|
Softpanorama
(slightly skeptical)
Open Source Software Educational Society |
May the
source be with you,
but remember the KISS principle ;-)
|
Supply Side Economics as an Example of Modern Lysenkoism
The best description of supply side or “trickle down” economics I ever heard was by JK Galbraith:
“trickle down economics is the idea that if you feed the horse
enough oats eventually some will pass through to the road for the
sparrows.”
Supply-side economics can be called Lysenkoism of late XX century, as
it would never survive without huge political support government.
The best description of supply side or as it often called “trickle down” economics I ever heard was by JK Galbraith:
“trickle down economics is the idea that if you feed the horse
enough oats eventually some will pass through to the road for the
sparrows.”
Usually critics of supply-side economics point to the lack of academic
economics credentials by movement leaders such as
Jude Wanniski and
Robert Bartley
to imply that the theories were bankrupt. But like in Lysenko case the key
here are not economic credentials and level of absurdness of supply economics
claims. The movement actually attracted several pretty bright, albeit corrupt
people. The key is the usefulness of this pseudoscientific nonsense
for the elite as a smoke screen for the brazen attempt of wealth redistribution.
The other questionable part of the dogma is so called supply side economics.
One postulate of supply side economics is the existence of so called
Laffer curve:
Laffer is best known for the
Laffer curve, a curve illustrating tax elasticity which asserts
that in certain situations, a decrease in tax rates could result in
an increase in tax revenues. Although he does not claim to have invented
this concept (Laffer, 2004), it was popularized with policy-makers following
an afternoon meeting with
Dick Cheney and
Donald Rumsfeld in which he reportedly sketched the curve on a napkin
[1] to illustrate his argument (Wanniski, 2005). The term "Laffer
curve" was coined by
Jude Wanniski (a writer for the
Wall Street Journal), who was also present. The basic concept
was not new: Laffer himself says he learned it from
Ibn Khaldun and
John Maynard Keynes.[1]
A simplified view of the theory is that tax revenues would be zero
if tax rates were either 0% or 100%, and somewhere in between 0% and
100% is a tax rate which maximizes total revenue. Laffer's innovation
was to conjecture that the tax rate that maximizes revenue was at a
much lower level than previously believed: so low that current tax rates
were above the level where revenue is maximized.
The economist
John Kenneth Galbraith noted that supply side economics was not a new
theory. He wrote, "Mr.
David Stockman has said that supply-side economics was merely a cover
for the trickle-down approach to economic policy—what an older and less
elegant generation called the horse-and-sparrow theory: If you feed the
horse enough oats, some will pass through to the road for the sparrows."[39]
Galbraith claimed that the horse and sparrow theory was partly to blame
for the Panic of 1896.
See
Supply-side
economics - Wikipedia, the free encyclopedia
Here is a couple of comments from an excellent article by Barry Ritholtz
NYT Blaming Bush for the Wrong Things The Big Picture
Bush has created a new hypertext linkage definition of kleptocracy*
and massive US financial ponzi scheme to keep the bullshit US economy
going where credit must flow like a raging river or America’s house
of cards goes bust trumps everything else.
Mission accomplished and BOL to 98 or 99% of Americans for next ?
years.
*government by those who seek chiefly status and personal gain at
the expense of the governed.
===
As for Clinton, I never saw him as moral, and not even a true progressive.
He was/is pure ego with few principles, IMO. As for the rest of the
Democrats, many are in the same class as Clinton. In addition, many
have been co-opted (like Schumer) by the 28 year long dominance of free-market
philosophy; they and Clinton were too weak
and too concerned with their own re-elections to stand firmly against
that trend.
This situation was very beneficial to "deregulation criminals" like Greenspan
|
|
- Your
feedback is
extremely important. Please send us your opinion
about the page. This way you can help to improve the
site. Thank you in advance for this
courtesy...
- This is a Spartan WHYFF (We Help
You For Free) site written by people for whom English
is not a native language.
