Bashing “Supply Side Economics”

Bashing “Supply Side Economics”

June 7, 2009


Bill Gross bashed “Supply Side Economics” in his latest letter.

Bill Gross June 2009

I suppose I am a “supply side economist,” although I stopped paying dues at the supply side country club a number of years ago. Most people bash “supply side economics” for purely political reasons. They’re Democrats, and it is considered a Republican thing, so they bash it. If Republicans somehow made fuzzy kittens part of their policy platform, then Democrats would be bashing fuzzy kittens (and vice versa). There’s no more to it than that.

However, Bill Gross has been around long enough to be a little more sophisticated than that. “Supply side economics” is directly responsible for the bull market in bonds in the 1980s-present that made Bill Gross rich. He doesn’t seem very thankful. Let’s see what he has to say.

The fact is that supply-side economics was a partial con job from the get-go. Granted, from the 80% marginal tax rate that existed in the U.S. and the U.K. into the late 60s and 70s, lower taxes do incentivize productive investment and entrepreneurial risk-taking. But below 40% or so, it just pads the pockets of the rich and destabilizes the country’s financial balance sheet. Bill Clinton’s magical surpluses were really due to ephemeral taxes on leverage-based capital gains that in turn were due to the secular decline of inflation and interest rates that at some point had to bottom. We are reaping the consequences of that long period of overconsumption and undersavings encouraged by the belief that lower and lower taxes would cure all.

Interesting. He says it was a “con job,” but then disagrees with himself and says that reducing tax rates from 80% to more like 40% was a good thing. Ummm … which is it?

He then declares, out of thin air, that rates above 40% “disincentivize productive investment” while rates below 40% “just pad the pockets of the rich.” Now, sometimes the rich do get their pockets padded by the government. In a biiiig way. That’s what the banker bailouts are all about — transferring money from mostly middle-class taxpayers to the super-wealthy. But, I can’t really see how taking less than 40% of someone’s income away from them is “padding their pocket.” Rather odd terminology, no?

Second, while the Bush tax cuts lowered the top income tax rate from 38.6% all the way to 35% — whoop de doo — the fact of the matter is, the marginal rate is still above 40% for many people when state and local income taxes are included. And, if Obama has his way and eliminates the upper income limit for payroll taxes, they would be way above 40% (more like 60% effective). So, even if we go by Bill Gross’ own statement that 40% is about right, then we should have a tax cut, not a tax hike.

You’d figure that Bill Gross would know about that, living in a high-tax state like California. But, I wouldn’t be surprised if, like many very wealthy, he doesn’t actually pay those high income tax rates, which mostly fall on the upper middle class. It seems a lot of these wealthy types are like that. Even Warren “Grandpa Honest” Buffett talks up his support of an inheritance tax, but his money goes into a foundation tax-free.

Actually, the rate “40%” by itself is rather meaningless. It could be 40% of all income above $10,000, or 40% of all income above $10,000,000. Big difference. There have been examples of economies with rather high tax rates, which can work passably if those rates fall on very high incomes. This was common in the 1950s, in Japan, Germany and the U.S.

Isn’t it interesting that Gross centers on “40%” as if he actually knows something about something? I see no evidence that rates below 40% have no economic effect. If you look at places that adopt rates below 40% — any of the flat taxers like Hong Kong, Russia, most of Eastern Europe, Singapore, etc. etc. — all the evidence is the other way.

On the contrary: the 40% level is, I propose, a political compromise.

I mentioned some time ago that “free market capitalism” has a problem: it doesn’t work.

March 8, 2009: Capitalism Vs. Socialism

The 19th century, in the U.S. and Britain, was a time when “free market capitalism” — low taxes and stable money — was embraced to an unprecedented degree. Stupendous economic growth ensued.

But the results were not satisfying. The rich got a little too rich; most people were effectively enslaved. This led to over a century (1849-1970) of experimentation with various ways to ameliorate these problems.

Part of this solution was things like Social Security, state health care, corporate pensions, limits on working hours, paid vacation, compulsory state-funded education, and all the rest.

But, another part of it was the idea of the “progressive” income tax. Contrary to popular belief, the “progressive” income tax was never really about “wealth redistribution.” Have you noticed that wealth is never really redistributed? Social Security is about the closest thing we have. It is a redistribution from mostly poor and middle-class working people to poor and middle-class retired people. Medicare is a redistribution from poor- and middle-class working people to the health care industry, with some leftovers for retired people. Neither has anything to do with the “progressive” income tax, and are actually “regressive” using that terminology.

The Federal income tax (and corporate income tax) is mostly for funding the military, and the interest on the debt that was issued to fund the military in the past. It’s the Empire Tax. (A little is left over for corporate subsidy, pork payoffs to political allies, and the National Park System.)

