Saturday, June 30, 2012

Job creating supply side trickle down

Let's take a look at the right wing economic mantras.

A recent cartoon struck me with a very simple statement. The K chronicles had a line "Rich people are rich because they save their money." Simple, obvious, yet profound. If we want to push the economy towards saving, then giving more money to the rich would be the way to do it. But if we want the opposite, we need to do the opposite.

The current crisis is at core a lack of demand. Credit has been pulled from businesses, homeowners, credit card holders. Wealth has fallen. Everyone is scrimping, saving more, and spending less, and the aggregate result is less economic activity- at least less than we could have if everyone were usefully employed and fairly paid.

The economy hangs on the balance of saving versus spending. If it were booming, we would want to encourage saving. But as it is crawling, we want to encourage more spending and less saving. The current low interest rates are part of the equation, but the more important part is missing- the spending that should be coming from government. The stimulus helped, but has petered out, while state and local governments have heavily retrenched and are spending less.

In the stimulus, legislators asked whom to give the money to. Would it be directly spent on public goods like infrastructure and energy sustainability? Would it go to individuals, and if so, which ones? Would it go to the rich or the poor? Washington came up with an unholy mix of payroll tax cuts, going to the lower and middle class, an extension of the Bush tax cuts, going to the rich, and some infrastructure spending and state support.

Going by the above, the Bush tax cut extension was entirely useless, hardly contributing to spending and demand. But aren't its targets the "job creators", and isn't giving them money bolstering the "supply-side" of the US economy, from whence higher pay and other benefits "trickle down"? This is the Reagan revolution in a nutshell, giving us three decades that dramatically reshaped economic inequality, towards the guilded age heights we now enjoy.

Back when inflation was an issue, reweighting the economy towards supply (i.e. away from demand) made some sense. Though why that involved giving money to the rich, instead of, say, cutting military spending and funding research, isn't clear at all. In today's environment, however, it is sheer madness, and we don't hear the line used very often anymore. "Job creators" has taken its place in the mouths of Republicans.

Republicans want job creators to feel comfortable and confident, not put-upon and protested against. They should be coddled by a reversion to feudal rights to run roughshod over the environment, over their employees, and into the public purse. Oh, and fawning treatment by the media would be nice too!

But who creates jobs and why? Most are just created by ongoing businesses in response to economic prospects. Anything the government can do to improve those prospects, by way of Keynesian spending, is going to raise employment and help get us off the deflationary / zero interest rate floor. Raising or lowering taxes on individual rich people will have no effect. If such a business needs money, they go to banks to borrow some- which is even more dependent on future economic prospects.

The other class of jobs is created by entrepreneurs- those hallowed innovators always threatening to "go Galt", in the minds of Republicans, if they face just one more environmental regulation or raised tax bill, perhaps decamping to Mexico, where they can find virtually stateless regions to do business in! More seriously, entrepreneurs are an important element of US innovation and success, but their critical decisions come long before they hire accountants to moan about the difference between marginal tax rates of 31% or 35%. That is not what sent the Steves to their garage to build the Apple I.

The inspiration of socially significant business success is only partly money, and then only in the most vague and uncountable way. Entrepreneurs need efficient monetary rewards to keep their dreams alive and building, (if successful), but other motivations and resources clearly are equally important, like the cultural influence they can have through their work, the education they and their colleagues have gotten from mostly state-sponsored institutions through their lives, and the sheer enjoyment of building a temple to themselves in the form of, in this case, Apple Computer, worshipped throughout the world.

The most fatal bar to entrepreneurial innovtion is generally the anticompetitive barriers and corruption sponsored by existing businesses. Who wants to license hairdressers? Not hairdressing entrepreneurs, but established hairdressers. Who wants to raise tarriffs against imports of sugar? Concentrated interests who use the state to further their own ends. It is not the state in general that is bad for entrepreneurs, but the state made captive to incumbent interests, expressed in bureaucracy, red tape, and corruption. If Republicans were interested in bringing those costs to light and eliminating them, they would be doing the country a service. But of course most of their funding (and Democratic funding as well) comes from precisely such incumbent interests.

