Now, I’m no Economist, so if anyone sees me going wrong here, forgive me.
But, doesn’t Keynesian theory suggest that when the economy is doing well, governments should reduce spending or raise taxes to prevent inflation? Therefore, rightly or wrongly, it’s not appropriate to claim our Rocket Scientist as a Keynesian when he says “the tax rates must have been too high – and thus a drag on economic growth – regardless of how the economy was running at the moment,” because a Keynesian would not disregard the current performance of the economy?
Also, as others have suggested, Bush’s tax cuts, while an appropriate Keynesian response, should have been better directed - at the poor and middle class, rather than the rich. But, we’ve covered that, and now we’re going around in circles.
I’m having some trouble deciding how to answer this. Like most economic theories, Keynesians are very diverse, so there are Keynesians that would agree with you, and Keynesians that would disagree.
Basic Keynesian theory says that prices and wages are rigid, and react to changes in the market slowly. Many Keynesians are less concerned about inflation than about unemployment, which they feel reacts much more quickly to changes in the market; therefore, they think it can be more easily effected by government policy. But there are many anti-inflationary Keynesians, too.
Many Keynesians also think the government should act to minimize the amplitude of the business cycle. In other words, they think the government should minimize the lows and highs as the economy runs through its cycles of peaks and troughs. But again, not all Keynesians agree on this point.
In other words, many Keynesians would agree with you, and many would not. Regardless, my statement was certainly misleading (if not erroneous), so thank you for pointing it out.
Not always. The problem at the end of the Bubble was overcapacity. Investing your money in more transmission capacity that was going to rot in the ground would not make the economy grow. We needed more demand, not more investment. Low interest rates, leading to refinancing by the middle class, increased demand.
New wealth only to those who sell at the top. Paper losses have a real effect on spending. I hope you’re not saying that bidding up the price of a stock with an absure P/E is a good thing. And well run companies do not make decisions based on their stock price, but rather on sales forecasts and market conditions. Certainly some companies lay off people to make Wall Street happy, but I wouldn’t call them well run. It has been a long time since GE did an IPO,. so I fail to see the connection between this and their investment. If you said buy a GE bond, then there might be a point.
I really haven’t heard anyone call it a Bush recession. He didn’t make the recession (which was inevitable) but he botched the recovery. Want to compute dollars in the deficit per job created?
The Clinton/Republican Congress tax increase /spending control definitely helped - because for the first time in a long time the budget seemed under control. That increased confidence and decreased interest rates, and was one of the factors leading to the boom.
I think the root cause of the problem is that the notion that a tax and spend Democrat created a surplus has blown the minds of our conservative friends.
First, there are no neutral positions for the government. Balanced budgets, for example, are pro-cyclical. It is the case that the government will affect the economy; being the largest spender in it this should be obvious. The question is: how will this power be used?
Yes, capital investment is grand. Other forms of capital investment are
Public education (ooh, government spending from increased taxes!)
Health care (ooh, government spending from increased taxes!)
Infrastructure creation/improvement (ooh, government spending from increased taxes!)
as three examples, two of which would be considered “human” capital investment. I address this to you and the OP in case RTF’s point was lost: increased taxation can indeed help the market. All capital investment, regardless of who does it, means trading consumption now for increased supply in the future. The more we consume now, the less we can in the future (whether or not pervert cares to remind me, as if I didn’t know, that economics is not a zero sum game, there are always at any period in time finite resources which demand this trade-off a priori). For some reason, I note many conservative thinkers (and I mean this very roughly, as in some ways I still consider myself a fiscal conservative) only think of capital investment in a Reagonomics, “trickle-down” sense of businesses purchasing equipment in order to increase productivity. This is really a very narrow view of capital. I am not trying to accuse professional economists of anything. If your supply-sider was in this debate maybe things would go differently.
Of course, else demand cannot be met. This isn’t really a chicken and egg problem, though. Millions of dollars of venture capital money is lost every year because someone tried to anticipate demand in this supply-side sense to have production available to meet what would become demand. For every Amazon that finally got out of the red there were ten to a hundred others that either got swallowed up by it or fell out of consideration completely. We can take two approaches to this.
