Prior to law school, Hale Stewart was a bond broker with Vining Sparks, where his clients were comprised of mutual funds, insurance companies and money managers. He returned to law school in 2001, graduating from the South Texas School of Law in 2003. After law school, he opened his law practice focusing on transactional work. He continued his education at the Thomas Jefferson School of Law in 2007 where he obtained an LLM in domestic and international taxation, graduating Magna Cum Laude. He has three certifications from the American Academy of Financial Management: Chartered Trust and Estate Planner, Chartered Wealth Manager and Chartered Asset Manager. Mr. Stewart is also a member of the AAFM’s Board of Standards. He is the author of the book U.S. Captive Insurance Law and is currently working on his Ph.D..

~~~

There is currently a debate regarding the appropriate policy response to the current economic situation.  The arguments can be broken down along two lines — supply side and Keynesian.  While supply side economics may be appropriate in some situations, they are completely inappropriate for the current problems we face.

In general, supply side economics can be described thusly:

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation

In thinking about the preceding, consider this simple chart of supply and demand:

What supply side policies are attempting to do is increase the supply of goods and services.  The underlying idea is that an increase in supply will satisfy more consumers wants thereby lowering prices for the economy as a whole and increasing overall growth.

Let’s consider some of the general policies advocated.

Perhaps the most important policy advocated by supply side advocates is a reduction in overall taxes.  Now, let’s think about what this would do by looking at the standard corporate income statement:

Notice the general orientation of the deductions (which apply both to individuals and companies).  First, the income statement lists a host of expenses to arrive at “net income before taxes” after which taxes are deducted.  So, the central idea of a cut in marginal tax rates is this will lead to an increase in income for the business and individual.  As to what is done with this increased income, little to no incentive is given.  Perhaps it will be spent in the economy, reinvested in the business or distributed to investors.  However, the central idea behind a reduction in tax rates is to increase the bottom line income thereby spurring the creation of business start-ups or increasing investment in ongoing businesses.  It’s exceedingly important to remember that national income is the flip side to GDP — and is considered by some economists to be a better measure of national growth.

However, as the following data indicates, the above results are not needed in the current economy.

First, corporations have more than enough money on their respective balance sheets right now, as evidenced by the following chart:

Above is a chart from the St. Louis Reserve’s FRED data system of total checkable deposits and currency assets on the balance sheet of non-farm, non-financial corporate business.  As the chart demonstrates, corporations have move than enough cash — in fact, they have the highest amount of cash in the last 50 years.

Also consider that people are in fact saving again:

The above chart shows the savings rate has increased over the last 5 years.  As such, individuals need to start spending the money to get some velocity going (more on that below).

Secondly, tax rates are near their lowest in 50 years:

As explained by Reuters:

  • Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America’s long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke.
  • Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable.
  • Employment taxes, by contrast—the regressive bit of the fiscal structure—are bearing a large and increasing share of the brunt. Any time that somebody starts complaining about how the poor don’t pay income tax, point them to this chart. Income taxes are just one part of the pie, and everybody with a job pays employment taxes.
  • There aren’t any wealth taxes, but the closest thing we’ve got—estate and gift taxes—have shrunk to zero, after contributing a non-negligible amount to the public fisc in earlier decades.

Put another way — the country is not over-taxed.

Third, remember that the central idea of supply side tax cuts is to increase income.  It does nothing to increase spending.  As a result, there would be no increase in monetary velocity as a result of the policy — meaning nothing would happen to the pace of transactions in the economy.  As the charts below indicate, this is a central problem with the current economic malaise — things simply aren’t moving in the economy:

As the three charts above indicate, the pace of transactions in the economy is very slow and dropping.  The reason is people and businesses are hoarding cash — meaning that once they make a profit, they are banking that profit and not spending it.  While there is nothing inherently wrong with savings, the economy also needs transactions which the above data indicates are occurring at a snails pace.  In short, we need policies that encourage people to spend their money — not hoard it.  And cutting taxes is not the answer to that problem.

And finally, consider this fact: taxes are already incredibly low and companies have ample cash.  Yet they are not creating jobs in any meaningful way.  As such, it’s difficult to conclude that the current rate of low taxation needs to be lowered in any way to create jobs.

As for the regulation argument, consider this:

McClatchy reached out to owners of small businesses, many of them mom-and-pop operations, to find out whether they indeed were being choked by regulation, whether uncertainty over taxes affected their hiring plans and whether the health care overhaul was helping or hurting their business.

Their response was surprising.

None of the business owners complained about regulation in their particular industries, and most seemed to welcome it. Some pointed to the lack of regulation in mortgage lending as a principal cause of the financial crisis that brought about the Great Recession of 2007-09 and its grim aftermath.

Also consider this post from Mark Thoma.  Additionally, consider that lack of regulation — in other words massive deregulation — was a primary cause of the recent financial crisis.  Finally, the incredibly low monetary velocity numbers indicate there is a dearth of transactions in the economy — meaning people and businesses are not spending money.  In short, the excessive regulation argument fails to provide an adequate answer for our current problems.

As the above data indicate, supply side policies are not needed in the current environment.  Businesses have ample cash on their balance sheets and yet are still not hiring people.  Neither businesses nor individuals are overtaxed; in fact, taxes as a percent of GDP are near their lowest in over 60 years.  And finally, there is no evidence that regulation is in fact the job killer many tout it to be.

There may be a time when supply side economics will be an appropriate policy response.  But now is not such a time.

Category: Economy, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

67 Responses to “Why Supply Side Economics Won’t Solve the Current Economic Malaise”

  1. Toktora says:

    Oh year, but what about the Laugher Curve?

    It was a stroke of genius drawn on a bar room napkin, so it must be right!

  2. Tarkus says:

    ” Businesses have ample cash on their balance sheets and yet are still not hiring people. ”

    The next sentence that should be there but is always left out is:

    “And when they do start hiring people, it will likely not be in this country thanks to incentives to do otherwise.”

    So just keep cutting taxes so that people have more money to spend to stimulate production and economies overseas. That’ll fix everything. Yeah, that’s the ticket….

  3. Transor Z says:

    “Why Supply Side Economics Won’t Solve the Current Economic Malaise”

    As thought-provoking a title as:

    “Why Leeches Won’t Cure Alzheimer’s”

    “Why Human Sacrifice Won’t Stop Volcanoes”

    “Why Painting the Laffer Curve on Your Barn Won’t Keep Away the Witches”

  4. Petey Wheatstraw says:

    A very well reasoned argument, but useless when one realizes that it has no bearing on folks who elevate ignorance and hypocrisy, and who want to destroy the economy in order to destroy a country that they see as being overrun by minorities, heathens, and libruls (thus the false meme of overtaxation).

    Mr. Stewart compares supply side and Keynesian philosophies, but completely misses the idea that TPTB would very much like a return to aristocracy and peonage/serfdom/slavery.

    We don’t have an economic problem (we are a wealthy, resource rich country), we have a political problem.

  5. franklin411 says:

    Fantastic article! This is the kind of piece that ought to be on the front page of the NYT, and subtitled: “how to shut down your idiot Tea Party friends.”

  6. xynz says:

    Barry, I really appreciate the fact that you’re one of the few people telling the truth about the economy. But we live in an age of almost universal deceit, where disinformation is the norm.

