The Lie of Supply Side

I graduated from the University of Missouri with a bachelor with honors in Economics in 1975, the year before Tim Kaine enrolled.  I majored in Economics for the same reason Tim Kaine did – Professor John Kuhlman.  Tim sent a letter to Professor Kuhlman that cited why he changed majors.  “You told our small honors section that you took attendance and that you expected us all to be in class every day, absent emergencies,” Kaine wrote. “Your reason for the expectation was unique and memorable: ‘UMC is a state school. Part of the cost of you being here is paid by the taxes from people all around the state, many of whom will never go to college and might not be able to send their kids to college. You owe it to them to be serious about your studies.’ That statement, and the moral sense that it conveyed, made a significant impact on me, as did your later interest in my progress at UMC.”  The moral imperatives taught in Dr. Kuhlman’s class also stuck with me.

One of those imperatives was that we had to watch our leaders.  Their decisions could have a dramatic impact on the success or failure of our nation.  They could make decisions that would have a beneficial on the overall good of the nation, or they could make decisions that would benefit a few for the short haul but cause sharp decline for the entire nation over time.

Dr. Kuhlman’s specialty was antitrust, and he gave me a passion for it as well. His rationale was simple.  Individuals simply cannot stand up to the power of a large corporation.  Neither can small companies.  When any corporation in any industry gets too big, nobody can compete with it, and there is no competition possible in the supply line.  They will simply suck the consumer dry with their pricing, suck the supplier dry with their ability to dictate prices, and prevent any potential competitors from entering the marketplace.  Worse, they are able to prevent innovation that could move us beyond their products.  We see this now, with the Koch brothers.

Among the things I learned while getting my degree were the demand and supply curve and the multiplier effect.  The multiplier effect refers to the increase in final income arising from any new injection of spending. The size of the multiplier depends upon household’s marginal decisions to spend, called the marginal propensity to consume (mpc), or to save, called the marginal propensity to save (mps).  The mpc plus the mps equals one, or the whole after tax income of the consumer.  The multiplier is then calculated using the formula 1/1-mpc. If consumers spend 0.8 and save 0.2 of every dollar of income, the multiplier will be 5.  This means that the money will circulate through the economy enough to generate 5 times as much value as its original. A common example is that when $100,000 is spent on a new road in a community and the wages go to working people with a 0.8 mpc, it generates $500,000 in economic activity in that community.  This is an important concept.  Because, the mps will vary across different segments of society.  Poor people are unable to save 0.2 of every dollar of income, really rich people are unable to spend 0.8 of every dollar.  In a society with a reasonable distribution curve, it would wash out.  But when income is heavily weighted to the top, the result is a restriction of the economy.

It is this principle that makes trickle down economics a sham.  The notion that if the guys at the top get more money, they will spend more and it will work its way down to the little guy flies against all data as well as being contradicted by the math.  There is nothing anywhere in any reality based world that suggests the possibility of trickle down economics working.

Another nonsensical notion is supply side economics.  Supply-side economics is the theory that says the supply of money, labor, and goods or services, creates demand.  In particular, supply-side economics focuses primarily on lowering marginal tax rates to the after-tax rate of return from work and investment, which results in increases in supply. Supply side economics contradicts any models that have ever worked.  There is not a credible business plan out there that suggests that a company would base new hiring on getting a tax cut.  It just doesn’t happen.

Companies base hiring on the idea that the cost of adding one more person to their employ will be less than the added revenue that employee produces.  That added revenue is generated by consumers buying the goods or services offered by the company.  That added revenue is not generated by tax cuts.  It is generated by demand.  Demand is generated by people having money to spend.

So let’s look at what is about to happen.  We already saw, courtesy of the Bush administration, that tax cuts to the wealthy do not generate jobs.  A major reason they do not generate jobs is because they don’t put money in the pockets of those with the highest mpc.  They put money in the pockets of those with the lowest mpc.  In fact, the Bush tax cuts put money in the pockets of financial hoarders.  Now the Trump administration is preparing to take money out of the pockets of people with the highest mpc, the poor and disadvantaged.  These are the people whose mpc approaches 1.  The only economic thing that could result from this action is a tightening of the economy.  As more and more Americans fall into the poverty bracket, there will be less and less ability to buy goods and services.  Elective purchases will be the first to go, and there will be job losses in those sectors, further increasing the numbers in the poverty bracket.  Those currently receiving the most income, more than they can spend, will not increase their numbers.  Meanwhile, even the large corporations, receiving the juiciest tax cuts, will not have people to sell their products to.  They will reduce employment, and the cycle will be complete.  At this point, the large corporations and the wealthy will no longer be able to sell their goods and services, the money that they gained in tax cuts will be more than offset by their losses in sales.

The wealthy and the corporations will still have a stranglehold on the factors of production, thus leading to Corporate Feudalism, which will be the topic of my next rant.

Where Is the Gold of Toulouse

In this episode, the feather I am removing from the featherbed of lies deals with the tax cuts for the rich.  Or, rather, how the rich seem to have this notion that the more they amass at the expense of their fellow citizens the more comfortable they will be and that their wealth will prevent their children from ever lacking for anything.  It makes them warm and comfortable to see their vast fortune in comparison to the rest of society.  They see themselves passing down this wealth to their children for generation upon generation.  History shows that this does not happen.  So I ask you … where is the Gold of Toulouse?