Some amount of grammar and spelling errors should be
expected.
- The site contain some broken links
as it develops like a living tree...
Please try to use Google, Open directory,
etc. to find a replacement link (see
HOWTO search the WEB for details). We would appreciate
if you can
mail us a correct link.
|
|
|
February 1, 2009
The idea that policies favorable to the wealthy, such as financial
deregulation and favorable tax treatment of capital income, will ultimately
benefit everybody has been described, pejoratively, as ‘trickle
down’ economics.
The same idea been summed up, more positively, in the aphorism ‘a
rising tide lifts all boats’ attributed to John F Kennedy, and a
favorite of Clinton advisers such as
Gene Sperling and
Robert Rubin. (It should be noted that this phrase is also used
in the context of debates over free trade and over the effects of macroeconomic
expansion. While it generally implies that we should focus on expanding
aggregate income without too much concern over distribution, it is less
sharply focused than the ‘trickle down’ pejorative.
Whatever you call it, trickle down economics is one of the casualties
of the financial crisis. I’m
not the
first to point this out, and I’m sure I won’t be the last, but here’s
a piece summing up my thoughts.
US experience during the decades of neoliberalism gives little support
for this view. In the period since the economic crisis of the early
1970s, US GDP has grown strongly, and the incomes and wealth of the
richest Americans has grown spectacularly.
By contrast, the gains to households in the middle of the income
distribution have been much more modest. Between 1973 (the last year
of the long postwar expansion) and 2007, median household income rose
from $44 000 to just over $50 000, an annual rate of increase of 0.4
per cent. (More on this
here and
here)
Household size has decreased, mainly due to declining birth rates.
The most appropriate measure of household size for the purpose of assessing
living standards is the number of “equivalent adults” derived from a
formula that takes account of the fact that children cost less to feed
and clothe than adults and that two or more adults living together can
do so more cheaply than adults in separate households. The average
household contained 1.86 equivalent adults in 1974 and 1.68 equivalent
adults in 2007 (my calculations on
US
census data). Income per equivalent adult rose at an annual rate
of 0.7 per cent over this period.
For those at the bottom of the income distribution, there have been
no gains at all. Unlike the situation in Australia and other countries
where a poverty line is defined in relative terms, as a proportion of
average income, the US has a poverty line fixed in real terms, and based
on an
assessment of a poverty-line standard of living undertaken in 1963.
The proportion of Americans below this fixed poverty line fell from
25 per cent in the late 1950s to 11 per cent in 1974.
Since then
it has fluctuated, reaching 12.5 per cent in 2007, a level that
is certain to rise as a result of the financial crisis and recession
now taking place. Since the poverty line has remained unchanged, this
means that the incomes accruing to the poorest 10 per cent of Americans
have actually fallen over the last 30 years.
Other measures yield similar conclusions. Median earnings for full-time
year-round male workers have not grown since 1974. Women have done a
little better, with median earnings for full-time year-round workers
rising by about 0.9 per year over this period.
Overall, the main factors sustaining
growth in living standards for American households outside the top 20
per cent have been an increase in the
labour force participation of women
and a decline in household savings. Over the period since
1999, consumption financed by borrowing against home equity has been
the main factor offsetting stagnant or declining median household incomes.
Thus, in statistical terms the US offers little support to the trickle
down theory. It is equally important, however, to look at how the theory
is supposed to work. The general idea is that, the more highly owners
of capital and highly-skilled managers are rewarded, the more productive
they will be. This will lead both to the provision of goods and services
at lower cost and to higher demand for the services of less-skilled
workers who will therefore earn higher wages.
The financial sector is the obvious test case for this theory. Incomes
in the financial sector have risen more rapidly than in any other part
of the economy, and have played a major role in bidding up the incomes
of senior managers and professionals in related fields such as law and
accounting. According to the trickle-down theory, the growth in
income accruing to the financial sector benefitted the US population
as a whole in three main ways.