    The massive amounts of cash now held by the financial elites are the result of one of the greatest heists in human history: trillions of working class taxpayers’ dollars were transferred from government treasuries into the banksters pockets. That heist came on top of three decades of economic “rationalizations”, which redirected worker productivity gains almost exclusively into the pockets of those same elites.

    These kleptocrats control most of the channels of the discourse and they set the dominant themes. That is why we continue to see a parade of red herrings to confuse and confound: where the CRA, government regulations and now budget deficits are blamed for an economic crisis engineered by the people who reaped the benefits of bailouts which looted national treasuries.

    After their national treasuries were transferred to the kleptocracy, the working class stiffs who filled those treasuries in the first place are being told that their governments no longer have enough money to spend on social safety nets and stimulus programs. So the working class stiffs will just have to make even more sacrifices: waiting longer for Medicare and getting less money from the Social Security programs that they’ve been paying into their entire lives.

    We’ve seen this massive disparity in wealth distribution before, back before the First Great Depression. The New Deal and strong unions restructured the economy, muting the wild swings from unregulated business cycles and disproportionate concentrations of wealth. The economy no longer self-destructed with alarming regularity and the result was an unprecedented period of stable prosperity that lasted nearly 50 years…..until the great unraveling started in the late 1970s:

    Proposition 13 and the Reagan Revolution started a 30 year trend of completely undoing the New Deal and weakening labor unions. The result has literally returned us to the conditions which set the stage for the First Great Depression.

    The only countries that have fared well during the current Global Economic Crisis are countries which have highly regulated economies, high rates of taxation and union participation: Norway and Sweden. Success stories that will NEVER be mentioned by the kleptocrat controlled media….instead it will be more noise about ACORN, CRA, deficits, sex scandals and the latest faux outrage dejour to distract the electorate from greatest outrage of our age.

    I appreciate your taking the time to shout down the rain barrel and I think you should keep doing it. But you should be aware of the interests that are arrayed against you and anyone who wants to discuss the truth about the state of the economy. You’ll not only see them in the traditional media, but you’ll probably see them posting disinformation here on your blog, courtesy of “persona management software”:

    http://www.scribd.com/doc/51066167/Online-Persona-Management

    The “persona management software” has been brought to you by the same DOD that gave you the propaganda campaign for a ruinous (but oh so very profitable) war against Iraq:
    http://en.wikipedia.org/wiki/Pentagon_military_analyst_program

  7. Jolly Rancher says:

    The kind of supply the economy needs is the old fashioned kind: natural resources. Government stimulus would be a lot more effective if the stimulus didn’t end up in China and the Middle East. Every time the economy grows, natural resource prices rise causing businesses to become more efficient by investing in cost saving capital and cutting human resources. There needs to be a massive worldwide effort to encourage more drilling and mining AND a lot more incentive to cut energy consumption, such as a tax break for telecommuters.

  8. ThatsNotAll says:

    Taxes are incredibly low? For whom? The 47% who do not pay income tax? Well you should have asked me and I would tell you a different story. My property tax bill has increased $4000 in 8 years. My sales tax rate has increased 20%. And, at every turn it seems my state government is asking for more money and at every turn the national Democratic party is preaching higher taxes.

    And how about the cost of things that matter most? Energy prices: higher. College tuition: more expensive. Health care costs: more expensive. Food prices: more expensive.

    The economy is failing precisely because the political elite believe they have the power to fix it. So they devalue the currency, bail out failed banks, throw money away on fraudulent “green” jobs, raise the cost on companies of actually employing people and keep paying people not to work. When so much money is wasted on failed efforts would you expect the economy to flourish? Would you?

  9. Petey Wheatstraw says:

    ThatsNotAll Says:

    Most of your complaints are addressed, factually, in the article.

    Did you even bother to read it?

    Please explain and post a link to any government program or agency that pays people not to work, or that raises the cost of companies employing people (per the article, not really a concern of the actual job creators — small businesses).

    The economy is flourishing like a bad weed for corporations and the upper 1%.

    You seem so resentful of the government, you can’t even see beyond it.

    If you want low, low taxes and small government, move to Afghanistan.

  10. ThatsNotAll says:

    Petey,

    I am only resentful of policies that protect cronies and suck the wealth out of the middle class. But you tell me. Why has college tuition increased far faster than the inflation rate over the past 30 years? Why have health care costs increased so much faster than inflation? Why did home prices increase so far and so fast (until the bubble popped)? What do all three have in common? That’s right, college education, health care and home lending are all politically favored industries.

    Out in the real economy companies must compete for customers. They must continually improve the value of their products and often this leads to innovation that yields better products for the same or even less money. Not in education. Not in health care and, until the bubble popped, not in housing.

    Bad Government is the problem. Good Government would focus on their being equal justice under the law. The crony capitalism manifest in Washington is a disease and until it is eradicated the problem will not be fixed.

  11. leveut says:

    “Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. ”

    At least one of the commenters in this thread seems to be under a rather severe misapprehension of what the article is about. It is not an argument or explanation as to why Keynesian policies are superior to supply side policies for the current economy. Since the title is “Why Supply Side Economics Won’t Solve the Current Economic Malaise,” one might have thought even the typical Ritholzian commenter could figure that out. Alas.

    I seldom post in here because of the silliness of much of the opinion stuff and most of the comments.

    Hale Stewart’s resume at the top is impressively long. So long, in fact, that it seems that he or whoever put it there is trying to improve the quality of what follows by appealing to his authoritativeness.

    While a number of his observations seem accurate, others are rather puzzling.

    “As explained by Reuters: Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America’s long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke…Put another way — the country is not over-taxed.”

    The first part of that, is he is quoting from what appears to be an opinion piece by some guy over on Reuters. The second part is that, as he mentioned early, “supply side” talks about lowering tax RATES, while the chart store chart shows TAXES PAID. The third part is that the conclusion “the countryis not over-taxed” does not follow from any of what preceded it. Taxes PAID are down as a percent of GDP (the chart) because private income is down, and because GDP has been goosed rather handsomely by Keynesian deficit spending. [As a snarky aside, taxes PAID as a percent of GDP would be even lower if Ritholz and Krugman had their way--that is, the initial stimuluses were not big enough.]

    “And finally, there is no evidence that regulation is in fact the job killer many tout it to be.”

    That could be the stupidest thing in the article if only because there is no discussion or evidence to support it. Of course it is unsupportable.

    One of the bothersome things about this article relates to the beginning paragraph: “The arguments can be broken down along two lines — supply side and Keynesian.” I would say that is a false choice. I would say the arguments can be broken down along three lines: 1. the problems can be addressed successfully by supply side economics, 2. the problems can be addressed successfully by Keynesian economics, and 3. the problems cannot be successfully addressed by either, because the problem is a credit cycle problem–too much borrowing, too much leverage–and that can’t be addressed by either supply side or Keynesian economics.

    Another bothersome thing is this: “In short, we need policies that encourage people to spend their money — not hoard it. ” Yeah? And so how is that going to happen?

    Another bothersome thing, the last I will mention, is this: I eagerly await his similar article about why Keynesian economics won’t solve the current economic malaise. Surely such an eminent and superqualified economics observer would not be a Keynesian True Believer.

