[ul]
[li]Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell. [/li][li]The Moody’s research covering couples earning more than $210,000 found that spending by the wealthy is more likely to be influenced by the ups and downs of the stock market than changes in income-tax rates.[/li][/ul]
So, supply siders. Is this a valid data point, a strong arguement against supply side, contain an obvious hole that makes it moot, or what? I am interested in hearing your views and if I’m missing something here.
Full disclosure, I don’t think supply side economics holds for large mature economies. (Frankly I don’t think it holds for smaller economies or less mature economies either, but let’s keep debate lines simple.)
I thought it was well established that the marginal propensity to spend was lower for wealthy people. Why would anyone be surprised at that? Also, why would someone apply supply side remedies in a time where the cost of borrowing capital is at historic lows and there is not enough demand to keep existing companies fully utilizing the capacity of their facilities and equipment?
I was having this debate over the Labor day weekend a barbeque. We were discussing the economy and I asked a small bank owner (who deals almost exclusively with small bsuinesses and import/export financing) why he thought his clients were’t hiring more employees… and his reply was “to do what?”
I’m always amused to see this argument. I wonder: what does it matter if the rich save their money vs spending it? Doesn’t the additional savings capitalize banks, allowing them to make loans to small businesses, for example? Doesn’t the extra capital in the system (ie, out of the government’s hands) keep the interest rates lower than they would otherwise be, since there’s more money to lend now? Doesn’t their investments in mutual funds and equities help stablize those companies, providing room for growth and job creation?
To me, the wealthy saving that cash is just a more nuanced way to create economic growth for the country than if they spent it on a boat or whatever, which has a more direct (measurable) impact on jobs.
We have factories with underused capacity and people out of work. Interests rates are at historic lows. This would be a great time to expand a business, but if there is not enough demand for the goods or services then why would you do it?
This is the problem in a nutshell. After any financial crisis-induced recession it takes a hell of a long time before the economy gets going again as the whole process of credit creation is dislocated and there’s all the bad debt to work out of the system. Add on the biggest personal credit bubble in history with vast numbers of Americans borrowing against the value of their houses, because the value of their house is always going to keep going up, and then when the bubble bursts nobody is borrowing anymore. Consumer demand is 71% of the economy so if consumers aren’t demanding anymore – and not only are they not spending anymore, a generation of tapped out boomers is now desperately saving for retirement – business doesn’t need to hire anymore.
The solution to this has been an inadequate economic stimulus which was worth about 20% of the drop in GDP from pre-crisis levels, and also, and here I veer back towards the OP, a vast amount of Quantitative Easing, basically supply side monetary policy. QE floods the financial system with cheap money so there’s money at attractive rates for banks to lend to business to get things started. But the problem isn’t supply, banks aren’t lending what they already have! The problem is that banks don’t have creditworthy customers sitting on the other side of their desks.
Now to create creditworthy customers there needs to be an increase in demand, all the QE in the world won’t put money into the pockets of consumers. And as is clear as day, the economy won’t get going again properly until consumers have money in their pockets and start spending again.
So my question to supply siders is, now that tax cuts for the wealthy have clearly failed in their purpose of creating solid broad-based economic growth, would you be prepared to put your ideology aside and see tax increases for the wealthy coupled with tax cuts for low/middle income earners – basically a big redistribution of wealth downwards to make up for the big redistribution of wealth upwards that we’ve seen in the last thirty years – in order to get the economy growing sustainably again. And if not how do you expect the economy to recover/how would you get the economy growing again?
I don’t know much about supply side economics, so can you cite that? I’d like to see that it is 1) a tenet and 2) a “cornerstone”.
Off the top of my head, I’m going to guess that it’s “invest” instead of “spend”, since supply emphasizes, well, supply rather than demand (which would correspond to spending). But I really am just guessing.
I’ll assume that this is sarcasm. A quick google search “loans to small businesses” turned up over 66 million hits. ING and Lending Tree were sponsored links. I’m sure you’re not going to say that no loans are happening out there.
Now, I have no doubt that the requirements are stricter than they were. The question is, what would they be in a situation where wealthy people didn’t do enough saving to make that money available.
The question you should be asking is, what would the numbers look like with less equity investment by the wealthy (due to higher gov tax rates)? And I would argue, the answer is unknowable with anything resembling precision. So we are forced into the world of the hypothetical, hence my comments.
Also, the underused capacity and unemployment are not exactly across the board: the health industry is humming along, as is mine (government contracting). There are others, and certain geographies, that have healthy economies. You could make the argument (and I will) that Lockheed Martin, Northrop Grumman, CACI, Mantech, CSC, and many other companies would have much less room to maneuver, less internal investment, less hiring, were access to balance sheet funds made more difficult.
You mean what would be happening if the rich consumed more, stores sold more, factories expanded production to meet the demand, more people were hired to produce the goods, and those people then had enough money to buy stuff which, stores sold, …?