One approach is that venture capitalists are truly innovators trying to anticipate demand or genuinely viable businesses before they come into their prime, in order to win big. Another approach is jshore’s above, that they will create a product/service/etc and then advertise in an attempt to create demand. Of course the final analysis will have to take both into account, in which case the problem just isn’t simple (of course, who said otherwise apart from our dear OP?).
This, however, does ignore the point RTF mentioned, that not all investment is actually capital investment, nor does it equate to such, nor can it be said to necessarily be so. Conspicuous consumption, for example, is not a “better investment” than standard consumption. If I buy a Jaguar rather than a Honda Civic, I am not increasing my productivity. I am increasing the amount of money people can make in the automobile market, perhaps. Perhaps. But this requires the same assumption again: that there is no money sloshing around at the top, which is just what we’re trying to demonstrate or dispell. We would need to know, for example, what impact luxury goods have on raising the standard of living. After all, I could buy two or three Civics for every Jaguar, and thus employ more people for the same amount of money.
I do not intend to suggest that people can’t 1) make money or 2) spend it how they choose, but I do intend to suggest that conservative assumptions are a much rosier view than practical. Of course, I think the same of many liberal ideas as well.
We needed both supply and demand, but your point is well taken. I tried to address that when I said:
Please note the word “too.” I meant that there must be both. Thanks for clearing that up, though.
And I don’t think Supply Siders are the only ones arguing that you must have both demand and supply for economic growth. Keynesians acknowledge it, too. It’s just a disagreement about which side – supply or demand – the government should massage.
No, new wealth to anyone who sells at a profit.
It’s neither a good thing or a bad thing, intrinsically. It’s good to the people that make money, and bad to the people that lose money. The same is true for bidding up stocks with low P/Es.
In most states, the Board of Directors owes a fiduciary duty to act in the best interests of the stockholders. The interests of the stockholders are usually aligned with the interests of the company (i.e., what’s good for the company is good for the shareholders).
I don’t have any idea when GE’s IPO was, but they issue new stock all the time. It’s something that investors call stock dilution, and it can come from employee stock options, or buying other companies or services using stock instead of cash, or simply making a new public offer of stock on the exchange, or a number of other ways.
For example, in 2001, GE offered roughly 60.8 million new shares through employee stock options. (The linked article also explains stock dilution.) Those shares are offered in lieu of compensation, so GE gets a workforce. In other words, it’s just like if GE had received money for the stock, and then used the money to invest in workers.
Great post, erislover. My only disagreement is with your assertion that the OP said things were simple.
If I may (humbly), I’d add the observation that investment doesn’t come only in the form of money. The government can also make investments in ventures through spending time and effort (i.e., how much time goverment employees spend working on the issue, and addressing it in press conferences or television ads).
And you’ve highlighted what I think is the central disagreement here: where should the government allocate its resources to get the best return on its investment? Should Bush have cut taxes? If so, did he distribute the tax cuts in the proper proportions? Should Clinton have cut government spending instead of raising taxes? If so, what should he have cut?
I’d be willing to bet that if you asked those questions to a dozen Nobel Prize winners, you’d get a dozen different answers.
And we haven’t even gotten into monetary policy yet. [shudder]
Let’s try an analogy: there are evolutionary biologists, and they have journals and stuff. There are also creationists, and they have their ‘theories’ and write books and whatnot. The creationists’ stuff doesn’t get published in the journals of evolutionary biology because it’s crap.
I’m sure supply-side economics isn’t as deranged as creation ‘science’. But if you’re trying to do serious economics, you want to publish your ideas in a forum where you can intellectually slug it out with other serious economists. That’s why it’s important to me to know whether supply-siders have been there and done that. Unless you’re alleging some massive conspiracy by conventional economists to keep supply-siders out of the journals, their absence from there would be something I’d regard as prima facie evidence that they were cranks.
I still don’t see a cite to an economics journal here, or evidence of one. Maybe you can be clearer.
You have said Mundell has developed ideas of supply side economics, and that he has received a Nobel for some of his work.
Einstein developed the Theory of Relativity, and Einstein received a Nobel for some of his work, too.
Thanks. I guess I just got that impression from the line about how taking people’s money away could possibly help the economy. I feel, if you want to look at it like that, convenience stores “take” my money away, too.