  12. farmera1 says:

    Religious extremists and Supply siders have a lot in common. Facts, history or scientific arguments do not matter. Beliefs (as in hatred) are all that matter. Forty plus percent of the people don’t believe in evolution, and believed Saddam was behind 9/11 so why are they going to believe anything logical about economics. Just isn’t going to happen. Their goal is Sharia Law opps I meant a law based on religious principals. Don’t bother them with arguments that challenges their beliefs. When God is on your side you don’t have to bother with any kind of deep analyses, just belief/hatred is all that counts.

    No taxes, small government is their utopia, you know just like Afghanistan, Somalia that sort of thing.

    Pretty much like anarchists as far as I can see.

  13. theexpertisin says:

    What?? “None of the business owners complained about regulations in their particular industry”???

    Not in my world, buddy. Practically every exec I know in varied industries is hunkering down being piston whipped by Beltway Bullies.

    He must have been talking to the folks at Solyndra.

  14. Toktora says:

    ThatsNotAll:

    I don’t quite grasp the connection between the things you are using as examples and Keynesian economic policy…

    That said, how about this in terms of answering your questions:

    “Why has college tuition increased far faster than the inflation rate over the past 30 years?”

    Maybe because there’s a dearth of low-skilled employment (and of that which remains, one has to fight with illegal immigrants for the rock bottom wages) and an ever increasing pressure from employers and the global marketplace for a college degree. Add in the mix a combination of deregulation of oversight and requirements for degree granting institutions (think about the recent proliferation of for-profit institutions such as the University of Phoenix) and incredibly easy to obtain government and non-government student loans. Big demand – check, limited supply – check, irrational (or at least partially irrational in this case) belief of future large economic gains – check. What you have in his case is the recipe for a bubble – one which will most likely pop in the near to mid-range future.

    “Why have health care costs increased so much faster than inflation?”

    Short answer: because they can.

    Long answer: because unlike every other country with an advanced economy we as a society don’t recognize health care as a basic human right. We leave it up to people to provide it for themselves (or rather, find a job that provides it for them), while at the same time mandating that people who arrive at the hospital be treated for their illness/wounds (at the expense of everyone else). Healthcare costs have risen, at least in part, in order to cover for losses realized in treating multitudes of uninsured people. Additionally, the companies providing us the benefit of being insured have greatly increased the percentage of our premiums that goes toward “administration” [http://www.nejm.org/doi/full/10.1056/NEJMsa022033].

    “Why did home prices increase so far and so fast (until the bubble popped)? ”

    Come on, I KNOW you’ve been reading TBP for quite a while now…are you telling me that you haven’t read or understood anything Barry has posted about the mortgage fiasco?! Seriously????

  15. plantseeds says:

    “Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable.”
    Funny, no mention of spending, that trend is not sustainable either. Any balanced and therefore credible analysis would mention that as well no?
    No, cutting taxes and removing regulation probably won’t solve our problems however raising taxes and increasing regulation won’t either, but thanks for pointing out the obvious.
    In reference US savings which is somewhere around 5%. You suggest that, “individuals NEED (emphasis added) to start spending the money to get some velocity going”.
    Seriously?…is that what you…with all of your financial management and lawering wisdom, education and experience suggest? Spend? Why would they? You said it yourself, there is no incentive for doing so, in fact quite the opposite. The people who are actually running and managing businesses and tight household budgets and balance sheets would know.
    At the end of the day when the going gets tough, the LLM ends up bringing in a CPA or a CFP every time. When you want to really roll up the sleeves and pull the cover off of an issue, you know who to call.

  16. DrungoHazewood says:

    The problem in my business are insurance and property taxes. I found a property insurance bill from 1967 and it was $47 a year. Now its $1500, far outstripping increases in anything else. And my agent has basically told me not to file a claim, and they have it rigged so you can’t switch without incurring more costs. Any other taxes, like sales taxes have also soared into the stratosphere. I can’t avoid these taxes, but I see the underground economy exploding all around me. And its not tbaggers that are doing most of this illegal activity. So here I am, with the top 1% fleecing me, a huge underground economy churning, and people who say they want work flipping you off when you actually ask them to do something. They leave me in a cloud of dust as they go to pick up a check of one kind or another or make a transaction where there’s no reports to file. Ya that’s right-I am trying to crash the economy.

  17. AmyAV says:

    Add up Fed & State income tax, property tax, sales tax, DMV fees, & cap gains, and the government has taken over 46% of my income. It’s no wonder I don’t feel safe spending what little cash I have in the bank! Perhaps corporations are flush with cash, but the above average gal isn’t. I only say above average because I work in Silicon Valley, and am statistically considered wealthy (>$200K). Come spend some time here and pay $1M for a small 2000 spft house, commute 30 miles to work paying $4.00/gal, pay 10% state tax and 9.5% sales tax and you’ll start to understand why people are opposed to increasing taxes.

    When my business loses income, I can’t just increase prices – I have to lower costs and live within my revenues. I have competitors that will take my business if the price goes up. Not true for the government. They just increase prices, but there is no competition and I have no other choice to purchase my services. At every level the government is a group of inept and lazy workers out for their own personal gain (at best); corrupt at worst.

    I am sickened by the thought of paying even more than 46%.

  18. amboycharlie says:

    Petey

    Why? Let’s see:

    College education: for one they spend enormous amounts of money on sports facilities, student activities, luxury dorms, administrative salaries, and scholarships for disadvantaged students. The scholarships are probably the biggest factor. At the elite private schools the elite parents don’t care because their incomes are rising even faster.
    I used to work at a rich dumb college in Virginia. The prices of many of the students’ cars exceeded for years tuition.

    At the state schools, the problem is that legislators don’t want to support the schools with tax dollars.

    Health care costs: What’s your BMI? Look around you at all the obese people. The unhealthy diet. The all you can eat restaurants. The drinking. The drug abuse. The use of emergency rooms by uninsured patients, who can’t go to an HMO or a doctors office because private practices are so rare today.

    Home prices: because interest rates were low and remained so for far too long so lazy people could make money by borrowing short and lending long. Until the couldn’t anymore, and then the whole house of cards came tumbling down all the idiot speculators (masters of the universe) demanded to be made whole on your nickle, chump.

    Bad government is the problem, but the worst of it began with Ronald Reagan. Every one who followed him was either Ronald Reagan lite or Ronald Reagan zombified.

  19. LoriInNC says:

    xynz says it best:

    “The massive amounts of cash now held by the financial elites are the result of one of the greatest heists in human history: trillions of working class taxpayers’ dollars were transferred from government treasuries into the banksters pockets.”

    So what you want to tax the workers more to benefit the banksters? That’s where it will go no matter what the politicians say … the banksters are the rulers regardless of what we do at the polls.

    Without a major restructuring in the way that this country managed and ruled, no amount of increased taxation will fix the underlying problems.

  20. riverrat says:

    Best post I’ve seen here in awhile, which is saying something- most of what I read on TBP is cogent, insightful, of very high quality.

    It just makes my blood boil that Obama and the rest of the Democrats seem congenitally incapable of getting this point across.

    Would love to see this as front page news in MSM outlets across the nation.

  21. lunartop says:

    Red herring nonsense. The solution is private sector debt writedown and clearing.

