Does supply-side economics deserve a second look?

by on September 7, 2016 at 10:54 am in Books, Economics | Permalink

That is the topic of my latest Bloomberg column, which focuses on Edward Conard’s new book The Upside of Inequality (not a good descriptive title for the book, in my view).  Conard’s central idea is that risk-bearing equity capital is the truly scarce asset in most economic situations, and economic analysis should adapt accordingly.  He is very creative in seeing some of the implications of this view, for instance:

This framework makes Conard a revisionist on the U.S. trade deficit. The traditional story is that Americans buy goods from, say, East Asia, and the sellers respond by investing those dollars back in the U.S., a win-win situation. Conard believes that analysis would hold only if people who accumulate cash from foreign transactions invest their funds into risky, innovative enterprises.

But too often they buy government securities, and so Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic. This confounds the traditional libertarian defense of free trade by indicating that we are not really getting market-oriented investments when the funds return.

That is the kind of argument that few people are willing to accept, yet they typically don’t have a good rejoinder to it either.  And on supply-side economics here are my comments:

Maybe supply-side economics isn’t as wrong as its reputation indicates. Maybe the earlier supply siders just spent too much time focusing on one supply obstacle – high taxes – when other barriers were bigger problems.

…Cuts in marginal tax rates became overrated after the Reagan recovery years of the 1980s, but maybe after the failed Bush experience they are now somewhat underrated.

Perhaps no economic policy is going to work especially well in a time when median incomes are falling. If we can clear away other impediments to supply, tax cuts may prove potent once again. Don’t forget that there are decades of research in economics showing that tax incentives matter.

Ditto!

I disagreed with much in Conard’s book, but found it very stimulating to ponder.  It puts many of the pieces together in a new and different way.

1 anon September 7, 2016 at 10:59 am

Does this argument depend on a closed national economy? I ask because in the retirement forums I have frequented I saw many people expanding, expanding, their “international” funds to seek growth and opportunity. Was that just the small investor, the dumb money, or did the financial system itself move “the supply side” overseas?

2 msgkings September 7, 2016 at 11:05 am

For their sake it better start working soon, the US market has outperformed the rest of the world for over a decade now. Thanks Obama!

3 anon September 7, 2016 at 11:14 am

I stubbornly stayed onshore myself. Not that I was an independent thinker, I just trusted the Words of Bogle that US equities had adequate international exposure.

4 Moo cow September 7, 2016 at 1:02 pm

Same. I’ve been around the block a few times. I’ve been advised on numerous occasions to increase my “international” exposure. When I’ve fallen for that advice I’ve generally regretted it.

Oh yeah, and haven’t you heard? Index investing is communist.

5 MOFO September 7, 2016 at 11:07 am

I think a lot of macro flies apart in the face of globalization. The more open your economy, the more your interventions are diluted out to other countries. The more interconnected your economies are, the less important your own local economic metrics are.

My uneducated opinion, anyway.

6 mulp September 7, 2016 at 1:23 pm

Free trade stories are based on trading labor for labor.

Ever seen a free trade argument that was something like:

The Saudis send Americans their land in the for of oil which American burn, in exchange for Americans sending deeds to American real estate for which Americans will forever send the Saudis monthly rents.

This means very few Saudis need to work, and in exchange millions of Americans are put out of work building assets to harvest and store solar and wind which cost Americans more than using oil, but those workers buy things from Americans putting them to work, or rent from American owners who buy from Americans who buy from Americans.

Free trade involving Saudi Arabia involves the Saudis buying all the land they can in other nations before they sell all the useful land they have to other nations to burn.

They are the winners, everyone else the losers.

7 MOFO September 7, 2016 at 1:32 pm

To answer your question, no, i have not every seen a free trade argument anything like that.

8 Jeff R. September 7, 2016 at 1:40 pm

Mulp the Nationalist. That’s fun.

9 chuck martel September 7, 2016 at 11:16 am

“But too often they buy government securities, and so Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic.”

But aren’t those government securities used, at least in part, to finance the glorious infrastructure that everyone wants more of, as well as the transfer payments that supposedly drive a share of consumer spending? At least, that’s what we’ve been told.

10 Trev September 7, 2016 at 1:05 pm

Government spending is 90%+ “consumption” spending… decreasing the overall supply of goods & services in society. If foreign holders of U.S. Dollars choose to lend those $$ mostly to the U.S. Government, they are financing consumption… not productive capital ‘investment”, that increases the supply of goods & services in U.S. society… and overall standard of living for Americans.
The U.S. Government pays those foreigners back with more borrowed/printed $$… not the profits from productive investments.

Capital is always scarce generally; scarcity is what economics is about.
Consuming available capital is a bad idea; its “productive” investment a good idea.
The trick is to accumulate capital and invest it wisely — something the U.S. Government is absolutely incapable of doing (note the U.S. National Debt/Deficit).

