Supply Side Economists: how does this affect your view?

[Scylla]

@China_Guy

A supply side economics cornerstone is that the rich will spend tax cuts and lead to direct and/or indirect job creation.

I don’t think a supply sider would think that was a fair an accurate summation of their stance on the matter. For it to resemble something a supply sider might agree with, you need a qualifier or two:

“all other things being equal, tax cuts will tend to increase the propensity to spend among those with disposable income, thereby increasing the demand for goods and services, leading to jobs creation.”

I think that’s something a supply-sider might say, and I think that qualification suffices to answer your later questions, I.E. If they lose more in the stock market than they gain from a tax cut than there will likely be a net decrease in spending, and therefore not see jobs creation.

The likely argument is a “jobs saved” one. The Jonson saved being attributed to the impact of the difference between the losses in the stock market offset by the gains from the tax break.

[John_Mace]

@Scylla

@China_Guy

A supply side economics cornerstone is that the rich will spend tax cuts and lead to direct and/or indirect job creation.

I don’t think a supply sider would think that was a fair an accurate summation of their stance on the matter. For it to resemble something a supply sider might agree with, you need a qualifier or two:

“all other things being equal, tax cuts will tend to increase the propensity to spend among those with disposable income, thereby increasing the demand for goods and services, leading to jobs creation.”

Isn’t that demand side economics?

[Sam_Stone]

Okay, let’s step back and talk about what ‘Supply Side’ economics is, and how it differs from demand-side economics.

Let’s say we have an economy that is stagnating. Consumer demand is down, jobs aren’t being created, business investment is low. So what’s the right fix?

“Demand Side” economists would say that low consumer spending is causing investment to shrink. Inventories grow because no one is buying, so businesses start laying off employees. That takes more money out of the demand side, causing even more businesses to fail. The answer then is to prop up demand by giving people lots of money to spend.

‘Supply Side’ economists would say that demand is down because businesses aren’t making what people want, or the cost of business is too high. To fix that requires investment in new businesses and products. “If you build it, they will come.” So, the argument is that by removing the impediments to business, you spur innovation and the creation of new products that people want, and that stimulates demand.

If there is unemployment, a supply sider might say it’s because labor is too expensive. There’s a supply and demand curve for labor just like anything else. So minimum wage laws, regulations that make employees more expensive, overzealous worker protection laws that make hiring people too risky, and other costs of labor price many people out of the market.

So who’s right? It depends. It’s stupid to believe in ‘demand side economics’ regardless of the specifics of the economic situation, just as it’s stupid to call yourself a ‘supply sider’ regardless of the situation. Furthermore, you can believe in both things simultaneously. It all depends on context.

For example, if your capital gains rate is twice as high as your trading partner’s capital gains rate, you have a supply side problem. If you have worker protections so strong that it’s almost impossible to fire someone and as a result you have 25% structural unemployment among citizens without a solid work record, you have a supply-side problem.

On the other hand, if you have low business taxes and regulations, but a financial crisis has spooked the population and they start saving all their money, you have a demand side problem.

You can also be in a situation where you have predominantly a demand-side problem, but there may be no good solutions available. In that case, it’s worthwhile to see if there’s anything you can do on the supply side to incentivize businesses to invest and create new products that may generate demand.

Also, you can have economic problems that are simply the result of a mismatch between production and demand, either because the culture has changed, or technology has changed what people want, or because government policy or an economic bubble has distorted production to the point where people don’t want what businesses are making, or because a disaster strikes and changes the mix of things people want and need. In that case, your best plan of action may be to do nothing and let the economy adjust itself. Accept that you’re going to have a downturn until the economy can correct itself.

Supply side policies don’t have to include tax breaks. Regulatory reform to lower the regulatory cost to business is a supply-side move. Stability policies to reduce future risk can improve the supply side. These things can be done in conjunction with demand-side stimulus if necessary.

So to answer the OP’s question, no, those things don’t invalidate ‘supply side’ economics. What they might indicate is that the recession of 2001 wasn’t caused by a supply side problem. If the problem was with demand, then giving businesses tax breaks will simply cause them to save the money, since they can’t find profitable paths to expansion.