  22. bmz says:

    @plantseed–we do not have a spending problem; we have a taxing problem. Our income taxes are far too low. From 1945 to 1980 income taxes averaged near12% of GDP. Reagan reduced marginal tax rates so much that they fell to 9%. Clinton increase them back to 12%; and Bush/Obama reduced them again to 9 %. However, on budget expenses have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, mostly from the Social Security trust fund. But, not only can we no longer continue to borrow from the trust funds, we have to start paying money back as beneficiaries start relying on the trust funds. In the short term, we have to raise income taxes to 12%, simply to cover on budget expenses. In the long term, income taxes must rise above 12% in order to pay back the trust funds.

  23. DeDude says:

    Supply side policies are beneficial when there is a supply problem. If prices are high because there is a lack of product and a lack of investment capital to fund the increase in production (to meet demand), then supply side policies can be effective in increasing economic activity. There is no data to support the idea that we have such a problem now or that we have had it for decades. Our policies since Reagan has send huge amounts of capital to corporations and the rich investor class and all data seem to suggest that if anything they have such an excess of capital that it is creating problems.

    Demand side policies are beneficial when there is a shortage of demand. All data seems to suggest that we have a severe excess of capacity in our economy and more demand is needed for the economy to operate at full capacity. The cost to GDP of 10 million people wanting but unable to find jobs, is about $1 trillion per year of lost GDP. The specific demand side policy that is most effective and whether to conduct it in credit or by taxing away some of that excess capital from the rich and corporations is another debate.

    The idea that all the problems can somehow be solved with no pain by some magic policy “pill” is absurd and immature thinking. A large chunk of the economic growth since Reagan has been the result of debt based spending. The consumer class has not had much income growth since that time so the increased consumption was based on increased debt/decreased savings. A lot of wasteful military spending increases was also done by increasing public debt. We are getting closer to the point where increased debt will not be able to contribute to growth and we have to find other models for sustainable growth or face a slow painful decline.

  24. m111ark says:

    Seems we’ve got a lot of power hitters here who couldn’t field a ball thrown by a 6 year old.

    Debt-money destroys. Debt-free money prospers. “Until you change the way money works you change nothing.” I first heard this, without completely understanding it, from Michael Ruppert, so I give him credit here as he is the first person I know of to use that specific phrase. Those of you who chance to read this may not understand it either; but it’s fundamental to our economic predicament. That’s the issue, the critical human rights issue of the 21st. century, first heard by me from Damon Vrabel.

    I’ve given you all you need to begin your own understanding of what we face. Who will follow up?

  25. mathman says:

    (probably out of context, sorry, i just thought it would interest your readers just how vulnerable the human being is to triggers of “gain” over morality):

    http://jonathanturley.org/2011/09/16/the-plain-ponzi-scheme-feds-charge-the-amish-bernie-madoff/#more-39570

  26. BusSchDean says:

    Well argued. Good comments. Deceit and actual illegal behavior + irresponsibility AND a lack of accountability + too much capital (not too little) + short-sighted leaders in business and politics + a really stupid set of tax policies = US economy 2011.

    Everyone should pay taxes (OK, if you want to let the 80 somethings on fixed income off the hook). We should stop trying to cure social ills or transfer wealth through tax policies. We do those two things by creating jobs, primarily in the private sector. Gov’t has ALWAYS partnered with businesses though AT TIMES played a debilitating role in the process. Businesses have ALWAYS been the key to growth, have REGULARLY sought gov’t help, and have AT TIMES (usually because of being too short-term oriented) done real damage to the economy. Unfortunately we seem to be in a period were few leaders in either sector can get beyond narrow self interests.

  27. ThatsNotAll says:

    (1) Taxes paid as a percentage of GDP are lower than they have been in decades.
    (2) Taxes paid as a percentage of GDP by the elite 5% of our country are higher than they have been in decades.

    Increasing taxes on the rich will only further skew #2 and will not fundamentally change #1.

    So how do you “fix” #1?

  28. PDS says:

    “the country is not overtaxed” he argues…..he misses the real problem….it’s not the tax rates that are the problem….it’s the narrow base that liberal pols continue to exploit in their distracting class warfare battles

    We need a fair tax….3 low basic rates with few to zero deductions…..100pct of tax base contributes….and tax simplification…like Hong Kong has and like Jon Huntsman has proposed and been endorsed by WSJ….easy solution…

  29. Petey Wheatstraw says:

    I got some push-back for things I didn’t write (at least I think I did, but it’s early, and I obviously have poor reading comprehension skills). So, here goes:

    Government:

    Don’t confuse government with politics. Good government is what made us what we were at our peak: The greatest creditor nation on earth, with low poverty, living wages, fairly good education, and investments in science and infrastructure. Good government — based on politics other than what we’ve seen in the last 30 — 40 years — regulated industries (including healthcare, education, and affordable housing. BTW: you forgot the captured military, legal, and prison systems). Good government mandated cleaner air and water. All of that was thrown into the shitter by those worshiping at the political alter of “conservatism.”

    Politics changes all of that, based on the idea that if you let the greedy hoard wealth, and poison the air and water (costs not accounted for in their business models, as they expect the EVIL Government to pay for the clean up), they will share more of that wealth (via trickle-down), than would otherwise get to the lower classes (and that includes the middle class).

    Why has this happened? Politics. We chose it (at least some of us did).

    AmyAV: Don’t complain about the choices you have made. If the area you live in is unaffordable, move. If taxes in your area/state are too high at $200K+, move to Texas, Florida, or Mississippi. Sure you’ll earn a sharecropper’s wage, but you’ll keep more of it, and won’t go through life feeling so abused. If you make $200K/yr., and keep more than half of it, you have NO complaint, in the first place. No one forced you to buy a small home for $1M. There are 14 million people out of work (some accustomed to making what you do), and one sixth of the nation is below the poverty level. You complain? I hope you never get canned, ’cause sister, you will see how the other half lives.

    As for your business losing income, apparently there is someone, somewhere, that is a better business person, as they seem to be able to provide an equal or better product or service for less money. OTOH, maybe they have used wage arbitrage to outsource what you are producing domestically. OTO,O, H, maybe your customer base is suffering from low wages or outright job loss, and can’t afford your products or services. Producers aren’t worth a shit without consumers (a fact that will, eventually become apparent to everyone).

    Toktora Says:

    “Maybe because there’s a dearth of low-skilled employment (and of that which remains, one has to fight with illegal immigrants for the rock bottom wages).”

    Crops are rotting in the fields in the south because there are no illegal immigrants to pick them (another byproduct of reckless and idiotic “conservative” policy). No one is fighting for these “jobs.” Why? Why would they, when crime — especially white collar crime — obviously pays much better? If you found yourself unemployed in America, would you move YOUR family into the fields to pick vegetables and fruit? Of course not, because you are a “skilled” worker and an exceptional American (whose “skills” are offered in a “free” market, and can be had for less, elsewhere).

    LoriInNC Says:

    “So what you want to tax the workers more to benefit the banksters?”

    I think it’s the other way around. The bankers, corporations and entrenched wealthy need to let their “trickle-down” happen, or have that entrenched wealth be taxed much more heavily than it is. It worked in the past. What changed? Politics.

    DrungoHazewood Says:

    “The problem in my business are insurance and property taxes. I found a property insurance bill from 1967 and it was $47 a year. Now its $1500, far outstripping increases in anything else.”