The alleged trade-deficit is totally non-relevant. Conard seems to have nothing to say worth reading.

11 JonFraz September 7, 2016 at 2:09 pm

The US government is not an investment firm and should not be judged by those standards. Government in fact is inherently unprofitable as it is the dedicated role of government to undertake a great many activities which can never be profitable, hence the private market will not bother with them– yet they nonetheless need to be done.

12 Thomas September 7, 2016 at 3:10 pm

Government expenditures are supposed to be profitable after considering the externalities. That’s what we are told, and that’s the only way that government expenditures make sense. I assume the poster you are responding to is suggesting that even after extra analogies government expenditures are not profitable.

13 Thomas September 7, 2016 at 3:10 pm

*even after externalities

14 Trev September 7, 2016 at 5:39 pm

@Franz
The issue here is ‘productive’ economic capital investment. It’s profitable for me to steal your wallet full of cash to buy stuff I want — but I’ve added nothing to the general economy, just re-distributed existing assets.

Government mostly does exactly that — redistribution/transfer. It doesn’t create more stuff. The U.S. Government is extremely profitable for its insiders and favored groups. There is nothing inherently noble or selfless about government, it’s just some ordinary people with official titles– most of its activities it need not do.

Government infrastructure spending (like roads and bridges) can qualify as good capital investment. But government usually mucks it up by building too much unneeded stuff at over twice the market price and then fails to properly maintain it long term. Most all infrastructure is actually built by private contractors anyway — the government’s usually just unproductive overhead.

Mr Conard’s central idea is that investors prefer low risk investments rather than higher risk capital investments at comparable returns, in their judgment. Government soaks up the loose capital, not leaving much for actually productive private entities. Economic growth requires PRODUCTIVE capital investment, not consumption spending.

Government borrowing/taxes/spending edging out the productive private sector.
Where have we heard that before.

15 Per Kurowski September 7, 2016 at 6:02 pm

Yes indeed many, not all, are just vulgar redistribution profiteers

16 mulp September 7, 2016 at 1:39 pm

“But aren’t those government securities used, at least in part, to finance the glorious infrastructure that everyone wants more of”

When did tax cuts become “infrastructure”?

And I have never seen anyone getting big tax cuts invest more wisely than government and repair any roads or replace any century old water mains before theit leaks turn the road into a sinkhole swallowing cars.

In the year 2000, the overall US Federal debt decreased by precisely one billion, more or less, yet in 2001, Republicans and Bush cut taxes to give back the surplus resulting in a $400 billion increase in debt in 2003. A fantastic achievement of fiscal conservative Mitch Daniels who refused to run for president on his budget balancing record.

And in 2001, Dick Cheney had secret meeting on energy policy that was followed by US oil production declining for 8 years and Saudi oil profits rising to $40- $50 per barrel as a consequence. There were objections to the Wahhabist oil sellers owning things like US ports used to trade goods and dispatch war materials, but it was a good time for Saudis buying US and London real estate.

17 Cooper September 7, 2016 at 1:55 pm

>And I have never seen anyone getting big tax cuts invest more wisely than government

So on the margins government always spends dollars more efficiently than the private sector?

18 Edgar September 7, 2016 at 11:19 am

If the “Bush tax cuts” were such an obvious failure, why did President Obama and a majority of congressional Democrats extend them by signing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, on December 17, 2010? Following the first round of tax rate cuts in 2001, US gdp per capita grew pretty well. http://www.multpl.com/us-real-gdp-growth-rate Who knows how bad the Great Recession would have been in their absence?

19 anon September 7, 2016 at 11:26 am

I know my cynical answer. Americans want a certain level of spending, and Americans want a certain level of tax. The political drama of the 00’s convinced people that spending could be greater than tax, indefinitely.

That is where we still are today. There is no serious effort to make spending fall to tax levels, or to make tax climb to spending levels.

In fact, as always, proposed tax systems of Presidential candidates, even “conservative” ones, have greatly mismatched tax and spending.

20 Brian Donohue September 7, 2016 at 12:30 pm

It’s true. Bipatisan intergenerational theft, unless you think you can kick the can down the road indefinitely and the chickens are trapped inside the can so they can never come home to roost or something.

Boomers are the worst.

http://www.usdebtclock.org/

21 Ricardo September 7, 2016 at 12:36 pm

Um, this is pretty recent history and if you weren’t paying attention to the domestic policy scene six years ago, it is pretty easy to find the answers to your questions. The hint is even contained in the title of the act you cite. Obama compromised on extending the Bush tax cuts in exchange for an extension in unemployment benefits.