The reason I say ‘might’ is because there were many factors that changed the economy drastically in those years. The WTC attacks erased a trillion dollars in wealth, just as the U.S. was coming out of a recession. The tourism industry took a massive hit. The government was passing new regulations willy-nilly to make everyone ‘safer’. In addition, Sarbanes-Oxley was a huge regulatory kick in the teeth to smaller public enterprises, the Bush Administration was toying with protectionism, the public mood was terrible because of the fear of terrorism, and the U.S. was gearing up for war. It’s not surprising that the economy stumbled. What we don’t know was what the relative contributions of all these factors were.

One fundamental mistake in the OP is to assume that supply-side economics is just demand-side economics for rich people. It’s not. The whole idea is to get them to invest their money, not spend it. Presumably, those wealthy people who ‘saved’ their money saved it by putting into a mixture of high and low risk investments, including startup capital for new ventures, investments in their own businesses, savings that banks then loan out to other businesspeople, etc.

If you just give money to rich people so they’ll run out and buy Porsches, you’re engaging in demand-side stimulus, not supply side economics.

[Mr_Smashy]

@DanBlather

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 think that people are largely in cash because they are nervous about what the government is going to do next. (and other reasons as well, but that fear is the bulk of it).

I think that if we’re going to have an honest conversation about what is stimulative to the economy, the honest person must include the beneficial effects of having lots of money flow to both cash/bank accounts, which lower interest rates and make it easier for businesses to get loans, as well as equities, which help companies do all kinds of beneficial things as I’ve already shown.

Only a narrow-minded, agenda driven partisan would suggest that the only way money not confiscated by the govies through taxes is beneficial to the economy is through consumption/spending.

[Mr_Smashy]

@DanBlather

I’m still waiting for any evidence that we have a shortage of capital for willing investors.

OK, one more time:

There’s money out there for borrowing currently. The Bush tax cuts are still in effect. What would be the interest rate and available borrowing dollars if they were repealed? Who knows, but the answer is almost certainly less, you agree? If taxes were further lowered, it’s reasonable to assume that there’d be even more money available for small business to invest, hire, etc. You agree with that?

The point is, cutting taxes doesn’t always benefit the country if the rich spend every tax dollar in consumption. Savings and equity investment helps as well, perhaps even moreso than mindless investment.

[davidm]

@Mr_Smashy

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.

I’d be very curious to see how exactly they invest that money and who the banks would loan it to. In this economy I’d assume (and I’d be happy to be proven wrong) that they’d invest in relatively safe investments such as government bonds. If they invest in securities such as stock, it’s mostly aftermarket and doesn’t finance any actual production.

If they do put it in banks, what are the banks going to do with it? Loan it to small businesses that can’t find customers? I keep hearing that banks are hoarding money and small businesses can’t get loans. That may or may not be true. I’d love to see a cite one way or the other.

[DanBlather]

@Mr_Smashy

@DanBlather

I’m still waiting for any evidence that we have a shortage of capital for willing investors.

OK, one more time:

There’s money out there for borrowing currently. The Bush tax cuts are still in effect. What would be the interest rate and available borrowing dollars if they were repealed? Who knows, but the answer is almost certainly less, you agree? If taxes were further lowered, it’s reasonable to assume that there’d be even more money available for small business to invest, hire, etc. You agree with that?

Interest rates are at historic lows, do you want them to start paying you to take a loan? It’s not interest rates that are limiting investment, it’s the lack of demand. Is that really hard to understand? Companies are not expanding because there is limited demand for goods and services.

Business in cities with high unemployment are closing because people don’t have enough money to spend. Is this a good time to expand? Will the fact that you can borrow money at a good rate make you decide to expand anyway? You still need to be able to pay premium and interest. Even with 0% interest you aren’t going to expand if you can’t sell enough goods and services to make it worthwhile.

[DanBlather]

@Mr_Smashy

Only a narrow-minded, agenda driven partisan would suggest that the only way money not confiscated by the govies through taxes is beneficial to the economy is through consumption/spending.