    Your business pays $1,500/year in property taxes, and it’s killing you? Has the value of your business RE not increased since 1967?

    As for the “underground economy,” where is the untaxed, unregulated wealth you say it’s producing?

    plantseeds Says:

    “Spend? Why would they? You said it yourself, there is no incentive for doing so, in fact quite the opposite. The people who are actually running and managing businesses and tight household budgets and balance sheets would know.”

    If you think corporate and household budgets and balance sheets are the same, or even similar, you aren’t paying attention. Corporate balance sheets, and those of the people in charge of those corporate balance sheets, are flush with cash, and it’s not trickling down. They need to spend. For the rest, spending means borrowing.

    ThatsNotAll Says:

    “Taxes are incredibly low? For whom? The 47% who do not pay income tax? Well you should have asked me and I would tell you a different story. My property tax bill has increased $4000 in 8 years. My sales tax rate has increased 20%.”

    You seem to have a major disconnect in your thinking. Your income tax has gone down. Property taxes are local and sales taxes are at the state level. Fact of life 1: property is taxed. if you don’t like it, rent instead of owning. Fact of life 2: even the poorest pay sales taxes.

    You ask:

    “Why has college tuition increased far faster than the inflation rate over the past 30 years? Why have health care costs increased so much faster than inflation? Why did home prices increase so far and so fast (until the bubble popped)? What do all three have in common? That’s right, college education, health care and home lending are all politically favored industries.”

    They were politically favored via deregulation by the government we voted for. Education has gone up for the same reason housing did: Easy access to unrepayable credit.

    amboycharlie Says:

    “ and then the whole house of cards came tumbling down all the idiot speculators (masters of the universe) demanded to be made whole on your nickle, chump.”

    That all came about as a result of deregulation. The only chumps are those who so foolishly voted for it.

  30. Petey Wheatstraw says:

    ThatsNotAll Says:
    September 17th, 2011 at 8:58 am
    (1) Taxes paid as a percentage of GDP are lower than they have been in decades.
    (2) Taxes paid as a percentage of GDP by the elite 5% of our country are higher than they have been in decades.
    ___________

    Yet the incomes of group #2 have grown far faster than their tax bills.

  31. buddhabucks says:

    Petey Wheatstraw

    “Please explain and post a link to any government program or agency that pays people not to work, ”

    Dept of Agriculture, pays farmers, or more correctly, associates of high ranking officials, NOT to farm land. Recipients are no longer published

    Dept of Justice, places people in jail for minor infractions (pot smoking, stealing $50, paperwork not handled properly …..) where they not only not work, but get paid in food, clothing, shelter, and security. This ensures the the security industry gets paid well also, but technically they work.

    Health and Human resources… so many examples, my son qualifies for $800 month, if he doesn’t work. It’s a long story, but now he is getting very good at it, and gets a free cell phone, food stamps, taxis, etc. all free, and he knows so so many in the same situation. I had no idea.

    And of course there is unemployment insurance for those who would rather sit home than work for almost the same amount. Not arguing the morality of it, you asked if anyone gets paid not to work, and this is an example.

    How about teachers who sit in rooms all day because of a legal investigation because the union will not let them be fired. Taxpayer dollars are being paid to them not to teach. And this goes on for years. And it is government approved, as it is negotiated by public officials.

    Oh and how about getting paid for sick days you don’t take? I’m not sure they do that in the private sector. I don’t mean a day here or there, but hundreds of days accumulated, taken at once. That’s not the intent of sick days, but paid out by dept of Ed.

    Then there is the gray area, like paying Haliburton for the meals it doesn’t serve to our troops.

    I’m sure there are many more examples

  32. Winston Munn says:

    GDP is comprised of approximately 70% consumption. Of that amount, 50% of consumption comes from those who consume virtually 100% of income, i.e., the 80% of families who earn <$80K per year. (Batra, 2005).

    It is obvious that to increase GDP consumption must increase; the most effective means to increase consumption, is to put more money into the hands of those who consume 100% of their incomes.

    This requires a redistribution of wealth from those at the top – who can afford to contribute more – to those at the bottom, who will spend the extra.

    This is not socialism – this is common sense. Regressive taxes such as FICA and sales taxes decrease GDP and thereby decrease employment because they take a proportionately higher amount from those who will totally consume their income. On the other hand, progressive taxes coupled with intelligent policy that stimulates growth by redistributing some wealth to the lower classes increase GDP and thus employment.

  33. Petey Wheatstraw says:

    buddhabucks:

    There’s a reason employment numbers are called NFP. Sure, there’s graft, but corporations being paid not to farm land isn’t the same as being paid not to work.

    You think prisoners don’t work?

    Is your son disabled, or is he a fraud? If he’s the former, he won’t get rich, and I’m glad our society can make life comfortable for the disabled (maybe having crippled beggars in the street would better fit your idea of a how a wealthy society should function). If he’s the latter, he should be working, in prison.

    Unemployment INSURANCE does not pay people not to work. Do you really believe 14 million formerly employed Americans would rather collect a stipend than have their jobs back?

    Fired pending the outcome of an investigation? What if the investigation exonerates them? Do they get back pay? Are all of their former perks (housing, credit, etc.), restored? Do you know that they sit in a room all day dong nothing? Aren’t most of them moved into administrative roles?

    The private sector, at least much of it, no longer distinguishes between “sick” days and other time off. It’s now called “personal” leave, and includes all days off. You take it or leave it. many corporations have a “use it or lose it” policy.

    Halliburton is a government agency? I had no idea that privatization had gone so far as to come full circle.

  34. leeward says:

    m111ark,
    reach a little further than M Rupert and try Doug Noland’s discussion of the actual definition of money. Then, when thinking about real money, what things can we collectively do to increase the velocity of the stuff around us ? There will always plenty to worry about and even more missed opportunities to make a positive difference. Gov’t isn’t going to fix anything and fighting about it is a waste.

  35. MadisonWasRight says:

    Guess what? Comparing (a) taxes paid by individuals and domestic corps that are making low – or no – profits to (b) GDP is bogus as a proxy for tax rates! The “evil rich” are not getting cap gains and are not paying cap gains taxes. Purely domestic corps (including many small businesses) do not have the profits of the multi-nationals that derive benefits from other markets. So …. if a company’s revenues decline 15% and its profitability declines to zero, then it pays no taxes as a % of what it produces! Let’s aggregate all the companies in this boat, along with individuals making less and paying less, and then we can pretend to have a valid measure of taxes paid as a percentage of GDP. The problem, kids, is that this does not equate to low tax RATES. Taxes are down so much, because we are making so much less money (i.e., profits) – it is a paucity of income. A company can literally still have 85 – 90% of its output, make no net income (legit dedux only) and no income liability.

    Get it right, guys … ramping up taxes and diverting income to the government is how we tanked things in 1938.

    You have more law degrees, but I have more finance credentials & experience

  36. flocktard says:

    I like the arch comments here, but you have to remember for charlatans like Laffer and his alky friend Kudlow, they do not use economic theory, they are preaching a religion.

    If there is one person out there who calls him or herself an “economist” who does not see this economy as utterly clusterf*ck demand constrained, they need to be outed for the phonies they are.