Moreover, did you ever ask why, if the Bush tax cuts where so great, they were set to expire in nine years instead of being made permanent? The answer, of course, is that the Congressional Budget Office scores the deficit impact of bills on a 10-year time horizon and so passing a tax cut that officially expires in nine years mutes the calculated deficit impact. This is true even if you are acting in bad faith and have every intent of demanding an extension after nine years, which the Republican leadership predictably did.

22 Edgar September 7, 2016 at 1:42 pm

Ummm…”a compromise”? Why? In 2009 the Democratic Party increased its majorities in both chambers, giving President Obama a Democratic majority in the legislature for the first two years of his presidency. 59 Dem Senators and 59% of the House. No reason to compromise at all. Obama cut a deal with the Republicans. It was the House Democrats wanting tax increases who had to be brought in line. http://www.washingtonpost.com/wp-dyn/content/article/2010/12/06/AR2010120605923.html

23 JonFraz September 7, 2016 at 2:11 pm

In the 2010 midterms the GOP won back the House, and gained some Senate seats. In late 2010 the Obama administration rushed to cut as many deals as it could

24 Anon7 September 7, 2016 at 7:37 pm

Obama wanted the tax cuts extended for everyone making under $250K. Anyone serious about the deficit/debt would say that it is absurd to believe that you can cut taxes for middle and lower income people and increase spending on them and pay for it all simply by soaking the rich. Call it the left’s version of “voodoo economics.”

25 S M V September 13, 2016 at 3:17 pm

Ricardo
“Moreover, did you ever ask why, if the Bush tax cuts where so great, they were set to expire in nine years instead of being made permanent? ”

The answer for this is easy. Allowing any policy to expire gives politicians another chance to hit up donors for cash. “Elect me and I will fight to extend policy X” It also allows them to hide the long term financial impact. The congressional budget office has to assume that a policy will expire at its expiration date. Even if that is highly unlikely.

S M V

26 Troll me September 7, 2016 at 11:12 pm

Here’s a guess.

When Bush made the cuts, they did little to create growth but led to trillions in additional debt. But when Obama extended them, there was actually a reason for attempted stimulus. (Probably not the most effective way, but Republicans presumably would have been happy for Obama to agree to anything that would make a former Republican’s policy look potentially better …)

27 collin September 7, 2016 at 11:25 am

It appears the biggest supply problem is the skilled labor force is short supply. However, the problem is the decision for for labor supply today is made by:

1) Parents of 25 years ago who decide when to have children.

2) High school students of 10 years ago who saw working class wages stagnate since 1974. How do you convince young people to invest their skills in jobs that have stagnant wages and no job security? There are a lot complaints for a lack of construction experience workers than 6 years ago Arnold Kling was calling PSST workers.

28 Art Deco September 7, 2016 at 12:10 pm

The size of birth cohorts has bounced around a set point of 4 million since the end of the War. This has been supplemented with escalating quanta of immigration. Also, there’s more and more tertiary schooling, most of whom so enrolled are following occupational programs. The number of BA degrees awarded each year has nearly doubled since 1980 even though birth cohorts have seen no secular increase in size. If you got skilled worker ‘shortages’, you’ve got unimaginable malinvestment (atop that incorporated into the distribution credit system).

Blue collar compensation has not stagnated since 1974.

29 Cooper September 7, 2016 at 2:12 pm

“The number of BA degrees awarded each year has nearly doubled since 1980 even though birth cohorts have seen no secular increase in size. If you got skilled worker ‘shortages’, you’ve got unimaginable malinvestment (atop that incorporated into the distribution credit system).”

The number of bachelor’s degrees awarded in physics has been roughly flat for the past forty years.

The number of bachelor’s degrees awarded in psychology has increased by 300%.

We are getting lots of new college graduates but they are studying bullshit.

30 Cooper September 7, 2016 at 2:13 pm

And if I may add, computer science is a less popular major now than it was in the mid 1980s (as a share of total degress awarded).

31 JonFraz September 7, 2016 at 2:17 pm

See: offshoring of entry level programming work. In the 90s a CS bachelor degree graduate could expect multiple job offers. Not so much any more, when most job ads for tech positions require multiple years experience, often with a long list of “Must Haves”

As for physics degrees, who is looking for them? I have a BS in physics (class of 92). It impresses people, but it has never been useful for any job I’ve held.

32 Art Deco September 7, 2016 at 4:44 pm

The number of bachelor’s degrees awarded in psychology has increased by 300%.

We are getting lots of new college graduates but they are studying bullshit.

Physics is notorious as a useless major.

As for psychology, programs, they are quite variegated. Some are academically oriented, some are vocationally oriented. Some vocational programs are oriented toward clinical and counseling work, some toward industrial or school psychology, some toward rehabilitation work. Some academic programs emphasize experimental psychology and cognitive science, some tests and measurements, some neuroscience, and some social and cross cultural work, and some the academic analogue to clinical work. It’s pretty standard nowadays for academic psychology departments to be segmented into two or three subdepartments.

