Tuesday, July 5, 2011

The Idiocy of Supply-side

It is rarely surprising when you see some right-wing nutbar say something incalculably stupid.  The general M.O. of conservatives is to basically blindly repeat certain rules as some sort of absolute.  In general, the difference between people who lean liberal vs. conservative is not the set of values they have, but in how they prioritize them.  Liberals tend to value fairness and minimization of harm over other values.  Conservatives tend to value authority and purity above other values.  This is why the sort of blind adherence to rigidly defined principles trumps everything when it comes to Republican discourse.  That's why being deeply religious to the point of rejecting science is practically a requirement of conservative politics.  You have to reject something like science because it indicates progress and change, while religion is indicative of order and authority (as well as unflappable loyalty to that authority) -- things that conservatives value more.

When it comes to economic policy, it's hard to hide the fact that all politicians are basically self-serving greedy douchebags looking to profit through under-the-table activities which aren't entirely kosher.  The real factor, though, is in how they rationalize it before their constituency.  Doing that basically rests on pandering to those specific values which your voters prioritize.

The thing I hear most from conservatives and libertarians alike on economics (as the latter is technically fiscally conservative) is that there is an immutable relationship between taxation on the rich and a dearth of jobs.  When you simplify to that extent, you're doomed to be wrong.  The problem isn't so much with the idea that taxation on the wealthy and/or corporations affects jobs, but that the relationship is immutable and absolute.  This is where Republicans and, to a large extent, fans of the Austrian school of economics, basically have no hope of of being anything other than intolerable idiots unworthy of ever drawing breath.

The basic thesis of this belief is that if you raise the costs that an employer has to suffer, then it becomes more difficult for an employer to financially justify new labor.  After all, if adding on to your labor force increases revenues by X amount, but adds on to costs by Y, the question is raised as to whether or not it's really worth it.  And if Y is greater than X, then it definitely isn't worth it since it works out a net loss.  So reducing the overall cost structure to employers seems like a reasonable way to create jobs.

Here's the problem -- you have to assume that all the issues are strictly on the supply side.  That's not a safe assumption to make.  In this economy, especially, the problem is on the demand side.  Companies aren't likely to pull in as enough revenues not because the costs are too high for them, but because the consumers simply aren't buying.  The consumers aren't buying because they are too apprehensive about spending in a time when property values are low, when they're worried about holding onto their jobs, when they don't have the buying power or borrowing power to stimulate the economy in the first place, and the nation is so deep in debt that there are risks of them losing the government benefits that they've been paying for their whole lives (ultimately making all that money they paid in basically gone forever).  When things are that bad, people put more into savings, and the whole economy suffers for it.

If on the other hand, there is a climb in demand, employers actually have the possibility of pulling in significantly more revenues by raising supply to match, and that is how employers can actually justify expanding their workforce.  So how do we raise demand?  Well, you're certainly not going to do it by putting money in the hands of the rich.  As much money as they do control, they don't buy proportionally more stuff.  They might buy more expensive things, but not more of it.  After all, the top 1% wealthiest people in the nation are still at best only 1% of the overall market.  Sure, they might hypothetically form 10% of the market for obscene luxury yachts or some other stereotype of wealth, but that's a very small and vertical market to begin with.  If you're going to stimulate the economy, you've got to get 100% of the market moving and willing to spend.  Well, the majority of the market is the middle class -- the population that's unwilling to spend right now because nearly 10% of them are out of work, and even those who are working expect Social Security not to provide any retirement benefits, which in turn inspires them to spend less and save more.

The only way to bring demand up is to increase the strength and security level of the middle class.  Without that, the majority of the market doesn't spend, demand stays low, corporations don't pull in revenues, and jobs don't get created.  So at the very least, you don't want to raise taxes on the middle class.  This is why the Libertarian party's concept of trading income tax for a high sales tax (the so-called "Fair Tax") is entirely doomed to kill the economy in a single blow.  You effectively raise the price of all goods and services, and the people who get hit the hardest are the majority of the market, for whom you've made everything too expensive to bear.  Intrinsic in the effect of the "Fair Tax" proposal (which proposes a federal sales tax as high as 25%) is that it punishes consumption and spending.  If you do that, you are sending a signal to the market that actually stimulating the economy, actually providing demand for companies to sell their goods and services, is a bad thing.  It is also, in effect, a regressive tax because the lower your income, the greater the percentage of your income which is taxed since the cost of goods, and therefore the tax levied, is not relative to your income but effectively a flat fee.  It certainly doesn't hurt those of high income anywhere as much because they actually do not buy in equivalent proportion to their wealth, but when you hurt the middle class, there is no economy.  Period.