Empires are funny things. What are they good for? Did the British Empire improve the life of the average British workingman in any way? Quite the opposite, the British workingman was disadvantaged by the colonies. The colonies were a source of endless cheap labor, and also a destination for a river of British capital, which flowed overseas instead of being invested in Britain. (In 1910, the outflow of British capital was a whopping 9% of GDP!) Remember the capital/labor ratio:

March 30, 2008: The Capital/Labor Ratio

Obviously, the British workingman was disadvantaged by the Empire in terms of the capital/labor ratio. Plus, he died to make it possible. It was not so much different than the “outsourcing”/cheap imports/”globalization”/illegal immigrant boom that is eviscerating the U.S. middle class today.

But back to our story: the “progressive” income tax was not about funding the government. For funding the government, maybe a simple sales tax (and no other taxes) would be the best method. It was not about redistribution. It was about making it difficult to amass large pools of capital.

For whatever reason, politically, a rate of about 40% seems to have been settled on in most of the developed world. This is where we stand today on the discussion that has been going on since about the 1840s, on how to resolve the apparently inherent problems of the capitalist system. I am not saying that this system is a rational or effective one, or that 40% is an appropriate rate. That is simply the way things stand for the moment.

That’s one reason why, recently, I have suggested tax cuts more in the spirit of the Japanese or German tax cuts of the 1950s. They kept the highish rates, but they radically increased the level of income at which those rates applied. You can see that there is ridiculous, irrational resistance to the lowering of the top tax rate from 38.6% to 35%, which is an irrelevant twiddle. However, I doubt there would be the same resistance to, for example, making the first $50,000 of income per adult tax-free. Indeed, Obama suggested exactly this, for retirees, but why not for everyone? If we had the 37.5% rate apply to more like $2 million of income instead of $350,000, with comparable moves in other brackets, that would be significant for the vast majority of people.

As I was trying to get at earlier, the problems with capitalism ultimately reflect deficiencies in the average human character. While capitalism “ideally” might not be a system whereby the strong exert power over the weak, the fact of the matter is: such is the desire of the “strong” to exert power over the weak (just look at the “strong” bankers taking all the taxpayers’ lunch money today), that any system — feudalism, communism, fascism, imperialism, racism, colonialism, whatever-ism — will have a tendency to become such a system. Capitalism, just as Adam Smith argued, is successful perhaps because it channels this basic urge into forms that are at least somewhat more productive than other past systems. In the olden days, people just used to rampage across the countryside, like the Mongol hordes, or the Roman legions, or the Wehrmacht.

If this character deficiency did not exist, maybe we wouldn’t need capitalism. Probably any system could also be used to express a more generous and cooperative demeanor, and there are examples of noble aristocrats, enlightened despots, and happy communes. This has always been the exception, however.

* * *

Worse than the Depression Watch: “Depression Expert” Barry Eichengreen says: worse.

Eichengreen/ORourke: tracking the present Depression

* * *

Chrysler dealerships: It’s all politics. See what I mean about the strong getting stronger? Here we have some Clinton cronies cleaning up in Chrysler dealerships all around the country, while perfectly good dealerships — which exceeded the “pass/fail” metrics that Chrysler sent out earlier — are being shuttered. Lefty fascism has a little different flavor than righty fascism, but it’s all the same in the end. The liquidation of the S&Ls in the early 1990s was a huge fiesta of theft among government insiders — especially the Bush family. The amount of theft going on today is magnitudes larger.

Zero Hedge: Testimony from Chrysler dealers

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Something for those of you with a bad back: The human body is not designed to sit in a chair for eight or ten hours a day. Often this results in chronic lower back pain. I’ve had it.

You’ve probably tried all kinds of things. Maybe you’ve even gone and bought a very fancy “ergo” chair like an Aeron chair. They can be quite expensive, costing $1000 or more.

Didn’t work, did it?

That’s because you just can’t sit properly for eight hours straight. Eventually, you’re going to slump against the backrest. This is what is really hard on your lower back.

I found a solution quite by accident. I have a cheap Chinese office chair that I bought for $99 including shipping. Like everyone else, I ended up slumping against the backrest from time to time. This caused lower back pain.

Eventually, I slumped against the backrest so much that I actually broke the backrest. Damn cheap Chinese crap!

So, I took off the backrest with the thought of maybe fixing it. But, that seemed like a pain in the butt so I didn’t do it right away, and instead ended up using the chair without the backrest.

Eureka! With no backrest, you can’t slump against the backrest. No more back pain!

It looks pretty funny. Like a stool on wheels with armrests. But, it works great.