    Arthur Laffer actually based his “theory” that cutting taxes would incentivize people to work- which is an outgrowth of his utter contempt for the average American citizen. But that is how these people think.

    Just like blaming CRA for our housing problems- when it’s Goldman and Greenspan’s fault, blame the poor and the colored.

  37. Jim67545 says:

    I think the impact of regulation as well as “advances” in personnel related litigation and increasing costs of benefits (and include such “benefits” as workman’s comp and unemployment insurance) and ancilliary employment costs (protective gear, protective training and programs, etc.) DO depress employment. On one hand they increase the manpower devoted to managing these things (think larger personnel departments, compliance officers, training departments) and on the other hand they increase the cost of supporting an employee and there fore give further incentive to increasing productivity – aka reducing headcount.

    The legislatures promulgate general laws which lack all consideration of cost/impact and then hand them to bureaucrats who write the detailed regulations. A 5 page law becomes a 50 page regulation with many aspects one wonders if the lawmakers really intended. Then, as circumstances arise in implementing the regulations, one receives notices, enforcers visit who come bearing unfamiliar interpretions sometimes unique to their region of the country, one has to read trade journals, perhaps hire consultants, send employees away to seminars on complying, regulations are regularly updated, forms revised, etc. Each major regulation becomes a little industry unto itself.

    I think we need to do 2 things: 1. Either have a sunset date on regulations or create a mechanism whereby they are reevaluated by an office whose mission it is to end all regulation (and not by the agency who administers the regulation and has a vested interest in perpetuating it.) and 2. Be more specific on what it takes to comply and then reduce oversight and increase penalties. Part of the problem is the busy-making that goes on among the regulators and their desire to make it better, to keep pushing the envelop toward optimizing the reach and breadth of the regulation they oversee.

  38. Lukey says:

    First of all, while tax rates are currently at historically low levels, actual taxes (current + deferred) or what we otherwise refer to as “spending,” is at its highest level as a percent of GDP since WWII.

    [BR: So are you calling unfunded Iraq war, the unfunded Bush tax cuts, and the unfunded Medicare Prescription Drug Plan part D) all tax increases? I did not expect that from you]

    So, if we accept the Permanent Income Hypothesis, while the wealthy still have plenty of wealth and corporations have plenty of cash, the steady drumbeat in the President’s rhetoric, outlining his plan to have them balance the books, makes all this spending look a lot like higher (future) tax rates to them and has them hunkered down. I don’t necessarily buy the argument that the wage taxes the working class pays insulates them from suggestions that they don’t sufficiently contribute to the cost of government, but one thing we know for sure is that they aren’t the ones being singled out for the (much) higher taxes needed to eliminate the deficit and pay down the debt. If this is indeed the case, one could make the argument that a sensible (phased) contraction in government spending might look more like a tax cut to the folks with all the money than a lower current marginal rate. That might get them to open their wallets on things like construction and leisure services that will result in a real increase in domestic economic activity (and therefor more jobs).

    As for the regulation part of this argument, I read the McClatchy account of that survey and, while the small business owners didn’t cite regulations (in general) as a concern, they did specifically mention things like “workers comp” and “insurance costs” which they may not realize are driven by an increasingly complex regulatory environment. So I am not willing to buy the interpretation of the results of that survey that says we don’t have a regulatory problem in our economy. I recently saw a chart of capacity utilization since 1970 that shows it clearly on a steadily negative trajectory. My guess is that if you added a line representing pages in the federal register you’d see that it more or less negatively correlates to capacity utilization. I know correlation isn’t causation but the two trends are unmistakable.

    Finally, with respect to the Keynesian’s favorite boogyman – “a lack of demand” – I would just say that there’s demand out there – it’s just all being generated in the emerging economies (as America de-leverages). Our businesses (again, largely due to our tax and regulatory policies) just find it more profitable to supply that demand from overseas rather than their domestic plants (further depressing domestic demand). As with the $4 trillion in “stimulus” we’ve had over the past three years, any additional stimulus will likely only generate additional (domestic) demand for (higher priced) foreign commodities and (cheap) foreign made products. It’s (roughly) the fiscal policy equivalent of “pushing on a string.”

    So, rather than saddle our producers with higher (current or deferred) taxes through another “stimulus” measure (depending on whether it is “paid for” or borrowed), I would prefer to see us make a serious effort at curtailing unnecessary government spending, get rid of overlapping and confusing regulations without “gutting” the basic goals of safety and fair trading practices and provide incentives for big companies to repatriate productive capacity. Once more Americans are working (in the private economy actually making things people want to buy on the open international market) I suspect we’ll see a sustainable increase in domestic demand that generates sustainable organic domestic economic growth.

  39. wally says:

    “Any other taxes, like sales taxes have also soared into the stratosphere”

    Indeed. The trend for several decades now has been toward regressive taxes. That’s part of the diminishing of the middle class. A progressive tax structure is far more sensible for moral reasons, for practical reasons and for its effects on incentive.

  40. Molesworth says:

    Go Petey.

  41. DrungoHazewood says:

    Well its pretty obvious we’ve gone too far. We’re going to ride the FIRE economy straight into the bowels of hell and that’s that. You can talk economics all you want, but we ain’t going anywhere with the grifter elites running out of control. One more I already have some poor people who’ve agreed to mentor me in my career change.

    You want to know why the little guy won’t lend what little money he has. There’s this guy I’ve known since 1990. He’s worked for me off and on over the years. He came to me and said he had a great deal on a van and could he borrow some money. So I though here’s a guy who is working under bad conditions and doing what he can. We go and he finds an old clunker, I give him the money, and he just vaporizes. To get out of the car lot he had to of driven right by me. I think I’ll just call him- straight to voicemail. I’m still trying to contact him and still-straight to voicemail. Its every man for himself and all we can do is wait for the elites to lower the boom on us all.

  42. DrungoHazewood says:

    wally,

    I am in a kind of weird position. I own a bunch of depreciating property that the insurance and taxes on are skyrocketing. My health insurance is on a parabolic trajectory of its own. The local sales taxes just got a boost too. Due to my margins being squeezed, based on income, I am a hairsbreadth from qualifying for public housing. Hiring someone legally generates a blizzard of paper work and increase costs. One more QE, operation twist, or some other gimcrack financial scheme, and I’ll slip below the waves. And I’ll be joined by millions more as this joke of a system grinds us into dust.

  43. bmz says:

    Lukey Says:
    “First of all, while tax rates are currently at historically low levels, actual taxes (current + deferred) or what we otherwise refer to as “spending,” is at its highest level as a percent of GDP since WWII.”

    Of course spending is high relative to GDP; we are in the worst recession/contraction since the 1930s. That is why all honest comparisons are to “normalized” GDP. And when you look at normalized GDP, current on budget spending is not significantly greater than the average of the postwar era. It is only income taxes which are out of whack. When Reagan reduced the highest marginal tax rates from 70% to 28% he created our huge on budget deficit(which he offset in part by creating an “off budget” surplus through excess payroll taxes). Only when Clinton raised the highest marginal rates were we able to fully cover on budget expenses. Again, for those of you who did not understand it the first time: we do not have a spending problem, we have a taxing problem.

  44. basquebob says:

    @ThatsNotAll and those that hate taxes: 102 Things NOT To Do If You Hate Taxes http://www.addictinginfo.org/2011/05/18/102-things-not-to-do/

    I like taxes as much as anybody but as someone said the other day in this blog I like for taxes to buy me some civilization.