I’m glad you are not a narrow minded partisan who just keeps repeating that lower taxes are always good, and that every situation calls for supply side policies.

[DanBlather]

@Sam_Stone

Okay, let’s step back and talk about what ‘Supply Side’ economics is, and how it differs from demand-side economics…

That was a nicely written and informative post.

[John_Mace]

@Sam_Stone

One fundamental mistake in the OP is to assume that supply-side economics is just demand-side economics for rich people. It’s not. The whole idea is to get them to invest their money, not spend it. Presumably, those wealthy people who ‘saved’ their money saved it by putting into a mixture of high and low risk investments, including startup capital for new ventures, investments in their own businesses, savings that banks then loan out to other businesspeople, etc.

If you just give money to rich people so they’ll run out and buy Porsches, you’re engaging in demand-side stimulus, not supply side economics.

Thanks, Sam. I had a hunch that was so, but I really wasn’t sure.

I hope the OP returns to his thread at some point and learns something. But it’s disconcerting how often this happens around here-- someone posts an OP based on false assumptions, and everyone just jumps into the debate without ever getting the OP to back up his claims.

[Mr_Smashy]

@davidm

If they invest in securities such as stock, it’s mostly aftermarket and doesn’t finance any actual production.

If they do put it in banks, what are the banks going to do with it? Loan it to small businesses that can’t find customers? I keep hearing that banks are hoarding money and small businesses can’t get loans. That may or may not be true. I’d love to see a cite one way or the other.

To answer your last question, go take a look at the story I linked to in post 13 of this thread. The banks do have money to lend, at least Buffett says so. Now as to why the SBs aren’t jumping over themselves to borrow it, that’s a way more complicated question. In that case, it’s not due to a high interest rate, clearly.

Don’t assume that investing in stock doesn’t finance any production - money is fungible, so the high stock price props up all kinds of activities - M&A, R&D, expansion/hiring. It doesn’t just have to be an IPO to have a beneficial affect on the economy.

[Mr_Smashy]

@DanBlather

@Mr_Smashy

Only a narrow-minded, agenda driven partisan would suggest that the only way money not confiscated by the govies through taxes is beneficial to the economy is through consumption/spending.

I’m glad you are not a narrow minded partisan who just keeps repeating that lower taxes are always good, and that every situation calls for supply side policies.

Thank you, I’m not.

My point is, there’s economic benefit through both savings/investment and consumption. As to which is better, I’m not sure, but I’d guess it’s situational. It’s reasonably clear though that either are better for the economy than higher tax rates, since the government is terribly inefficient at allocating capital compared to the marketplace.

That would be the argument for keeping the Bush tax cuts, all of them, in place during this very fragile recovery (won’t be a double dip).

The argument for raising taxes on the richest 1% or whatever is that the budget is already in enough trouble thanks to the spending spree by this administration, and if we don’t raise taxes we’ll look like Greece in a few years.

[Damuri_Ajashi]

@Sage_Rat

@Damuri_Ajashi

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?”

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.

Yeah, I hear what youa re saying but I would say that keynesian stimulus is not just creating an environment in which the economy can grow. It is injecting adrenalin into the heart of a patient that has overdosed on supply side economics.

[DanBlather]

@Mr_Smashy

[
Don’t assume that investing in stock doesn’t finance any production - money is fungible, so the high stock price props up all kinds of activities - M&A, R&D, expansion/hiring. It doesn’t just have to be an IPO to have a beneficial affect on the economy.

And what exactly is that mechanism? A rise in stock prices benefits the stockholders, not the corporation.

[gonzomax]

Hiring is a reflection of the inability to keep up with demand with the present staff. It is all about demand. If people don’t have money, they can not spend. Centering the wealth in the hands of the few is not an efficient way to spread wealth and it does not increase demand like spreading the wealth around.

[Voyager]

@DanBlather

@Mr_Smashy

[
Don’t assume that investing in stock doesn’t finance any production - money is fungible, so the high stock price props up all kinds of activities - M&A, R&D, expansion/hiring. It doesn’t just have to be an IPO to have a beneficial affect on the economy.

And what exactly is that mechanism? A rise in stock prices benefits the stockholders, not the corporation.

