Tuesday, November 29, 2005

If supply-side economics is dumb, then are we progressives demand-side economists?

It strikes me that since the Reagan-Bush style economic strategy of lowering tax rates on the people with the highest incomes is called supply-side economics (make the rich even richer, so the thinking goes, and there will be a greater supply of money that can be used to invest in new businesses to stimulate employment), we progressives that recognize that strategy as bankrupt might be advocates of demand-side economics.

We don't really have a good name for our economic strategy.

The party of money has a great name in supply-side economics. That sounds so much better than enrich-the-rich economics.

I do think cutting taxes is a good idea if the people who get the tax cuts (and thus have more income) will spend that income in the United States. That will stimulate employment and economic activity, generating the multiplier effect of a dollar spent on tax cuts generating three or four dollars of economic activity.

Cutting taxes on wealthy people by lowering their marginal tax rate to 35% from 37% or cutting capital gains taxes does not have the same effect, since wealthy people don't spend their additional income. They invest it, and that means they buy equities or real estate or some other financial instrument anywhere around the globe. That does not generate economic activity in the United States. That's why enrich-the-rich policies are not as good at stimulating economic activity as demand-side economics.

I think demand-side economics is a better term than 'targeted tax cuts' that Clinton popularized. What's a competing term for the progressive economic agenda?

12 comments:

Nathan Kaufman said...

The Pro-Growth Progressive : An Economic Strategy for Shared Prosperity (Hardcover)
by Gene Sperling

Barry Ritholtz is a blogger who may write stuff of interest to you --> bigpicture.typepad.com

I think it helps to avoid getting pigeonholded or stereotyped. It helps to look at circumstances and come up with appropriate policies. Today is different than the early 1980s.

Nathan Kaufman said...

today is a lot different in many many ways from the early 1980s.

-foreign policy: Soviet Union and communism, terrorism
-historical marginal tax rates
-current inflation situation

i put together the rought draft graph below for my own purposes.

http://photos1.blogger.com/blogger/4398/1110/1600/marginal%20income%20tax%202.jpg

Look how high federal marginal income tax rates were prior to 1980?

so it seems to me like one could be a "supply side" person who advocated cutting marginal income tax rates in the very early 1980s, advocate otherwise today, and still be consistent. Please note I am not saying this is necessarily my opinion at this time.

Things like a national consumption tax on gasoline are also interesting.

Lazerlou said...

The problem is Dan, we are also supply side people, just less so. We admit the efficiencies of aggregating capital and having it invested by those who know best. We just advocate for a different balance between supply side investment, consumer purchasing power and regulation. We want to regulate investment and give the middle class and the poor more money to spend. As Clinton proved, when the middle class has spenidng power, growth is more sustainable and balanced, as well as income. But even under Clinton the rich got richer while the poor and middle class pretty much stagnated. Lots of jobs were created, but they were mostly service jobs to service the growing upper middle class and their consumption.

These are delicate equilibriums and dynamic systems we are talking about, so using such black and white terms only feeds into teh Rebuplican agenda to divide the country. If anything I'd say we are for ethical, sustainable growth.
Just becasue an econmy is growing based on debt fueled spending on things like plastic surgery, gas for ineficient cars and mocha lattes does not necessarily mean it is a good thing.

So-Called Austin Mayor said...

The first thing that popped into my mind is "family focused economics" as opposed to the GOP's "corporate focused economics".

simplesean said...

The problem with supply-side economics is that it really only exists in theory. The theory sounds nice and looks great but in practice falls apart.

CF said...

Demand-side economics, or the Keynesian model, was the dominant economic theory of the western world for most of the 20th century. It is still the model used by the European Union. The basic idea is you stimulate economic growth through government expenditures and redistribute wealth to achieve social and economic outcomes. This idea is hard-wired into the pysche of America and our economic system (just look at Bush's attempt to reform social security). If you want to give it a new name (like changing "liberal" to "progressive") go right ahead. But this is what conservative thinkers are talking about when they say the Left has "no new ideas." Why not just call it "Wealth Redistribution Economics" and make an argument for how it will produce economic growth. -- CF

Dan Johnson-Weinberger said...

Thanks Nathan -- I'll check those out. I think you're right that the case for cutting marginal income tax rates was a lot stronger in the early 80s than it is in the early 00s. Lou, that's interesting to think that we're supply-siders for the middle class instead of supply-siders for the rich. I think it's hard to divorce 'supply-sider' from 'cutting the highest marginal income tax rates' and 'cutting taxes on wealth' but I guess it's theoretically possible to be a supply-sider for low incomes. I don't think that works as a sharp political slogan, but it does, I think, help expose the intellectual bankruptcy of the supply-siders who stubbornly cling to cutting the top marginal income rates no matter what the circumstances. Mayor and Sean, neat points too. Chris Fanta, thanks for posting. I would say you are confusing the discussion that Lou articulated fairly well. I'm trying to make the point that we get the best multiplier from marginal income increases among low and moderate income people, and a fairly small multiplier from high income people, because purchasing power increases come from low and moderate income people, not from high income people. So increasing incomes among the highest income people is a bad economic development strategy. So the question of which taxes should be cut is not a question of wealth distribution (I think), and I definitely don't think it's a question of Keynesian economics, which I understand to mean running government deficits in times of recession in order to stimulate demand. Oh wait, I guess that makes the GOP Congress and the Bush Administration Keynesians, since they're running the biggest deficits in history, right? But, really, Fanta, I think you dodged the question. All else being equal, do you think it's better for economic development to cut taxes on high incomes or low incomes?