  45. Lukey says:

    Yes, Barry, I most certainly would. Unless we’ve figured out a way for the government to get money other than through taxation, spending = taxes (current + deferred). Frankly, I think that’s why the Bush tax cuts didn’t have the desired “supply side” effects. If you cut tax rates and increase spending, you really haven’t cut taxes, you’ve just made the long term budget picture unstable. People could see the spending exploding and knew the tax cuts weren’t “permanent.”

    I was never a fan of Bush (and I opposed his tax cuts precisely because he obviously wasn’t interested in cutting spending). The Iraq war was one of the biggest mistakes in the history of the USA.

  46. UncleMilty says:

    Maybe I don’t understand the definition of supply-side economics/religion, but I have the following bones to pick with this post:

    1) Doesn’t supply-side theory focus on making the pie larger, rather than simply moving supply curves around. I always thought that the old supply/demand graph kept all else equal in a zero sum game in the short run. Two different tax systems can collect the same amount of tax, but do so in ways that affect incentives differently and result in a larger or smaller pie in the long run.

    2) Is he suggesting that higher taxes and more regulation would help business and the economy? Why does he only entertain getting rid of regulations that would have stopped the financial crisis? Why don’t we start with the crappy regulations that protect big business and keep mindless bureaucrats busy? I’ve never met a small business that said it wanted more regulation. Anyone who pays taxes or does payroll or starts a business from scratch knows that assertion is asinine.

    3) The rich are paying less than they did, but the poor and middle class are paying WAY, WAY less than they used to. The Bush tax cuts lost more revenue on the broad provisions applying to everyone than they did on the top 5%.

    4) The payroll taxes are not like other taxes because they come with a LIABILITY, which by the way, pays benefits in a deeply progressive way. The pay-no-federal-taxes-crowd gets more out of SS, realtive to the % they pay in, than higher incomes (but still under the wage base cap). A failure to recognize the difference between liability generating receipts (i.e. the lock box) and regular taxes is why our unfunded liabilities are way out of control.

    5) True Supply Siders want LOW MARGINAL RATES, while still collecting the same amount of tax. This creates a greater incentive to work and invest. Ever done a rate of return analysis? Businesses do them for everything. Right now, no one is investing because the tax/healthcare/regulation/depression variables make investment too risky. Broaden the base, lower the rates, and give certainty over more than 1-2 years and suddenly, the incentives change and more projects become viable. Most IRR calcs are very close. Reduce taxes from 35% to 25% and more projects get a green light. Less jobs get moved overseas. 10% may not mean much on an income statement, but it is HUGE on an IRR projection.

    6) Of course Supply Siders want lower taxes. This is because they believe that individuals and businesses do a better job of allocating capital than government and almost-PHDs do. Lower taxes = better allocation decisions = bigger pie = more tax revenue. Think post office (vs FedEx), BMV (vs Amazon), politically connected solar companies (vs just about anything else), etc.

    7) As I understand it, consumption is back to where it was before the crash. It’s business investment that has fallen off a cliff and not recovered. Consumption, of course, has been aided by record amounts of transfer payments. Has this worked? No, of course not. Change the incentives and give business some clarity and they will unleash that cash and we’ll see real growth.

    8) We are currently undertaxed due to the recession, but businesses (especially small businesses, which are largely taxed as pass-throughs), see that rates are scheduled to go up. Businesses invest for the future, so these temporary cuts don’t have the impact that real tax reform would have.

  47. Joe Friday says:

    There may be a time when supply side economics will be an appropriate policy response.

    No, there will be no other “time”, just another place: BIZARRO WORLD.

  48. Joe Friday says:

    ThatsNotAll,

    (2) Taxes paid as a percentage of GDP by the elite 5% of our country are higher than they have been in decades.

    But only because their income increased so dramatically. Their taxes as a percentage of their income has plummeted.

    Just over the past decade, the top 1% of Americans saw their share of the nation’s income DOUBLE, from 11.3% to 22.1%, but their tax burden shrank by about ONE-THIRD.

  49. UncleMilty says:

    @ Joe Friday:

    Show me your data. Mine is below…

    Top 5% share of AGI:
    1980: 21%
    19990: 28%
    2000: 35%
    2008: 35%

    Top 5% share of federal income taxes:
    1980: 37%
    1990: 44%
    2000: 56%
    2008: 59%

    That looks a lot like “fair share” to me.

    http://www.taxfoundation.org/news/show/250.html#table5

  50. 4whatitsworth says:

    Good article and I agree that supply side is not the answer unfortunately the government is also not the answer. I think the reason all this cash is sitting around is 1) There is a political crisis in the United States we can’t all confront reality that if we are going to get out of this mess that taxes need to go up, more people need to pay them, and government spending needs to go down. 2) Our education and work ethic in the United States is a disaster so there are very view new hires to be had that would be a good investment over the long run. 3) Emerging markets are hungry want what we have and are taking it from us.

    I think that the first step to recovery is to admit that we are powerless over the lazy and the government and that we have a lost generation to contend with.

  51. Toktora says:

    Petey:

    You argue: “Crops are rotting in the fields in the south because there are no illegal immigrants to pick them (another byproduct of reckless and idiotic “conservative” policy). No one is fighting for these “jobs.” Why? Why would they, when crime — especially white collar crime — obviously pays much better? If you found yourself unemployed in America, would you move YOUR family into the fields to pick vegetables and fruit? Of course not, because you are a “skilled” worker and an exceptional American (whose “skills” are offered in a “free” market, and can be had for less, elsewhere).”

    Believe it or not, I actually worked on a farm in my youth – I made $4.00 an hour doing so. Minimum wage at the time was $5.15. That is the REAL reason why only illegal immigrants are willing to work in the fields – nobody in their right mind would work for below minimum wage (which in and of itself is far below a LIVING wage) doing an extremely labor intensive job with no benefits (especially no health care) if they absolutely didn’t have to. Right now, only the illegal immigrants have no other employment opportunities. If the economy gets any crappier and the social safety net is shredded even more I would expect this to change.

  52. maverick1970 says:

    Thought provoking article. However it seems disingenuous to argue that all the cash on the sidelines is due to low tax rates and no incentive to spend. Match those graphs up against consumer confidence, outlook by business leaders and polls showing whether the country is heading in the right direction or not. Companies and individuals are saving because there is too much uncertainty (e..g. will I have a job next week?, will I find a job soon?, will I be able to make payroll next week?, will there be sufficient demand for my products/services in the future that warrants today’s investment levels?)

    While I may err on the side of simplicity, I believe we can boil down the two economic arguments to the following. Supply side is about leaving money in the pockets of the people (individuals & companies) who generate the money. Demand side is about the government stepping in with spending when individuals/companies are unable/unwilling. We need both approaches to solve today’s economic issues. However these two approaches must be balanced, applied efficiently and is equitable to all without saddling current and future generations unduly.

    A great example of wasteful demand side spending is to look at some of the figures coming out on Obama’s job plan. I have seen where some estimate that it will spend about $150k per job that it saves. Yet the jobs supposedly being saved (construction, teachers, police & etc) earn no where near $150k/year. That is extremely wasteful! A better idea would be to create another jobs corp and employ 3 people for a year with that $150k. That is the type of smart demand side spending I can get behind!

