Sunday, June 23, 2013

Supply SIde Economics is SO Last Century - And Why That's Bad for America's Economy

Milton Friedman and his Supply Side followers got precisely one thing right in their economic theory - money taken out of the economy in taxes is not readily available for private capitol uses.  Sure, that money then reenters the economy down stream as labor wages for government workers, and as purchasing by government agencies (which then creates other labor wages in other sectors).  But tax expenditures do, in fact, remove money from first order private economic activity.

And in Friedman's day, altering that balance MAY well have led to more capital investment, since the economy of his time was dominated by newly rising industrial manufacturing and more industrialization of farming and food production.  So he was potentially right - way back then - that a key to economic growth in recessions might have once been diverting tax revenue back to the private sector where there were incentives (increased private profits) to grow manufacturing capacity and hire more and better paid workers.

The problem for modern Republicans - who cling to his Supply Side theories as if they were inviolate Gospel - is that those theories fall apart in service oriented, demand driven economies that are founded on consumption and provision for services, and less so on manufacturing (even if manufacturing is needed somewhere to feed the consumption demand).  The theories aren't even applicable to rent seeking economies (and the ultra rich who participate in such economies), because as rents increase (i.e. as more profits are made on financial transactions in Wall Street, Derivatives markets and the like), economy can "grow" with fewer people actually doing work.

Thus, as we have seen since the Great Recession began, historically low rates of income taxation on top economic earners and corporations do NOT trickle down to increased labor wages for the rest of the economy, nor do they lead to more hiring even as the economy appears to "grow."  The reason is really very simple - there is a perverse or negative incentive structure in returning more tax revenue to private hands in this kind of economy because the more funds a rent seeking 1%'er has, the more rents he or she will seek, and the more he or she will seek to dampen competition for those rents.  In an economy that grows because labor wages grow, an increasing number of people will move up the ladder to a point where more of their income can also be rent seeking, driving DOWN the amount of money to be made in that sector of the economy by any one person or corporation.

So if you support Republican "slash and burn" tax policy, you're not only deflating government's size and ability to control markets (which are historically bad at self-regulation), but you are destroying middle and lower class economic opportunity in order to destroy competition for rents.  That's, by definition, the OPPOSITE of " a rising Tide lifts all boats."  And I wish Republicans would just come clean about it.

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