No. What I mean is what would happen if the rich’s money were funneled more into investment (through their savings and equity positions). The question is, would it have as much or more of a stimulative affect on the economy. I don’t know the exact answer, and neither do you, but it’s clearly debatable that there’d be some.
By the way, the economy may not be the trainwreck you describe. Warren Buffett put it this way
I think you are greatly simplifying the situation, with that statement. Interest rates are determined by the supply of cash avail for lending, sure, but also the best guess on where the long term economy is heading, the government’s financial situation, oil prices, and a million other things.
Depends on what you mean by ‘works’. If your definition includes the government throwing a bunch of money into the economy, will some jobs be created? Sure. The less retarded way to say it, though, is ‘was it worth the money that was spent, and the amount of indebtedness to the Wonton Empire that was incurred, for the benefit received’. Most people here around the beltway know that the government is about the most inefficient spender of money in existence.
As George Will put it in yesterday’s post, using the Cash for Clunkers program as Exhibit A
Sure, we could unlearn everything we know about economics, both theoretical and observed, but why do that? As I said, there is plenty of money to be invested and it is available at record low interest rates. But no one will invest in a business unless there is demand for the goods and services.
Do you have any reason at all to think that there is a shortage of money to invest rather than a shortage of things to invest in?
I’m no economics expert (nor do I play one on TV…plus, it’s been months since I slept in a Holiday Inn), but two things strike me here. The first is that this was still during the height of the recession, so I’m not sure what this is supposed to prove. Surly even ‘Supply Side Economists’ don’t believe that a tax break is going to have an instant effect that will be a switch, causing the economy to go from deep recession to boom in an instant. I mean, Clinton presided under a boom era that crashed just before he left office. Bush the Younger started his reign of terror under the clouds of the dot com bust, recession plus 9/11 and the ramp up to war. It’s fairly unsurprising that ‘the rich’ didn’t go out and blow all their cash on hookers and blow, and instead saved more.
Which brings up the second point…‘saving’ doesn’t take the money out of circulation. Just the opposite, I should think. The ‘rich’ aren’t stuffing the money in mattresses, after all…and that depends on what ‘saving’ actually means. Most of ‘the rich’ don’t simply stick the money in some saving account at a bank, they ‘save’ by investment…if they are smart, diversified investment. Which means that the money is available to loan, and is working capital that can be used for, you know, that growth stuff.
Maybe the article addresses this…sorry, I’m not in a position to look at the link atm, or even read through all the other posts.
It probably is, but so what? Spending doesn’t equal investment, and (correct me if I’m wrong here…not a ‘Supply Side Economist’) the point would be that giving more money to ‘the rich’ means that more capital is available (and generated due to investment). No?
I’m not a supply sider, but I can’t say that either of those seems like a particularly meaningful attack on supply side economics.
In regards to the first point, we’re looking at a sample size of two. Even looking back through all presidents in the last 50 years, there’s so much variety in all of the things that a president might do (like going to war, or serving in office during an era when women start joining the work force in droves and hence double the number of incomes in the economy so that tax rates can be slashed massively), that there simply is too much noise to signal to say anything, let alone anything definitive. If this was a multinational survey of the US, Canada, Australia, Japan, and all of the Western European nations, covering the last 50 years, I could see attributing some weight to the findings, but anything less than that and all you’re doing is reading tea leaves.
In regards to the second point, I might be more careful when the stock is down and less careful when it is up. But, when my taxes are lower, I have more money to spend. Regardless of how careful I am or aren’t being, I’ll always be spending more on the economy when I have more than when I have less.
This is really not that difficult. Let’s put aside the deficit to make things simpler. Wealthy people have a lower marginal propensity to consume than the less wealthy. That means when they retain more of their income through lower tax rates, they will consume less and save more of their income than another group. All things being equal, as we shift the tax burden from poor to rich we will have more savings and less consumption. Shift it the other way and we will have more consumption and less savings.
If instead of lowering taxes for either the poor or rich, the govt spends the money, then there will be increased consumption and lower savings.
If we had a shortage of capital that was limiting the growth of the economy, then lowering taxes on the wealthy would be a good option to consider. If instead, there is a shortage of demand and plenty of capital available at low rates as we have now, it makes more sense to increase govt spending or lower taxes on the less wealthy.
Spending and investment behavior isn’t something that you get to have an opinion on, it’s empirically established. One can have an opinion on whether at any given moment in history we should emphasize the demand side, the supply side, or just leave things be.
I’m still waiting for any evidence that we have a shortage of capital for willing investors.
But, as I asked the OP (who seems to have disappeared), is this supply side economics? Does supply side economics postulate that tax cuts for the wealthy will result in them spending more on consumer goods? I doubt it.
And I’ll note that “savings” is “investment”, unless the rich are sitting on piles of cash.
That’s not really much different than the Fed cutting interest rates, though. Monetarism isn’t seen as voodoo mathematics. Stimulus packages, just the same. The best that the government or anyone can do is to set the conditions for the market to come back. It doesn’t cause the market to come back, it just makes it more easy once it has decided to do so on its own.