Supply Side Economics: Time To Stick The Fork In?

[Plissken]

Okay, work with me: This is a question.

Supply Side Economics is the theory that "economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes."

It's a theory that we've actively experimented with for almost three decades, beginning with Reagan - who lowered the marginal tax rate on the highest income tax bracket from 70% to 28% and began a push for deregulation.

The pursuit of this idea has continued unabated from then 'till now, and what we've gotten is a pattern of stagant wages for everybody but the top 1-2%, and a continuing series of bursting economic bubbles that have culminated in what is probably the most direct test this theory could ask for: Simply handing an enormous amount of cash to Wall Street with almost no regulatory strings attached in the hopes that the results would trickle down to the rest of us.

And the result is this: Yet another jobless "recovery" from the bursting of yet another bubble in which dire economic tides are reversing for Wall Street, and no one down here on Main Street can tell the difference, in either wages or employment.

So, the question is this: Should we finally stick a fork in this 30 year experiment and call it done? Why or why not?

[Avatar]

Hope Brinn chimes in on this one. I don't know jack about economics. It's all imaginary anyway...money just exists in our heads.

I can see the reasoning behind it anyway...more investment, more expansion, more jobs etc. Doesn't seem to cater much for preventing wage stagnation though...not sure how easy that is to counter in any case.

--A

[Cybrweez]

Plus, if you don't spend time studying economics, you won't know all the issues that are involved. Tell me why wages are stagnant? The economy is so large, I'm not sure most economists understand the implications of any policy change. They certainly don't all agree.

[Tjol]

Okay, work with me: This is a question.

Supply Side Economics is the theory that "economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes."

It's a theory that we've actively experimented with for almost three decades, beginning with Reagan - who lowered the marginal tax rate on the highest income tax bracket from 70% to 28% and began a push for deregulation.

The pursuit of this idea has continued unabated from then 'till now,

I've got to stop you right there.
Income taxes have fluctuated since Reagan.

Regulation levels have certianly increased in the larger of this country's economic engines in the coastal southwest and in the northeast and in Detroit.

Social benefits whether being funded directly by Uncle Sam or indirectly by Union Bosses, have expanded.

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I'll propose an alternate theory to you, just as welcome to being shot down. I see two fundamental problems to the present economic system. First, there has been an inflation of value of private market executives. Second, there has been an inflation of value of executives in our public bureacracy. The economy is top heavy. Businesses have overestimated the impact of individuals upon the performance of their companies. Voters have overestimated how much good a government can do given ever increasing amounts of money.

Both of these overestimations essentially effected inflation upon the economy, moreso on the upper upper class in the private and public sectors than for everyone else. That is until the proving point came, and the real value of these entities started being realised as much less than what we were paying for them.

Government spends too much money right now for too little result. When you waste money, you kill an economy.

Many businesses spent too much money on certian individuals with too little actual result, which was just as much a waste of money.

And government starts justifying it's waste by saying, 'Hey, private industry executives get paid these kinds of salaries, so it's really not such a big deal if I vote myself a pay raise.'

The way out is a cap on taxes that the government can collect. That'll stop the government from making a waste of revenues. Government is not going to become less wasteful unless it has less to waste.

Businesses are easier to deal with. The public can (and has) act in ways to limit a company's ability to be wasteful if it chooses to be wasteful. Disney stumbled for a little bit during this time period you described, much of it based on the perception that Disney was charging more money, but not providing the quality of product that should go with the increased price.

Likewise, economic 'bubbles' can be blamed on consumers more often than not. Supply side or consumer(demand) side, both kinds of spending will fail to prevent 'bubbles' from happening. So it seems like 'bubbles' cannot really be credibly blamed on one form or the other of government involvement.

And a minor nitpick... I don't think tax caps, tax cuts, etc. would represent supply side involvement. White collar welfare, such as investing in stadiums, building business centers at public expense, etc. are supply side government involvement, and they fail just as much as consumer(demand) side government involvement. But tax cuts work, because they don't give people money, they give them incentive to make their own.

[High Lord Tolkien]

My childhood was pretty poor.
Financially my divorced mother with 5 kids was technically living at what was then considered the poverty level.
I never finished college and have been working since I was 16.
In the past 20 years I've had a dozen full time jobs and tripled what I originally thought was a great salary, bought a house, always owned 2 cars, a vacation property, I provide for my wife and our 2 kids and due to a pre-existing condition of mine I always had to choose a job with a health insurance benefit.
Been laid off several times but never asked for help of any kind. Dropped out of work and went back to school. Paid for it myself (credit cards) while my wife and i ate mac+cheese for several months.

I've lived what I consider a spectacular life under supply side economics.
Most of my hard working friends and family have also done quite well and except for my brother have all retain their jobs in this recession.

So I'm at a loss reading that you consider Supply Side Economics a bad thing.

[Plissken]

Well, I outlined why in my post - that Supply Side doesn't work. Your story is compelling, and mirrors my own, but these stories are not definitive - especially given the current mess the country is in.