This is why any act that raises taxes on the middle class is going to be counterproductive to helping the economy.  But similarly, if you cut things like Social Security and Medicare, you end up losing the middle class anyway because they become insecure about spending.  The most fundamental flaw of basing economic policy strictly on raw principles is its complete unwillingness to consider psychological impacts on the both the supply and demand side as even remotely significant (arguing instead that security throughout will be restored as long as the rich stay rich and the poor stay poor).  In all fairness, Social Security and Medicare are hardly things that people view as a perfect system that will cover them for all of their retired lives, but the point is that it is something they've been paying into their whole lives in very large sums with the expectation of being able to get something back out of it.  If that goes away, people see it as an additional loss of several tens of thousands out of their pocket which has just been frittered away.  The loss of such benefits to the middle class would actually be something that people might take well if you could similarly reciprocate that loss in another way (i.e., give everybody their money back and eliminate the FICA tax).  Well, this would be fine, except the government is too deep in debt to be able to do anything even close to that.  So in the end, you still need some way to bring revenue into the government, and cutting spending alone will not do it.  Not unless we do something really ridiculous like eliminate the military entirely...  hardly a reasonable proposition.  In order to get the country out of debt, you need to start pulling in more than you're spending at the very least.  If you make spending cuts (e.g. removing certain unnecessary subsidies), and in turn pull in more tax revenue, then only is there even a slight chance of recovery.  Even then, you might only have a tiny window of opportunity which lasts only as long as the president and congressional members who are in office at the time to enact such policies are still around.  At the very least, though, if the populace sees the government in an economic surplus, you have some increased optimism on the part of the people, and that is enough to get the demand curve into a positive shift.

The standard supply-side argument is that people will get jobs so long as wealthy business owners and corporations keep more of their money and then the market becomes healthy again.  This would be a valid point if that actually happened.  The problem is that throughout history, it doesn't happen in any statistically significant way.  What actually happens is the wealthy end up saving more, putting more into personal portfolios or some other effect on their net worth, and not putting it back into job creation or spending to stimulate the economy in any way.  Sure, the Ron Paul worshippers of the world love to bring up small business owners, but as many of them as there are, they don't control anywhere as much wealth as necessary to make a huge impact.  Bringing them into the equation is nothing more than a silly political game to pretend as if you're thinking about the little guy, and voters who lean fiscally conservative fall for it hook, line, and sinker.  To give you a parallel of how deceptive this is, let me just  pose this little mnemonic for you -- there are literally hundreds of small businesses run by people who do pull in several million per year in income for every megacorporation.  But, each one of those small businesses might go through cycles of hiring or firing in single or double digit figures.  A megacorporation, on the other hand, may have cycles on the scale of hundreds or even thousands.  Also, because of the scale, the cost of each person hired or fired runs a wider gamut in a megacorp than in any small business, it all adds up to an equal, if not significantly greater impact from the activities of one billionaire-owned multinational conglomerate than there is from 100 or 200 millionaire-owned small businesses.

The real question is how much of an increase in demand do you have in concert with such a change?  Sure, there will be a small increase on the basis that you've done a little bit to decrease unemployment, but just how significant is it in relation to the cost of hiring?  The supply-side argument works so long as demand outstrips supply by so much that companies need to hire in order to meet demand.  If demand is completely saturated, then increasing supply by hiring more is not going to net you anything, and in fact, is likely to prove a wasteful expenditure.  Businesses, especially larger corporations are going to already have a good idea at what point increasing their workforce will prove wasteful, while smaller businesses tend to find out the value/cost of their decisions after the fact.  Given that, it is not all that surprising that history has shown without fail that decreasing taxes on the rich, rather than increasing job creation, really just increased the volume of trading on the floor of the stock exchange.

You cannot create new jobs simply by giving money to companies.  They need to have actual reasons to create new jobs.  Some sort of solid motivation is needed.  While you could give them money with strings attached, this is a bit too much muscle for government to flex, in my opinion.  It just doesn't work that way.  If there is value added by adding labor, that is all a company really needs to invest in expansion, even if their taxes are otherwise through the roof.  That value added is dependent on the market, and it's the market that needs to be healthy first.

All said, there is no fact-based discourse on any of this.  Politicians appeal to analogy, appeal to emotion, appeal to common sense, lie, lie, and tell more lies.  Those who swallow the shpiel tend to spout the same meaningless hypotheticals and point cases, never realizing the fallacy they're committing in assuming that what's true of the parts is true of the whole.  I'm not interested in how some local auto body shop managed to hire more work when their taxes went down or stories of Canadians waiting in line for needless MRI scans or idealistic predictions based on money always flowing back into the market because it "just does."  I need to see real statistics, real large-scale studies, real data, covering EVERY corner of the market, not just some subset which locally illustrates your point.  Don't tell me stories, show me the math and the science.

The bad thing about this is that the only ones who have really done any extensive work in collecting and analyzing economic statistics on a global scale are liberal activist organizations.  Yes, I'm a dyed-in-the-wool liberal as well, but I still say this is a bad thing because they are still activist organizations, and they definitely have agendas.  Granted, conservatives universally lie without exception about what that agenda actually is because that's what politics is all about, but nonetheless there is an agenda.  That means whatever data is reported is just as much at risk of being filtered to serve as a sort of echo chamber for people who lean left, and too much of that is never a good thing.  We run the risk of becoming exactly what conservatives fear-monger us to be if we do that.

Around 2001, I wrote the following --
A liberal is someone who will rescue those who need help using someone else's wealth and resources.
A conservative is someone who will rescue those who don't need help using the resources of those who do.

A libertarian is someone who will use anybody's resources to rescue himself while telling everybody else they don't deserve to follow his example.

An independent is someone who simply thinks about who to rescue with whose wealth but never actually does anything.
In short...  we're all screwed.  But among those, I'm still naturally prone to fall into the Robin Hood (liberal) camp, since they at least have some facts on their side, rather than concentrated mental garbage (conservative), meaningless idealistic principles that only work in theory (libertarian), or a random mess of ideas (independent).