First, the facilitation of takeovers, mergers and buyouts by private
equity firms offered the opportunity to increase the efficiency with
which capital was used, and the productivity of the economy as a whole.
Second, expanded provision of credit to households allowed higher
standards of living to be enjoyed, as households could ride out
fluctuations in income, bring forward the benefits of future income
growth, and draw on the capital gains associated with rising prices
for stocks, real estate and other assets.
Finally, there is the classic ‘trickle-down’ effect in which the
wealth of the financial sector generates demands for luxury goods and
services of all kinds, thereby benefitting workers in general, or at
least those in cities with
high concentrations of financial centre activity such as London and
New York.
The bubble years from the early 1990s to 2007 gave some support to
all of these claims. Measured US productivity grew strongly in the 1990s,
and moderately in the years after 2000. Household consumption also grew
strongly, and inequality in consumption was much less than inequality
in income or wealth. And, although income growth was weak for most households,
rates of unemployment were low, at least by post-1970 standards for
most of this period.
Very little of this is likely to survive the financial crisis. At
its peak, the financial sector (finance, insurance and real estate)
accounted for around 18 per cent of GDP and a much larger share of GDP
growth. With professional and business services included, the total
share was over 30 per cent.[1] The finance and business services sector
is now contracting, and it is clear that a significant part of the output
measured in the bubble years was illusory. Many investments and financial
transactions made during this period have already proved disastrous,
and many more seem likely to do so in coming years. In the process,
the apparent productivity gains generated through the expansion of the
financial sector will be lost.
The failure of the trickle-down approach has been even more severe
in relation to consumer finance. The idea that increasing income inequality
was unimportant when households could borrow to finance growing consumption
was never defensible. The gap between income and consumption had to
be filled by a massive increase in debt. With sufficiently optimistic
assumptions about social mobility (that low-income households were in
that state only temporarily) and asset appreciation (that the stagnation
of median incomes would be offset by capital gains on houses and other
investments) these increases in debt could be made to appear manageable,
but once asset prices stopped rising they were shown to be unsustainable.
In the US context, these contradictions have been resolved for individual
households by a massive increase in financial breakdowns. Until 2005,
this mainly took the form of a steady increase in bankruptcy, to the
point where Americans were
more likely to go bankrupt than to get divorced. Restrictive
reforms introduced at the behest of the credit card industry produced
a dramatic drop in bankruptcy (in part, the lagged counterpart a massive
upsurge in 2003 and 2004 as people rushed to get in under the old rules).
From 2006, onwards, bankruptcy rates resumed their upward trend, reaching
1.1 million per year in 2008
This trend attracted little attention as bankruptcies were rapidly
overshadowed by foreclosures on home mortgages. During the boom, when
overstretched householders could normally sell at a profit and repay
their debts, foreclosures were rare. From 2007 onwards, however, they
increased dramatically, initially among low-income ‘subprime’ borrowers
but spreading ever more broadly.
2.3 million houses were affected by foreclosure action in 2008.
In hard-hit areas of California, more than 5 per cent of houses went
into foreclosure in a single year
As in other respects, the longer-run implications of the crisis have
yet to be fully comprehended. Even when economic activity recovers,
consumer credit will be far more restricted than in past decades. As
a result, there will be no escape from the implications of decades of
stagnant wages for workers at the median and below.
Politically, the failure of the trickle-down theory seems likely
to produce a resurgence of the class-based politics pronounced dead
in the era of economic liberalism. The contrast
between the enforced austerity of any recovery period, and the massive,
and massively unjustified, excesses of the financial elite during the
boom period, will produce a political environment where phrases like
“malefactors of great wealth” no longer seem quaint and old fashioned.
(Just after writing this, I Googled it, and found it as the
title of a piece in Time Magazine’s Swampland by Joe Klein, among
the most reliable indicators of the political zeitgeist_
fn1. Here I’m measuring the
ratio of gross FBS output to gross domestic product, which is the
figure most relevant to the argument. The value-added in FRB (which
nets out inputs purchased by the FRB sector) is smaller, around 20 per
cent, but still indicates a highly financialised economy.