A rise in stock prices increase the value of the portfolios of many investors, and make them feel relatively rich and safe, which encourages spending. However, if the rise is not based on sound fundamentals, we are just asking for yet another bubble which will end badly. Dumping money into the market is not the best way to go.

[Voyager]

@Mr_Smashy

My point is, there’s economic benefit through both savings/investment and consumption. As to which is better, I’m not sure, but I’d guess it’s situational. It’s reasonably clear though that either are better for the economy than higher tax rates, since the government is terribly inefficient at allocating capital compared to the marketplace.

There was a time, the '80s I believe, where there actually was a shortage of investment money. In those times restructuring tax rates to encourage investment makes a lot of sense.
These are not those times. The rich today are not consuming up to their income level, the rich will never consume up to their income level, and so a tax increase for the rich (back to that of those depressed '90s) is not going to hurt consumption one bit. If, as you say, there is plenty of money to invest, it won’t hurt investment either.

A CBO (I believe) study cited by Krugman shows that tax cuts for the rich are the least effective way of stimulating the economy. Isn’t using the money made for business tax credits, say, obviously better, in that the government doesn’t dictate how the businesses invest, and the benefit is direct, not indirect.

The argument for raising taxes on the richest 1% or whatever is that the budget is already in enough trouble thanks to the spending spree by this administration, and if we don’t raise taxes we’ll look like Greece in a few years.

No we will not look Greece. The way to get rid of the deficit is to have the economy come back, and have the unemployed start paying taxes again, and for businesses to increase profits. Keeping tax cuts for the rich is one of the least effective ways to make this happen.

[Sam_Stone]

@Damuri_Ajashi

Yeah, I hear what youa re saying but I would say that keynesian stimulus is not just creating an environment in which the economy can grow. It is injecting adrenalin into the heart of a patient that has overdosed on supply side economics.

Or, it’s another line of coke provided to the guy who owes the mob money, hasn’t slept in three days, is still behind on his work, and is convinced that just one more hit of speed is what he needs to get through his rough patch.

But please explain the ‘overdose of supply-side economics’. In detail. Explain exactly what is wrong with the economy as a result of supply-side policies. Not just handwaving about how the rich sucked the money out of the system, but specific areas of failure that would not have happened had there been no ‘supply side’ fixes.

@Voyager

A CBO (I believe) study cited by Krugman shows that tax cuts for the rich are the least effective way of stimulating the economy.

This is exactly the kind of static, black and white thinking that is unhelpful. It is wrong to categorically state that tax cuts for the rich are always the least effective way of stimulating the economy. The best you can can say is that tax cuts may not be the best way to stimulate a specific economy under specific conditions.

Removing the luxury tax most assuredly stimulated the economy and led to more revenue for the government. Cutting tax rates from 39.6% to 35% might not have the same effect, although both are ‘tax cuts for the rich’. Capital gains tax cuts will not have the same effect as marginal rate cuts for income. Corporate tax cuts will change behavior in different ways than cutting an inheritance tax, although both are ostensibly ‘tax cuts for the rich’.

We need to get past these kinds of hardened, partisan positions. It is entirely possible that the very best policy this week is to cut capital gains taxes, but ten years from now the best policy might be to lower income taxes on poor workers. Or vice versa.

[Mr_Smashy]

@DanBlather

@Mr_Smashy

[
Don’t assume that investing in stock doesn’t finance any production - money is fungible, so the high stock price props up all kinds of activities - M&A, R&D, expansion/hiring. It doesn’t just have to be an IPO to have a beneficial affect on the economy.

And what exactly is that mechanism? A rise in stock prices benefits the stockholders, not the corporation.

Well, a healthy stock price then can be used as currency for acquisitions, which can then fuel growth for the company - think in terms of, the sum is greater than the parts. That growth takes the form of more jobs, expanded production, etc, all things that help the economy.

Stock grants can also be used to lure talent through the door, helping the company grow. Or they can increase the float, figuring that the stock is high enough that it can take the dilution with no ill effects… and that money then gets put to work.

All of this helps the economy.

[Bosstone]

Never mind, cheap shot.