And, as I said, the very direct giving of a train-load of cash has turned the economy around - unless you're talking about the lower 98% of us.

Tjol: Taxes have indeed fluctuated in the last 30 years, but neither the income taxes on the top earners (they who are supposed to trickle down on the rest of us) nor the capital gains taxes have approached even half of what they were before Reagan. Instead, we've got an economy that crashes every time a bubble bursts on Wall Street, and the Main Street jobs that are lost are either replaced by lower paying ones or not replaced at all.

When you compare the almost 50 years of growth that preceded Reagan, hey, it wasn't as dramatic. But it was stable and it was steady growth.

And if you look at the causes of the one big depression our economy had before those 50 years, well, it looks alot like the end of our modern experiment. (See, back then they didn't call it anything so insulting to the plebes as "Trickle-Down" - they had this theory that, if you fed the Horse of Big Business enough oats, enough of the oats in what would pass back out of that Horse to feed the "Sparrows" that trailed along behind it...)

[sindatur]

Hmmm...President Jimmy Carter presided over a very inflationary period, and Reagan's trickle down Economics came into play at a very appropriate time to suggest that invensting in R&D boosted the economy and led to lots of advances. One problem is that the more popular something becomes (computers, etc) the more the price comes down and they become a "neccessity", so the profit margin decreases, so, if we're not investing in R&D, we're not bringing the "next profitable thing" to the market place, so profit margins can rise again, leaving more dollars to hire with/pay employees more.

One big thing that led us where are now is the Mortgage crisis contributed to the Credit crunch. If the Gov't hadn't insisted everyone should own a home, wether they could afford it or not, things might not have spiraled as they did. Many who could not afford it, had the misfortune of signing adjustable rate mortgages (Not a slam against them, it could sound like a great deal, I may even have been naive enough if my Mortgage wasn't handled by my "Mother-in-Law"). This caused many foreclosures, which tightened credit, which gave many people a lack of disposable income, which caused less buying, which led to less sales which led to layoffs.... and of course, caused Credit to tighten up even more. And then of course you have the gas prices contributed before they came down.

So, there were a great number of factors that led us to where are today, and I don't really think you can point at Supply Side Economics and say "proof positive" there it is.

Yes, absolutely corruption and greed definitely contributed, but, they are only a portion of the contributing factors. And of course you also need to look at the constantly rising costs of Health Insurance and Disability Insurance, and Worker's Comp, those are very large expenses per employee.

[Cail]

Sind makes a valid point.

Government tampering with home ownership and the credit markets is far more responsible for the current mess than capital gains tax cuts.

[Plissken]

I don't think so. I mean, I think there is an advantage to higher taxes at the top - there becomes an advantage to put the profits back into your business, effectively not making the government the filter through which your R&D budget goes.

And I really don't see how the number of loans Freddie and Fanny made with requirements that were still higher than many of the more >ahem< numerous and creative loan products that became available because we allowed the wall between investment banking and S&L's to come down, while we were also refusing to regulate the Shadow Markets.

In short, more bad loans were made because the loan makers could sell their risk off to the investment markets than Freddie and Fanny have ever dreamed of making.

Also, I've been thinking quite alot about this little gem:

The 82-year-old Mr. Greenspan said he made "a mistake" in his hands-off regulatory philosophy, which many now blame in part for sparking the global economic troubles. He quoted something he had written in March: "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

online.wsj.com/article/SB122476545437862295.html

I mean, isn't the King of this little experiment pretty much kicking one of the more basic legs off the stool here?

[sindatur]

I can't argue on the loans, but, they were encouraged to make them to offer "opportunities", yes abuse, because it wasn't properly regulated (And nobody cared how toxic the laon was, because it didn't break the guidelines in the "encouragement to make loans available to everyone" statement, but it benefitted them making the loans to that sector). I won't deny the creditors abused it, and used horrible, dangerous practices that need to be stopped.

I'm not defending the current Supply Side system (The basic concept has merit, but, has alot of room for abuse to be cut off), only trying to broaden the conversation to acknowledge the other reasons. Yes the rich don't need to be at the same level of tax as the rest of us, but, it shouldn't be a 3 to 1 percentage ratio (Dollars paid in, absolutely and more, but, percentage paid doesn't need to be 3 times everyone else, that will make them greedy and scrabbling for every dime, because it becomes so hard to get ahead once you reach that level, everybody always wants to continue getting further ahead.)

I guess what I'm asking is that they consult experts in the actual fields, not political allies, I'm not suggesting they "rubber stamp" the suggestions, only that they be informed when they make their decision

[Plissken]

I understand your point, but the thing that keeps occuring to me is that the bank bailout pretty much proves, and in the most direct way possible, that when you throw money at the top, it pretty much stays there.

The money we gave them was used for (yes) bonuses to the guys that screwed the pooch in the first place, but it's also been used to buy out competitors, thrown into foreign money markets, just plain sat on, etc...

What hasn't happened is the promised loosening up of credit for small business. What hasn't happened is the creation of jobs. Hell, we haven't even gotten to pick the excess oats out of the leavings, 'cause they're sending those off to India and China.