As a lower middle class person, I need a neighborhood and surrounding area to sustain me. If we include the company I work for, we would expand that to a small city. If we compare my wealth to, say, Bill Joy’s of Sun Microsystems, we’d see that his extrememly large salary also requires a much larger “society” to support it.
In both cases, this society will need, at a minimum, regulation and protections regarding crime. As we progress more and more to a modern western society, the requirements for Bill Joy in terms of what kind of society he needs to support his income versus what I need to support mine go some way, I think, towards explaning the motivation behind progressive taxation. Someone has to pay for society’s maintenance. Since the wealthy require a much more involved society (more civil laws, more infrastructure, more “human capital”, and so on) it only makes sense, to me, that they should also shoulder a large portion of the source of funding for this society: taxation.
The problem, then, with supply-side analysis, is that it attempts to give (back? I guess that depends on perspective) money to the wealthy so that they may continue, in their way, to promote society. But this contradicts the notion that they should shoulder a larger portion of the tax burden. So immediately I have problems with it from a strict ideology point of view. However, I am willing to forget about ideology if we can show that this supply-side thinking achieves our ends anyway, which is largely material wealth, health, and emotional happiness.
I guess my problem is that we become a plutocracy or aristocracy when the standard of living does not rise roughly proportionally across incomes. Median incomes should definitely rise during good years. While the wealthy pay quite a bit of taxes, tax cuts that favor the wealthy should only be made when it is abundantly clear that our policy is quite draconian.
What incentive is there to do a great job when you can earn a salary high enough to sustain yourself at a more than moderate lifestyle in under a decade? My company’s president, for example, takes a meager salary for his position in order that the employees are treated relatively well. The extra fifty thousand dollars a year he doesn’t take but could goes much farther when it goes to his employees. Five thousand dollars a year means a hell of a lot to me. I’m young, I don’t own property yet, and so on.
So I think you ask the right question: where will we get the most return? Where will dollars mean the most? I contend that it is in the lower income levels that smaller amounts will mean more, that the sum of the parts are worth more than the whole. An extra three hundred bucks to me means my leisure time is spent more enjoyably (consuming, of course!). Give Bill Gates three hundred bucks and what is it to him? A drop in the bucket at best.
As you suggest, both avenues of supply and demand must be taken into consideration. I would suggest, however, that the wealthy already have supply in hand (else they wouldn’t be wealthy!) and that demand is the proper thing to stimulate. If this means a more progressive tax, so be in. Like the president’s 50K will mean less to him than all of the employees’ 5K, so would my 1K mean less to me than giving a minimum wage earner an extra hundred bucks.
If we want the government to interfere less in the economy, then we need to give politicians less incentive to pass such legislation. For example, it is one thing to present the fact that people living in modern societies that are poor still enjoy a high standard of living compared to their counterparts (even wealthier ones) just 150 years ago. So we can demonstrate, without a doubt, that an absolute standard of living has increased for a great number of people. However, the relative gap in standard of living causes, if nothing else, class envy as lower people desire goods and services that perhaps only an upper echelon can afford. Increase this envy enough by increasing the wage gap (for example), and a larger number of people will clamor for economic reform. A politician’s cue to take that platform on and get elected.
I understand that I can’t own a Jaguar. But I need a car to survive in today’s society (especially where I live) if my skills are to be utilized (we don’t want doctors digging ditches or sweeping floors). So I will not understand if I cannot even purchase a used Geo. (I intend this to be a bit exaggerated if only to clarify my point.)
So when my company’s shipping guy (who works part time here and full time somewhere else) is worried about layoffs at his primary job (or at our place), I don’t think it will appease him much to know that supply-side spending in the form of disproportionate tax cuts to the wealthy and/or businesses will “eventually” “somehow” raise the standard of living.
But be careful how far you take this view. Its not like Bill Joy does not contribute to that larger society even without counting taxes. Just like you are not simply leaching off of the city you live in. Consider, for a moment, that your city needs Bill Joy in some sense also.
Which, of course they do with a flat tax.
Not really. I have never heard a supply sider who advocated cutting taxes for teh rich and raising them for the poor. Certainly not in absolute terms. And in percentage terms only when the graduated taxes were quite wide. If you have a link to someone who does advocate something like a regressive income tax I’d like to see it.
