Supply Side Trickledown Mythology

Cut taxes and jobs will grow like bamboo in a rainforest! Give folks more money – particularly small and mid-sized businesses – and they won’t be able to hire folks fast enough. That’s been the mantra that some still refer to lovingly as Reaganomics or trickledown theory. One minor catch, in an economy where there is virtually no demand, where consumers are too terrified about their future to do much of anything but de-leverage and contract their standard of living, the tax cut theory has never worked.

On July 28^th, my Sittin’ on Cash blog pretty much dispelled the myth that given enough money, corporate America would create all those missing jobs. Bottom line is that big business has been hording cash by the billions and implementing even greater efficiencies (read: laying off more workers and deploying the remaining workers to even harder work schedules) within their operating companies. Without any clear signs that consumers would be willing to spend to buy additional products and services, corporate America has been loath to add manufacturing or service capacity by hiring more workers. Austerity programs instituted in Europe have further reduced global demand for anything we make except foodstuffs.

Republicans want to maintain the Bush administration tax cuts – set to expire – across the board; the Obama administration wants to extend the lower tax rates for all but the highest 2% of taxpayers. Each argues that (i) with lower taxes, folks are more like to spend (but they have a low rate now, and they aren’t spending) and (ii) with lower taxes (and perhaps a few special incentives for small and mid-sized employers) for business, they will have the cash to hire additional workers. In this economy, absent demand, cash surpluses are being used for just about everything except hiring new workers. Cash is used to buy competitors (mergers and acquisitions activity is on the rise), de-leverage and pay back debt, upgrade depreciated equipment and facilities, but most certainly not to hire more workers.

Those who can assess this economy objectively seem to agree: “The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. The report added that tax cuts for high earners would have the smallest ‘bang for the buck,’ because wealthy Americans were more likely to save th eir money than spend it.” New York Times (September 10^th). I have nothing against tax cuts per se – I mean who wants to pay more taxes? – but we have this massive deficit staring us in the face with a not-too-distant future when we will be taxed another way: eventually, the dollar will inflate (it may deflate first), reducing buying power; consumers will earn the same living, but their dollars will buy fewer goods and services. This “indirect” tax is every bit as economically significant as any direct tax could be.

We simply are so used to playing the “incentive game” in this country that we seem to forget that if you want something, and everything you have tried in the incentive world has failed, maybe it’s time to try the direct method: need more jobs in this economy? Create them directly, Mr. Government! President Obama has suggested that additional spends for infrastructure development – good stuff since infrastructure increases the efficiency that goods and services can be moved/transported and avoids budget-killing disasters like the results of dam or levee failures on surrounding land and towns: “The president has also called for the creation of a $50 billion infrastructure bank to improve roads, airports and railways, which would stoke business and hiring in the moribund construction industry.” The Times. But maybe direct hires by the government need to be increased for more… NOW!

These days the word “stimulus” is a political career-killer, but the impact on our deficit of failed incentive programs is equally pernicious; at least with direct government hires, there is an efficiency that produces a much more direct benefit to all of us: lower unemployment and much-needed, efficiency-building, improvements in the infrastructure around us. At least let’s “invest” in our future rather than burden it with pure costs with no or limited off-setting values.

I’m Peter Dekom, and it is disturbing to listen to politicians attempt to justify “popular” policies that actually will create many more problems than they could possibly solve.