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Wednesday, February 4, 2009

Supply Side Logic

A private email from a friend of mine... which I'm making public now:

"Kensyian stimulus--spending for spendings sake--doesn't
work--because it takes money from the most productive job-creating sectors
of the economy and redistributes it to the least productive sectors (low
income workers and government). Plus, it destroys incentives for business
formation, work, savings and investment. Government can borrow, tax and
print money. All three of these actions create drag on the private job
creating sections of the economy, either by increasing the cost of capital,
decreasing incentives to work, save and invest, or by devaluing the currency
(inflation).

The practical non-ideological approach to economic recovery involves cutting
marginal tax rates, sound money and deregulation. Ask Coolidge, Kennedy,
Reagan and the much maligned Bush circa 2002. You want a depression or
mighty stagflation raise taxes and/or spending. Ask Hoover, Roosevelt,
Carter and Bush 2008 and his Dem congress (Frank, Dodd etc.)

Nothing they are doing now will work. Look for Carter era stagflation (low
growth and high inflation within a couple years). Maybe worse."

5 comments:

mijopo said...

Ah, yes "doesn't work--because it takes money from the most productive job-creating sectors of the economy [i.e., rich people] and redistributes it to ... low
income workers "

Indeed that is supply side logic, and motivation, in a nutshell. Thanks for sharing.

mijopo said...

BTW, while we're throwing quotes around, here's one from an article Reich wrote yesterday:

"When even these coping mechanisms were exhausted, families went into debt -- a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.

What happened to the money? According to researchers Thomas Piketty and Emmanuel Saez, since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do -- after all, being rich means that you already have most of what you need. That's why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It's not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation's income.)"

(http://www.salon.com/opinion/feature/2009/02/03/after_the_stimulus/index.html)

Erik said...

I've commented in prior posts that I think it would be a bad idea to give tax breaks to the rich. I was recently denied preferred rates for a refinance of our residence on grounds that my FICO score had dropped (from 800 a year ago)... the reason is just that I've started a small business and had to take on credit card debt. In this economy, any debt or even the whisper of risk and everyone runs off to hide. Believe me, I'm looking to solve the problem. Payroll taxes are a huge burden on small businesses, as I've explained before. If we want to stimulate the economy, there is common ground. Forget the fat cats and help the little guys. That includes the middle to middle class (again, I've made this point before), as well as small businesses who are hoping to have an innovation that creates thousands (or more) of jobs, in place of the large companies that have ceased to innovate or at least are now at a disadvantage.

I'm sure there's still an argument here but please explain what it is...

mijopo said...

I don't disagree that payroll tax cuts in general can be a fair and effective away to spur job growth and consumer spending, they're targeted at the right place. My worry is that the situation we're in now is quite atypical, and not one in which payroll tax cuts would help much, mostly because the reason businesses are holding back in hiring, and/or massively firing is because nobody's buying anymore. We have to get that ball rolling first.

(BTW, I'd love to hear more about your small business.)

Erik said...

This is a personal blog, so typically there's no business discussion, but it's fair to offer that the company was started with an SBIR award, which is of course government stimulus from the SBA. We're now trying to transition into commercialization, but as you might expect its very difficult at present.

But even given the government contract, the payroll taxes are surprisingly onerous, and can constrain decisions about e.g., hiring a database administrator based on the fact that we can't free up enough funds for the new hire's salary plus the taxes owed.

Also, (and this is more a practical point), SBIRs are great and much appreciated for getting a research-based company going, but the length of time between award and contract, and then between first and second phase, essentially gaurantees that the entrepreneur must find consulting or other private sector work in order to stay afloat. Not complaining, just saying that starting a business however you slice it is fraught with myriad difficulties.