None at all if suporting yourself in a more than moderate lifestyle is all you can aspire to. If, however, you can aspire to becoming the next Bill Gates, then the incentive to do an outstanding job is immense indeed.
I’d like to question this assumption. If you assume that the president will simply use the 50,000 as a down payment on a hummer, then OK, I agree entirely. If, however, he might use it to invest in a company (perhaps your own) which would use the money to hire another employee, perhaps adding enough capacity that they can grow substantially, perhaps enough to afford the 5000 raise for everyone anyway? This might be a better use for all involved.
I’m not saying the either situation is always better. Just that neither is always worse.
Ok, but we are not talking about 300 to you, or 300 to Bill. We are talking about 300 to you and all your friends, or 3 Xillion from Bill Gates. The problem is that it is not at all easy to make these decisions from a central authority position. They can neither see not react the the demands or supply of a modern economy.
Now this I can whole heartily agree with.
But I would have to challenge this assumption as well. As you pointed out in another thread, above a certain amount of income wealthy people simply cannot buy more stuff. I think (I’ve not seen a study, so fogive me if you have one which disproves this) that if you look at the difference in possible possesions, power, or anything else, the gap between rich and poor may not be increasing so drastically. For instance, most people in this country have cars. Sure, rich people can buy better and more cars. But do they really get around more than poor people? And more importantly, do they travel more than poor people in comparison to the different travel rates of a hundred or more years ago? The difference between the number of people who own cars and the number of people 100-200 years ago who owned ships, for instance, might not measure in favor of our ancestors.
Let me add an amplification of the idea that a central authority is exactly the wrong place to make decisions about how we should spend our money. Leave asside the arguments centered around the fact that to do this requires taking money from some to give to others. A central authority will have the tendency to amplify errors and diminish productivity. It simply has to. In order to level out the disparity between those who make good decisions and those who make bad ones, a central authority has to diminish the success of the good decisions and decrease the effect of the bad decision. However, in order to apply central authority to larger protions of the economy, errors in planing have to effect large portions of the population.
It may not be the most equitable system (as measured by relative gaps in wealth), but free markets certainly are better suited to creating wealth in the first place.
Thanks for the thoughtful post BTW. It really made me think.
Just so you won’t feel I’ve changed too much, “Its not a zeros uhm… game.”
Often, perhaps usually, encouraging investment is a good thing. However companies with idle capacity are not going to use money they get for investment to add capacity until the demand rises. So the issue is whether the tax cuts were constructed to push the recovery or for political and ideological reasons.
By good I was referring to the benefit to the economy, not individuals. Ripping off Tyco was good for Dennis whathisface, and those managers who knew the problems and sold Enron stock early had something good happen to them. But I still think that bidding up the price of tulips is not good for the economy, even if some people do make money.
“Best interests of the stockholders” is a pleasant fantasy, which even makes sense for long term holders of the stock. But the best interest of these people is not the same as the best interest of a day trader, say. For instance, there have been studies done that show while large layoffs do increase short term stock prices, they are not in the best interest of companies in the long run. I am not taking a position against layoffs in all cases - many companies overhired during the bubble, and had to lay off to rationalize their workforce. I’m speaking of layoffs done to improve the stock price. Many decisions recently seem to have been taken to increase the stock price short term for the stockholder known as the CEO. So, using this as a criterion is a bit simplistic. I think we can agree that company interest and the interest of long term stockholders is in synch, but not necessarily that of short term stockholders. The CEO of my company took a beating from analysts for not laying off as many people as they thought he should. We’ll see if this was the correct strategy, long term. I think it is.
Working in Silicon Valley, I know all about stock options. I believe that GE has a broad option program, so the argument that this is an investment in the workforce is reasonable. Many companies, however, use options as compensation for top management only, and it is arguable that is a real investment. It seems to have encouraged short term thinking by management wishing to make a bunch of money before running the company into the ground. Even so, I’m sure that you’d agree that in today’s market there can be changes in stock price unrelated to company fundamentals, and that high prices do not mean the company is on the right track, just as low prices don’t mean its on the wrong track.
By the way, GE’s “IPO” was somewhat over a century ago.