 

First, I give you a bit of history.  In Colleen McCollough’s book The First Man in Rome, the story of the Gold of Toulouse is laid out.  From other writers I have read, her book is well-researched, although I do not know all of her sources.  One source may have been this.  At one time, there was a massive storage of gold in the bottom of a lake in Toulouse.  Some say it came from raiding Delphi during the Greek empire, others say it simply came from a very wealthy part of Europe.  But the amount was great.  Rome conquered the area and was bringing the gold home to the Mother state.  En route, Caepio, knowing what the legions were transporting, sent his own troops, who ambushed the legion and made off with the gold.  This gold would have made him incredibly wealthy and his heirs wealthy for all time.  Except that a few generations later, there is no sign of that wealth.  After the fall of Rome, there is no sign of his family remaining and living in great luxury.  Nobody knows what happened to the gold of Toulouse.

This is not the only story of vast fortunes being dissipated in a relatively short time.  Where are the wealthy feudal lords?  Why are the castles of Europe in ruins?  We know what happened to the wealthy nobles in 18th century France.  Why are there no wealthy warlords in China?  What has happened to these vast sums that families had at one time?

About five years ago, I sat next to a Mexican businessman on an airplane trip.  He was telling me how in Mexico (a land where the income gap is extreme), he had to keep his children inside a compound and was constantly worried about them being kidnapped for ransom.  He was afraid that even his own security guards would be cajoled into assisting in such an event.  He was hoping that his company would send him and his family to China for him to work, where his family would be safe.  So … his children could not go to the local school and could not leave the compound without security staff?  This is the joy of being wealthy?  And this was before the news reports we now hear every day about the violence in Mexico.  This is a society that saw a huge income gap and people turned to drug sales and other criminal activities to alleviate their poverty.

I present here my theory.  It is nothing but a theory, and I am no historian.  My theory is this:  the only way you can hang on to wealth is for your society to be stable.  When the gap between the haves and the have nots becomes too great, and when the lower class becomes too badly used, the society gets unstable and the economic security vanishes.  It gets carted off in revolution or the economy fails.  Without a stable economy, the wealth disappears.  Instead of having vast wealth for generations, the wealth is either squandered or carried off.

As a side note, it is interesting to me that those individuals (think Warren Buffet and Bill Gates) who have come about their wealth in an open and honest fashion have been responsible in their acquisition and use of their wealth.  They have not tried to amass more by clandestine means, nor have they oppressed their fellow citizens in its accumulation.  On the contrary, they give it away to worthy causes which they research, and encourage others in their situation to do likewise.  It is the ones who hide behind a corporate veil, themselves not well known to the public, who seem to me to commit the fraud and scurrilous tactics.  It also appears that the ill-gotten gains are the ones that turn out to be most precarious.

So my message to those in the wealthy class who are pushing for these ridiculous tax cuts for the rich – you are placing your own wealth in jeopardy.  By feathering your own nests at the expense of your fellow citizens who are suffering, you risk destabilizing the country that gave you the opportunity to become wealthy.  And for what?  Once you have enough wealth to buy everything you need and put some away, what good does it do you?

Economists are familiar with the law of diminishing returns.  Once you have a certain amount of something, the next unit of that something is of less value to you.  We just had Thanksgiving.  After you finished that big meal, how valuable to you was another piece of pie?  When you walked in to the dinner hungry, that pie was worth a lot to you.  But after the big meal?  It may have actually held negative value to you.  You can only wear one pair of shoes at a time.  When you already have a different pair of shoes for every day of the month, how valuable to you is the next pair?  But if you are barefoot, that first pair of shoes means a great deal.  So to whom is the tax cut more valuable?  To the wealthy person who already has what he needs?  Or to the person who is struggling to feed her children or repair the car he needs to get to work?  Economists have a term for this – Welfare Economics.  It is not the economics of welfare.  It is the economics of the welfare of the country – how do you get the greatest value for every unit of resources. In terms of the welfare of the country, the extra $40 to the middle class family yields a higher return than an extra $4000 to the wealthy.  It makes a greater difference in the life of the person who receives it.  In terms of Welfare Economics, the tax cuts for the middle class have a great return.  The tax cuts for the wealthy have virtually no return.

As the gap between the haves and the have nots in this country grows, so does the discontent.  We see the anger already out there in the streets (although the tea baggers have not yet figured out who the villains are).  It is already beginning to destabilize our economy and our nation.  When a nation is destabilized, it isn’t a question of whether it will fall, it is a question of how.  Will it be by forces from within or forces from without?

When you look at the accumulation and retention of wealth, the rich have a greater stake in ensuring that the tax cuts for the middle class pass and the tax cuts for the rich are defeated.  This is why people like Warren Buffet and the group of millionaires who are calling on our government to tax them more are doing so.  They understand that their own wealth depends on having a country with a healthy and satisfied middle class.

So the feather I am pulling out of the featherbed of lies is that there is something to be gained by the wealthy person who extracts greater wealth at the expense of his fellow citizens.  That is a lie.  In fact, he puts his own wealth in jeopardy.