July 17, 2011

The BS Behind Supply-side Economics

Are there people who still believe in the hype of supply-side economics?  If so, they must be living under a rock, because the evidence clearly suggests the theory to be a monumental failure.  Among the early promises of its architects are that economic rewards “trickle down” to middle income and low income workers when corporate interests are supported.  However, contrary to the hype, the economy doesn’t work like the sea in lifting all boats in a rising tide.  The reason it doesn’t should be obvious, but conservative law-makers are either blind to it, or too interested in lining their pockets with corporate money to care.

At first blush the basis for supply-side economics seems reasonable.  Its objective—to reduce the costs of doing business for corporations—is meant to improve corporate profitability and thereby create more jobs for workers.  Consequently, supply-siders seek to reduce income taxes to the rich and corporate interests as a component of the cost of capital. 

If anything, however, the relationship between tax rates and job creation is negatively correlated.  The greatest economic growth in recent history came after tax increases were imposed during the Reagan and Clinton administrations.  In contrast, job growth was anemic subsequent to the Bush-era tax cuts and continues to be unsatisfactory even though the cuts have been extended.  More problematic, however, is that the gulf between the rich and poor has only widened.  While corporate profits have been stellar and cash balances have increased geometrically, these results haven’t translated into a lowered unemployment rate.

The reason supply-side economics doesn’t work is a point you’ll never see printed in the Wall Street Journal.  When corporate tax rates fall, it’s not in the nature of CEOs to use the windfall to improve the situation of workers.  Quite simply, management sees labor as another cost to be reduced.  It is, however, in the nature of corporate managers to do whatever it takes to improve returns to shareholders.  And that, in a nutshell, is the problem with the theory: Decreased tax rates are used to enrich investors in the form of increased dividends and stock price appreciation, but the benefit doesn’t trickle down in a world where layoffs are seen as a good way to increase efficiency and further improve shareholder value.

Supply-side policies are great only if you’re a well-heeled corporation.  Otherwise, they force middle class tax payers to pay for an educational system, national security and infrastructure that corporations benefit from the most.  They create a situation in which GE can book $14 billion in profits and get a tax credit to boot.  More damaging is that corporations and their rich shareholders can parlay the savings into political contributions that insure their brand of politicians are elected.  No wonder there are so many corporate tax loopholes, which Robert Reich refers to as “institutionalized corruption.”

Supply-side economics is a bone-headed theory that doesn’t work—unless, of course, you’re rich.

No comments: