damaging effects on a country’s economy- it can mean managerial-type people are employed with high wages to not do very much, it can put pressure not necessarily on the cities, but smaller town or village councils- and it does not always work.

In Mexico City, at the time of a great pollution problem (that still exists in part today) a regulation was enforced that aimed to reduce car use and thus emissions and so on. So the government created 'Hoy No Circula' (literally meaning Today it (your car) does not circulate)- a legislation that stated that cars with only cars with certain numberplates could be on the road on certain days- to bring this example to england you could say that on Mondays, Wednesdays, Fridays, only cars whose number plates begin with letters A-M can drive, and on the other days, cars N-Z. 

In Mexico City however, this plan backfired- it’s a typical example of what is known as the Cobra Effect. Most people needed their cars everyday- to go to work, do shopping, go to places where cars were the only reasonable, comfortable way to get there. So people didn’t start walking or taking the bus on days when their car could not be on the road- instead people just bought a second car, with a plate that would allow them to go on the days they previously couldn’t- granting them car usage for the whole week. It was quite an ingenious way of avoiding the regulation.

However we must remember that most people of Mexico City were not wealthy- so the second cars these people did buy were more often than not old beat-ups- whose emissions were even worse than their first cars. The result? Not necessarily fewer cars on the road, but instead older, more polluting cars on the road. This regulation did not last long, unsurprisingly.

This was the Cobra Effect- the origins of which I’ll briefly explain in another article.

So bureaucracy can be damaging, that’s for sure. Regulation may be necessary in areas, but like all things, in careful measure.

SOURCES:

French bureaucracy effect on small towns 

http://www.theguardian.com/world/2013/apr/30/government-rules-hinder-france-growth

'Hoy no Circula' regulation http://geo-mexico.com/?p=2343

Driving Restrictions and Air Quality in Mexico City www.rff.org/Publications/WPC/Pages/08_15_08_Driving%20Restrictions%20and%20Air%20Quality%20in%20Mexico%20City.aspx Lucas W. Davis