Supply-Side Reprise

A friend recently disagreed with a posting of mine regarding supply-side economics.  The gist of his argument was that tax breaks to corporations encourage investment, which in turn creates jobs.  My reply was to say his summary explained the theory behind supply-side economics, but didn’t reflect its empirical results.  Since the Bush tax cuts were put into place, millions of workers have been laid-off and corporations have horded cash—trillions of dollars at last count—rather than invest it in new businesses or expansion.

Follow my logic that explains why this happens.

·   Typically, corporate employees are not significant shareholders of the institutions where they work.  (For example, in the late 90s, Bank of America made a big show of trying to get more of its stock in the hands of employees.  Today, however, its workers only hold about a tenth of 1% of the bank’s shares).

·   Corporations are beholden to shareholders.  Employees, on the other hand, represent labor costs to be managed.

·   Labor is managed in the following way:

o   Corporations hire employees only when it results in efficiency or revenue increases that are greater than the added labor costs.  When it comes to capital investment, corporations require not only a recouping of costs, but the achievement of a return to shareholders’ equity that exceeds an established hurdle rate.

o   Labor is often the target of a corporation’s search for efficiency, with jobs going to automation or offshore labor sources.

·   While it’s true that lowering corporate tax rates can change the projected returns of various investments, in practice, most corporations evaluate investment returns based upon an expected long-term tax rate.  As I mentioned earlier, the Bush tax cuts have done little to encourage corporations to expand or invest in new businesses.  Rather, businesses have horded the cash saved. 

·   The only thing that will get big businesses to expand or invest in new businesses—and thereby create new jobs—is revenue growth. 

·   The way revenue growth is achieved is through greater consumption, which is already 2/3s of our economy and much larger than the other components of GDP: government spending, investment and trade surpluses. 

·   The best way to induce consumption is to put more money into the hands of consumers, which could be accomplished through tax reductions to workers.  Tax breaks for automobile purchases and first-time homebuyers, for example, provided tremendous economic lift in 2010.

·   But that’s demand-side, not supply-side, economics. 

The point is that in any discussion about the nation’s budget, we have to get corporations to pay a fair share.  Some naysayers claim that U.S. corporate tax rates are too high.  That might be true if it weren’t for the fact that after all the loopholes are accounted for, the tax burden of U.S. corporations is one of the lowest in the developed world.  As I’ve said in previous posts, this institutionalized corruption should not be acceptable.  However, we’ve become accustomed to it—as have the politicians who find it profitable to grease corporate hands by exchanging tax and other benefits for campaign contributions.