Okay, I begin to rave. But you see my point.

[sindatur]

I understand your point, but the thing that keeps occuring to me is that the bank bailout pretty much proves, and in the most direct way possible, that when you throw money at the top, it pretty much stays there.

The money we gave them was used for (yes) bonuses to the guys that screwed the pooch in the first place, but it's also been used to buy out competitors, thrown into foreign money markets, just plain sat on, etc...

What hasn't happened is the promised loosening up of credit for small business. What hasn't happened is the creation of jobs. Hell, we haven't even gotten to pick the excess oats out of the leavings, 'cause they're sending those off to India and China.

Okay, I begin to rave. But you see my point.

Yea I do. That's why I'm so surprised by your defense of the Administrtion that brought it to you in the bailout, in the same way the opposition has objected to it?

You don't give away free money, you loan with a reason and an expectation, that you should enforce. If you're gonna claim you know better, make sure you do, and pursue it, take the blame or the credit.

[Plissken]

I don't remember launching a defense on the bank bailout, beyond pointing out that Bush had fewer strings attached to the first half of it than Obama did, even those were only there because the Dems told Bush he had to put them in.

It was a bad idea, but I don't think that the bailout being a bad idea doesn't mean it's a bad example of why Supply Side Theory doesn't work.

(Did that make sense?)

[Cail]

No, it doesn't. The bank bailout (and the AIG bailout) were bad ideas. It was a Democratic Congress that passed it when Bush signed it. It was a bad idea then. It was a Democratic Congress that passed it when Obama signed it. It was a bad idea then too.

The bailouts are a prime example as to why it's a bad idea to tamper with markets.

It'll be a bad idea in the next few months when the entire banking system is nationalized ('cause the FDIC is f*cked, and no one's talking about that yet).

[SoulBiter]

Well my wages havent been stagnant at all. Matter of fact Ive done quite a few career changes in my life to be sure that they dont stay stagnant.

There are many things about HLT's life that mirror my own.

I came from a poor background. Divorced family, pretty much raised by my Grandmother on her SS wages.

Worked for what I could get as a teen (local stores, bailing hay, constuction labor)
Worked in the cotton mills for a few years.
Military
Went to electronics school at the technical college.
Worked in the copier/fax/printer industry.
Wages for that industry flattened.
Quit that career path.
Took a pay cut to go back to school.
Went back to college while working a full time job and some part time.
Taught college and went to college.
Worked my way up to where I am now.
My wages are better than they ever have been and more than I ever thought they could be when I was a kid.

Economics have been good to me.

In my opinion, if you want your wages to expand then find something that pays a better wage and do that. The only thing holding you back is yourself.

[Cybrweez]

I think the idea of stagnant wages isn't so much staying at the same pay, but that wages don't gain on inflation. IOW, your salary may go up, but your spending power doesn't. Altho right now, your spending power could be real good if you're making the same you were 5 years ago, b/c quite a few things have gone real low in price.

[Harbinger]

The "boom" of the nineties was a direct result of the tax cuts of the eighties. If a corporation pays less taxes it has an incentive to grow. If it grows it creates more jobs. More jobs mean more paychecks. More paychecks mean more money in the "economy." More people spending paychecks creates more jobs to keep up with demand. "Voodoo" economics absolutely works. What screws things up is American jobs going to India, illegal immigrants, rampant gov spending with no accountability, home loans to people who have no business owning a home, and people's obsession with instant gratification (credit).

Hannah Montana could fill the role of president as well as Obama.

[Plissken]

Also, we're not talking about your (or anyone's) personal spending power. We're talking about an national average wage that has remained fairly stagnant, when indexed for inflation, or even gone down.

Cail, I can't tell if you are disagreeing with me, or agreeing from the other side of the argument. Governments "tamper" with markets all the time - and when we've got Greenspan finally admitting to us that enlightened self interest (when's the next time a pundit's going to use that phrase with a straight face?) isn't enough to keep the game honest, the only argument is really what form that tampering is going to take.

Harbringer, you make my point: The "boom" of the 90's was just another bubble that burst, followed by another jobless recovery.

[Farsailer]

Pliss, you've made your point, how about offering up your favored alternatives for us to shoot down?

[Harbinger]

Harbringer, you make my point: The "boom" of the 90's was just another bubble that burst, followed by another jobless recovery.

I disagree. Unfortunately, many members of our society borrow too heavily against their future. And many members of our society take what is offered to them without putting forth the effort to learn a specialized skill or obtain a specialized education. Even at the collegiate level there are a lot of people who expect a liberal arts degree and a a 2.3 GPA to get them an "out in 20" job. I heard a guy the other day lamenting that he had been unemployed for 6 months. He has a marketing degree. WTF? He of all people should at least be able to sell himself. Is he unwilling to work outside his field?

The fact of the matter is cream rises and shit sinks. It doesn't always sink right away, but sink it will. And the great thing about it is that you have a choice. Do you want to be an eagle or an oyster?