[Mar 26, 2008] A Political Comeback: Supply-Side Economics
March 26, 2008
When
Ronald Reagan ran for president in 1980, he promised
to cut taxes in what seemed, at the time, a magical way.
Tax revenue would go up, not down, he said, as the
economy boomed in response to lower rates.
Skip
to next paragraph
Alex Wong/Getty Images
President Bush, at right,
meeting with Martin Feldstein, a Harvard
economist, in 2003.
Related
Associated Press
David Stockman, left,
Donald Regan and Mr. Feldstein before
testifying on President Reagan’s budget in
1984.
Since then, supply-side economics, as it was called —
first with derision but then as a label embraced by its
supporters — has become a central tenet of Republican
political and economic thinking. That’s despite the fact
that the big supply-side tax cuts of the 1980s and the
2000s did not work out as advertised, as even most
supporters acknowledge.
But advocates see broader economic benefits from
lowering tax rates, which is one of the reasons the
concept has reappeared as a point of contention in this
year’s election campaign, in an amended form.
“What really happens is that the economy grows more
vigorously when you lower tax rates,” said Kevin
Hassett, an adviser to the presumptive Republican
nominee,
John McCain, and the director for economic policy
studies at the conservative American Enterprise
Institute. “It is beyond the reach of economic science
to explain precisely why that happens, but it does.”
Even with a growing economy, however, the promised
boon in tax revenue never materialized. Arthur B.
Laffer, the renowned proponent of supply-side economics,
still holds that tax revenues “rise dramatically” when
tax rates are cut.
In the 1980s, though, during the initial era of
supply-side tax cuts, per capita revenue from personal
income taxes, adjusted for inflation, rose an average of
just 0.7 percent annually throughout the Reagan
presidency, according to the White House
Office of Management and Budget.
That was far below what turned out to be an average
annual increase of 6.5 percent in the eight years of the
Clinton administration, when tax rates at the high end
of the income ladder were raised.
Since 2001, the annual per capita revenue from income
taxes fell 1 percent under President Bush even though
tax collections picked up sharply starting in 2005. The
budget surplus Mr. Bush inherited turned into a deficit.
“If you are cutting taxes without offsetting the cuts
through reductions in spending, then all you are doing
is increasing the debt and postponing the taxes,” said
Jason Furman, director of the Hamilton Project at the
Brookings Institution, and also a policy adviser to
the Democratic presidential candidates.
Circumstances vary across the decades, of course, and
it is difficult to sort out all the various influences
on the economy and tax revenues. But when Mr. Reagan and
his supply-side advisers first pushed through a range of
tax cuts, they applied their logic to the broad mass of
taxpaying workers. They argued that the incentive from
lower rates on additional increments of income would
prompt people to work that extra day or get more
education to qualify for a better job.
Similarly, a spouse might take a new job, encouraged
to do so by the promise of more take-home pay. The
family’s taxable income, and the nation’s, would grow,
the theory suggested, producing more tax revenue even at
the lower rate.
That was before so much more of the national income
flowed to upper-end households, and before the actual
tax collections of the last three decades undercut the
supply-side argument. Now the supply-siders single out
the wealthiest Americans and argue that because they
have so many ways to shelter their money from taxes, the
incentive to declare more taxable income is much greater
when tax rates are lowered than it is for the less
well-to-do.
“The supply-side argument these days really applies
to upper-income people,” said Robert M. Solow, a Nobel
laureate in economics who served in the Kennedy
administration. “They are portrayed as the golden geese,
and you don’t want to discourage them from laying their
eggs.”
By contrast, Mr. Solow says, “the Democrats are
convinced they’ll lay their eggs anyway, without tax
cuts as an incentive.”
Senators
Hillary Rodham Clinton and
Barack Obama, contending for the Democratic
presidential nomination, reflect that point of view.