Lastly, and most importantly, the trickle-down theory has long been a self-serving staple of Republican thought, if not rhetoric. Apparently, giving more money to the rich benefits society generally. How much more? Well, it is hard to tell where this process is supposed to end! As argued above, nothing could be more destructive in the demand-deficient environment we find ourselves in now, where encouraging people (i.e. the rich) to save is really the last thing we should be doing.

But it isn't true more generally either. The rich are thought to invest their savings. But what forms do these investments really take, and how socially productive are they? Much of it takes the form of government bonds, which lays the question of how such savings are employed right back onto the government. Most of the rest goes into the markets- bonds, stocks, real estate, hedge funds, etc. But buying such shares is difficult to truly call investing, since the businesses long since issued their shares and got their money (see the Facebook IPO), and one's purchase neither helps neither them nor anyone else hire more workers. These markets provide liquidity, buttressed by ongoing speculation by those rich enough to gamble in the prospects of the various companies, just as they might gamble on horses.

The listed companies can use their market valuation to issue more shares, or sell themselves, or buy other companies, but at this point, the individual investor is not doing anything for economic growth. If, say, Apple's stock rises to absurd heights due to market speculation, above what is warranted by fundamental parameters like its price/earnings ratio and dividend yield, then what have the investors jointly accomplished? They may have given the company the firepower to buy other companies, or to give themselves bigger bonuses. But all this is in the hands of the company's management, which may not hire any more workers or do anything economically productive with their high stock price at all. By far most of this wealth goes to other speculators who sell their shares at the proper time, rather the improper time (and then in all probability deposit them as government bonds). The transmission to economic growth is vanishingly tenuous, far more a symptom than a cause.

The spectacle of Bill Gates and his fortune should disabuse anyone of the trickle-down theory of pampering the "job creators". His percieved highest use for his money, after having crushed countless small companies and subjected us all to truly atrocious software, is not incubating startups and leading the next tech revolution, but giving it away on philanthropic projects such as disease relief in Africa. Laudible indeed, but it shows the ultimate poverty of accumulating money to absurd levels in private hands, for the sake of economic efficiency and prosperity. Much better if that money were in the hands of regular consumers driving normal demand for economic and other cultural goods, or, let it be said indeed, in the hands of the government in its role as provider of the public goods such as education.

  • In the class war, we've lost.
  • Krugman reviews it all again, for the umpteenth time.
  • Skidelsky on leisure, consumption, inequality, and modern capitalism."That road leads to a division of society into a minority of producers, professionals, supervisors, and financial speculators on one side, and a majority of drones and unemployables on the other."
  • Lakoff on Obama's weak economic framing- it isn't enough to be right.
  • Apple, abusing its employees both here and there.
  • For Greece, there is no way out. Not only do they need complete debt forgiveness, but also rebalanced trade flows with (or continuing bailouts/gifts from) the rest of Europe.. read Germany.
  • Kaplan on Pakistan. But from what I hear, Switzerland has mountains & languages, too.
  • Enough waiting for the Fed- they don't have the answer anyhow.
  • Big banks- who needs 'em?
  • Climate catastrophe, annals of appalling"... the World Bank has been investing heavily in coal-fired power production"
  • The Texas Republican platform reads as follows: "We oppose the teaching of Higher Order Thinking Skills (HOTS) (values clarification), critical thinking skills and similar programs that are simply a relabeling of Outcome-Based Education (OBE) (mastery learning) which focus on behavior modification and have the purpose of challenging the student’s fixed beliefs and undermining parental authority."
  • Economics quotes of the week, from Joe Stiglitz:
"But the crisis showed to everyone what economic research had long revealed—the argument was a sham. What was called incentive pay was anything but that: pay was high when performance was high, but pay was still high when performance was low. Only the name changed. When performance was low, the name changed to 'retention pay.'"
"What we’ve achieved is a state too constrained to provide the public goods—investments in infrastructure, technology, and education—that would make for a vibrant economy and too weak to engage in the redistribution that is needed to create a fair society. But we have a state that is still large enough and distorted enough that it can provide a bounty of gifts to the wealthy. The advocates of a small state in the financial sector were happy that the government had the money to rescue them in 2008—and bailouts have in fact been part of capitalism for centuries."

"The narrative that you describe [of capitalism] ignores the extent to which a lot of the inequalities in the United States are not the result of creative activity but of exploitive activity. And if you look at the people at the top, what is so striking is that the people who’ve made the most important creative contributions are not there."

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