    As for supply side, it is all about liberty. Everyone should be able to keep more of the money they generate. It is our money to begin with and we should be able to spend it as we see fit – whether that means buying something, saving or paying off debt. I don’t need the government to try and figure out ways to spend my money for me. Give me a proper economic climate and I will be in a better mood to spend, start a company and take proper investment risks.

  53. StatArb says:

    we should borrow and spend … that always works

  54. DuchessGateau says:

    Great article and charts! I realized something… If the wealthiest 1% don’t contribute to Social Security, they don’t pay for the monthly support sent to crippled and blind people. People like disabled veterans who can’t feed themselves. That money also supports the mother or family member who feeds him, a person who has no health insurance because they quit their job to take care of him, and now have only a part-time job. Yet even the poorest wage earners contribute to SS. However, ALL taxpayers contribute to medicare and medicaid, correct? Is this why so many politicians focus on eliminating medicare?

    By the way, eliminating entitlements won’t lower your taxes. Get real! It will just allow war profiteers and bankers to transfer more money out of the public till. That’s how it works. They are the ones leading the push to cut entitlements, not the Tea Party, because they are the ones who will directly benefit. More for them!

  55. michael33496 says:

    I don’t want to argue with the author’s view on whether supply side economics is the correct policy or not. I just feel like the author failed to address a major point in that lowering taxes is not just about increasing the amount of cash on the balance sheet.

    It is more about increasing the economic profitability of future capital investment projects. Lowering taxes is meant to increase after-tax cash flows in the future so that marginally unprofitable projects before tax cuts will now be able to overcome the firm’s cost of capital. (Even cash on the balance sheet has in implicit cost).

  56. [...] via Why Supply Side Economics Won’t Solve the Current Economic Malaise | The Big Picture. [...]

  57. McMike says:

    Only two things one can do with excess production: consume it, or conserve it. I don’t believe society can consume itself to prosperity. Vote for Democrats and Republicans and expect a different outcome.

  58. aigoo says:

    @ Unclemilty

    The Taxfoundation.org data show the percentage of total taxes being paid by the most wealthy rising over the years. It does not reflect their effective tax rate, rather, it indicates those at the top are paying more, because they are earning more

  59. jadogsl says:

    Repeat of my comments in July of this year

    Could we have changed a thing ? No.
    The forces that where in place were similar to the forces in place in the 1920s. Why ? Because they worked…until they didn’t.
    That is .. the Reagan Revolution was effective because the world was opposite then… strong labor, high inflation, young boomers….. George W. went back to that well one last time with opposite results. Why ? Because the world had changed but the economists on the left and right never noticed. For them it is heresy to say that one type of policy could work at one time but not another.
    And the response after the 2008 crisis was the same as the 1930s. Because the choices were the same. Meltdown or Government help. Even Repubs capitulated to this fact. Now that the crisis ‘seems’ to be over the Repubs have moved back to the comfortable right. The coming result. A 1937/1938 type second dip.
    Times change, but human nature does not.

  60. DeDude says:

    What an outrage, the rich who harvested all the wealth (and then some) created in the past decades are paying more in taxes, whereas those slacker poor people who lost income and wealth are not do their “fair” share and also paying more in taxes. I am sure that the rich soon will go on strike and refuse to harvest all the new wealth created by improved efficiency, then the poor bastards will be sorry, right?

    Do you think the readers here are Foxified morons?

  61. DeDude says:

    DuchessGateau;

    One of the reasons they are so strongly opposed to Obama’s RomnyCare plan is that it actually extend the reach of Medicare taxation. It will soon demand that capital gains over 250K pay Medicare taxes. So the mega rich can not escape by making their income capital gain. That is how the plan managed to both extend care and extend the funding of Medicare for another 8 years, and as you mention that is also against their goals of getting a collapse asap.

  62. Joe Friday says:

    UncleMilty,

    Show me your data.

    The data is not mine, however, the relevant government data has been displayed by Leonhardt at the NY Times, many other notable economists, and some references reprinted right here on this blog.

    Mine is below…

    The “Tax Foundation” is a fake RightWing front group.

  63. Joe Friday says:

    maverick1970,

    Thought provoking article. However it seems disingenuous to argue that all the cash on the sidelines is due to low tax rates and no incentive to spend. Match those graphs up against consumer confidence, outlook by business leaders and polls showing whether the country is heading in the right direction or not. Companies and individuals are saving because there is too much uncertainty

    NAH.

    It is simply a lack of demand. There’s a great McClatchy article around about them interviewing businesses. They said lack of demand. NOT “uncertainty”, NOT regulations, NOT taxes, just lack of demand.

    A great example of wasteful demand side spending is to look at some of the figures coming out on Obama’s job plan. I have seen where some estimate that it will spend about $150k per job that it saves. Yet the jobs supposedly being saved (construction, teachers, police & etc) earn no where near $150k/year.

    Because those numbers include the underlying spending on the projects involved, replacing bridges, repairing roads, refurbishing schools, etc.

    As for supply side, it is all about liberty.

    No, it’s about failure, as it has failed SPECTACULARLY each and every time it has been enacted.

  64. Joe Friday says:

    michael33496,

    It is more about increasing the economic profitability of future capital investment projects. Lowering taxes is meant to increase after-tax cash flows in the future so that marginally unprofitable projects before tax cuts will now be able to overcome the firm’s cost of capital.

    Ah, according to the GAO (the investigative arm of the U.S. Congress) more than two-thirds of corporations pay ZERO taxes and the rest pay less than 5%:

    MORE THAN TWO-THIRDS OF CORPORATIONS PAY NO TAXES

    http://www.washingtonpost.com/wp-dyn/content/article/2008/08/11/AR2008081102324.html

    ~

    STUDY SAYS MOST CORPORATIONS PAY NO U.S. INCOME TAXES

    http://www.reuters.com/article/newsOne/idUSN1249465620080812

  65. Joe Friday says:

    jadogsl,

    That is .. the Reagan Revolution was effective…

    At crashing the economy, raising unemployment, lowering the Standard of Living, and creating massive federal deficits & debt.

    George W. went back to that well one last time with opposite results.

    The failed results were the same, only partially reversed after Reagan reversed course.

  66. Carl C says:

    Using balance sheet cash as a measure of liquid assets can be misleading, because cash is not the only liquid asset. Businesses can use treasuries and other short term investments as proxies for cash.

    It is true, as the first chart shows, companies worried about liquidity significantly increased their cash position following the liquidity crisis in 2008. However, they did NOT significantly increase their total liquid capital positions. See the Fed’s Flow of Fund Z.1 release table L.102 line 41 for total liquid assets.

    From this source, total liquid assets were:
    Q4 2007: 1.5 trillion
    Q4 2008: 1.4 trillion
    Q4 2009: 1.7 trillion
    Q4 2010: 1.9 trillion

    An increase? Yes. A “massive” increase? No. Furthermore, if you look at liquid assets as a percentage of total assets, or of profits, the increase was even less significant.

    The idea that corporations are not spending is simply false. The only thing that has changed, is that companies are holding more of their liquid assets in cash.

  67. [...] Why Supply Side Economics Won’t Solve Our Problems – Hale Stewart [...]