CF said...

I think I understand the point now, it's more a narrow question of whose taxes should be cut to stimulate economic growth. In that sense, I agree that cutting taxes on the middle class will put more money into the economy, simply because there's way more of them than "rich guys." I, of course, would argue that you get EVEN MORE economic growth when you cut taxes on the middle class AND the upper class. Aside from the "inequality" and "rich getting richer" stuff, I assume you'd have to agree with that basic principle of economic growth, i.e. cutting taxes in general leaves more income to be spent in the private sector. For Progressives, taxing the rich is necessary for social equality reasons, not because it's good for the economy, right? As for the Keynesian stuff, Bush (like Reagan in the 80's) is running a deficit during a time of economic growth because of massive military spending (and tons of domestic spending too). Bush's supply-side theory is that we will grow ourselves out of the current deficit through low taxes and productivity. Debatable for sure, but not Keynesian. P.S. We're not in a recession right now, no matter how much you'd like us to be. - CF

Lazerlou said...

CF you certainly get more growth when you cut taxes for the rich and the middle class, but it isn't necessarily good growth. When you concentrate the benefit of the growth amongst the few you get growth based on conspicuous consumption and exploitation of the environment and cheap labor whereever it resides. Just becasue a dollar is taxed does not mean it vanishes into thin air. The government is perhaps the most important investment banker we have. When you allow too much capital to flow privately it ends up being invested in projects the sole goal of which is profit and the benefit of which flows to a select few. When the government acts as your investment banker, investments can be made of a scale that private intrets can't match, as well as investment in the sort of growth that might benefit society well more over the long rund than would an investment that results in an immediate short term profit.

Again, the economy is a lot like an internal combustion engine. Pwer output should be far less imprtant that efficiency. A toyota engine creates a lot more output over the long run with the smae amount of gas than does a ferrari, even if the ferrari is higher powered. Just pointing at growth is useless if that growth is all in gas profits, Louis Vuitton Bags, plastic surgury and second homes for the rich.

There is a argument for a net beneficial measure of growth, not just growth for growth's sake. Lets not dismiss that the government has acted as the biggest investment bank for funding guns, bombs and emergency housing.

Dan Johnson-Weinberger said...

I'm not convinced that a lower share of government GDP is necessarily pro-growth, and I'd reframe the desired outcome (as Lou suggests) to something like a higher standard of living for people rather than just economic growth. Admittedly, we lefties don't have nearly the intellectual infrastructure than the righties on what our desired economic outcomes should be -- or what economic measurements we care most about. Maybe it's purchasing power. Maybe it's standard of living. But whatever that measurement is that makes most people lives better (higher income / purchasing power) is what I want to focus on -- not just broad-based growth which may or may not lead to a higher standard of living for most people. I certainly think that in the Bush/GOP years, we've had far more recessionary months than we've had growth months, even if we might be climbing out of a recession right now. Would you agree with that? And I'm glad you agree that the middle / working class ought to receive any expenditures from the government (in the form of tax breaks) rather than the highest incomes -- I think that's a distinct difference than current Bush policy. So, to close the circle of this thought, I consider tax breaks to be just another government expenditure, in terms of economic impact, and if a competing government expenditure delivers a better return (say, investment in higher education or R&D or transportation infrastructure), I'm for that expenditure over the tax break. Would you agree with that or do you think there's something special about the 'private' sector that the 'public' sector can't deliver?

CF said...

Very interesting discussion. I never thought of the government as an I-banker. I do think that there's something special about the private sector, at least in terms of efficiency and allocation of resources. Goldman Sachs would never finance a bridge to nowhere in Alaska or continue pumping money into the Department of Education with no return on investment over the past 30 years. But I can't say I have a good response to Lazerlou about unfair outcomes when the motive is pure profit. There are winners and losers in the private sector, no question about it. And wealth aggregates the best and the brightest, who in turn pass it on to their heirs who may be stupid and lazy. But I don't think this discussion is purely theoretical. Governments control a much larger percentage of GDP in countries of the European Union, and their economies are stagnant. I believe that government has a role in regulating a free economy (we need an SEC, FDA, FCC) but I would argue that since the Depression we've layered in enough regulation and could benefit from the removal of some.

Lazerlou said...

CF, you should. And you are right in noting that the Governemnt is a very poor I banker when the same interests in the private sector that control most of the wealth influence the decisions of the governemnt. The bridge to nowhere is a perfect example. But the flaw is in the running of the governemnt and the deficiencies of democracy in our country, not the government itself.
We need represenatives who are truly out for the benefit of the people, not just their supporters and financial backers. This implicates campaign finance reform (which Republican resist based on free speech - ug).

The new deal was one of the most productive times in our country. We can do that again. The governemnt should be the investment banker for healthcare, not private interests.

The government fails in corruption and waste. It does have an incentive problem that Goldman does not. But the first step to solving all this and avoiding the unfortunate outcomes casued by too much privitization is getting the top people,our brightest minds, into government bureaucracies that dole out money. If we could convince a harvard grad to join the government instead of Goldman, we'd all be much better off.