They say that they have no intention of undoing the Bush
tax cuts on families earning less than $250,000 a year.
Married couples with incomes above that level, however,
would once again be taxed by either candidate at up to
39.6 percent — the top rate reached during
Bill Clinton’s presidency.
President Bush pushed through legislation in 2003
that cut the top rate to 35 percent, but only until
2011. Senator McCain wants to extend the 35 percent rate
indefinitely and his camp increasingly cites as
justification the supply-side effect on upper-income
families.
Having once voted against the Bush cuts, Mr. McCain
has reversed position and now has even enlisted Mr.
Laffer as a special adviser. “McCain is on the right
track,” Mr. Laffer said.
While Mr. Laffer insists that tax revenue will rise
when tax rates are cut, other supply-siders are less
categorical. Martin Feldstein, a Harvard economist who
was the first chairman of President Reagan’s
Council of Economic Advisers and now supports
Senator McCain, estimates that a 10 percent tax cut
would in fact reduce tax revenue — but only by 3 to 5
percent.
“It is not that you get more revenue by lowering tax
rates, it is that you don’t lose as much,” he said.
Not since Mr. Reagan ran in 1980 have supply-side tax
cuts been so central a campaign issue.
George H. W. Bush and Bill Clinton each ended up
raising taxes, ignoring the supply-side thesis, which
the elder Mr. Bush once called “voodoo economics.”
Now his son argues that his tax cuts strengthened the
economy. Growth resumed after Mr. Bush pushed his tax
cuts through Congress, but that position, critics say,
is harder to maintain now, given that the election
campaign is unfolding in the midst of a credit crisis
and an incipient recession.
Still, even in hard times, the incentive from a tax
cut is particularly strong among the wealthy,
supply-siders say. A drop of four or five percentage
points in the top tax rate of these households saves
them tens of millions of dollars. Above all, the
supply-siders say, less money will be wasted on
accountants and lawyers hired to find ways to dodge
taxes when the rates were higher. These outlays will be
put to more productive use.
The supply-siders also argue that at the corporate
level, lower tax rates, which Senator McCain favors,
prompt companies to hire more workers and to invest in
new equipment, generating more output and more taxable
income.
The Democrats, and many economists who describe
themselves as nonpartisan, have a different perspective.
Tax incentives might indeed increase labor supply and
output, they acknowledge, but what good is that if there
is insufficient demand for the additional labor and for
the goods and services that are produced?
The Democrats are quick, as a result, to support the
$160 billion
stimulus package, with its rebate checks that
millions of Americans will be encouraged to spend,
supporting demand. They also are prepared to raise taxes
to introduce more equity into the tax system and as a
means of shrinking or eliminating a large budget
deficit.
The excessive borrowing required to finance the
deficit, they say, acts as a drag on the economy,
pushing interest rates higher than they otherwise would
be, adding to the cost of business investment.
Gene Sperling, an economic adviser to Bill Clinton
during his administration and now to Mrs. Clinton as a
candidate, said that supply-siders vastly exaggerate the
incentive effect of relatively small changes in tax
rates while ignoring the benefits of bringing government
revenue more closely in line with spending.
“The supply-siders predicted in the 1990s that
raising rates, even for deficit reduction, would lead us
to recession,” Mr. Sperling said. “What followed instead
was the longest recovery in history, and the people
whose tax rates went up had exceptional income gains.”
The tax issue, for all its importance, does not yet
have a prominent place in the campaign. That is mainly
because Senators Clinton and Obama are still struggling
with each other on issues other than taxes, on which
they generally agree. A winner has not emerged to cross
swords with Senator McCain.
“When there is finally a candidate,” said Austan D.
Goolsbee, chief economic adviser to Senator Obama, “then
we’ll debate taxes and the flaws in the supply-side
argument.”
![[1]](http://www.polyconomics.com/gallery/Napkin003.jpg){kind=link}