And, again, 60% of your baccalaureate degrees are awarded in vocational subjects: business, teacher training, nursing, information technology, athletics, hospitality, etc.

33 collin September 7, 2016 at 2:18 pm

How do you explain this in which real wage non-managerial has not increased since 1973/1974? Looks like the wages took a 20 year drop and has only recently equaled the early 1970s. So if you a High School student in the 1980s or 1990s why would ambitious students go into blue collar positions?

http://www.pewresearch.org/fact-tank/2014/10/09/for-most-workers-real-wages-have-barely-budged-for-decades/

34 Art Deco September 7, 2016 at 4:35 pm

You need to be examining BLS data.

35 JonFraz September 7, 2016 at 2:14 pm

I am very skeptical that skilled labor is in short supply (outside some very rarified job types). The problem is that “skilled labor” has come to me all too often “Persons capable of hitting the ground running on day one, no need of even minimal training.” Adding to the problem is the fact that too many firms offshore long level jobs, creating a dearth later of people with some years experience gradually climbing the ladder from rung one. And of course God forfend a firm hire someone over 50 no matter how good their resume.

36 derek September 7, 2016 at 11:27 am

Wasn’t one of the drivers behind the increase in asset values and housing pre 2008 the influx of foreign capital? It didn’t seem to work very well. We are seeing an equivalent in Canada right now which is putting lots of cash in the economy but driving up housing prices.

37 spencer September 7, 2016 at 11:46 am

When the Reagan structural deficit was first forecast economist almost across the board said it would generate crowding out in the credit markets and higher interest rates. But it did not happen.
Why, because they were looking at the US as a closed economy and failed to anticipate the influx of foreign capital. The foreign capital kept rates low, but caused the dollar to soar. So we had crowding out, but it worked through the strong dollar to damage the sectors most exposed foreign competition not through higher interest rates.

All those blue collar white men who lost their well paying jobs lost them because of the Republican tax cuts. But they do not know that.

38 Art Deco September 7, 2016 at 12:06 pm

The sectors most exposed to foreign competition are undifferentiated commodities for which buyers are price-sensitive, e.g. fruit and grain.

The blue-collar workers who lost their jobs did so because of failures of industrial organization and technological shifts atop the cyclical recession.

39 anon September 7, 2016 at 12:22 pm

Are you Japanese, describing your relationship with the United States?

http://www.asiamattersforamerica.org/japan/2010-us-japan-trade-composition

40 Troll me September 7, 2016 at 11:17 pm

Between protective subsidies and very high levels of mechanization in agriculture in the USA, fruit and grains are not the commodities where the US has lost jobs. Rather, the “commodities” in the sense of fairly standardized outputs in easily produced manufacturing goods, is where the jobs have been lost. And what is considered as “easily produced” expands over time …

41 Govco September 7, 2016 at 11:52 am

Did the Bush cuts fail? Why did a unified Democratic government permanently renew the Bush cuts for the majority of Americans?

Why did they fail? Did the Bush cuts cause the crisis? On the contrary, his penultimate budget had about the same deficit as his first, giving plenty of room to spend like crazy in 2008 (spending that must’ve been very wise for Bush to approve, since it was urged by Cowen, Obama, Bush, McCain, Buffet, Krugman et al.)

42 Beliavsky September 7, 2016 at 11:52 am

If foreigners buy U.S. Treasuries, that lets Americans who would otherwise fund our deficits invest in riskier assets, so I don’t see the problem.

43 Harun September 7, 2016 at 2:13 pm

Its not “foreigners” but foreign central banks.

This means its not a natural market force of supply and demand, but a thumb on the scale.

This actually hurts both economies: Chinese investors may see a depressed RMB and mal-invest in more factories for export. US on the other hand sees tons of money inflowing for housing, but they would avoid investing in a US factory.

China didn’t just buy Treasuries either – they held $800 billion or so in Fannie and Freddie.

I doubt Chinese peasants thought that was a good idea, vs. buying john Deere tractors or whatever they would have if not forced to give their foreign earninged dollars to the Chinese central bank.

44 spencer September 7, 2016 at 3:13 pm

only on the assumption of an unchanged deficit.

If the deficit increases, as it did you point is not correct.

45 Joan September 7, 2016 at 11:59 am

Decades of experience has also shown that supply side tax cuts created loopholes allowing people with unearned income, self employed people and corporations to evade paying their taxes so an increasing share of the tax burden fell on wage income. Corporations share of federal taxes is 1/3 what it was in the1960s while the share from individual income tax and spending is nearly the same. The difference is made up by increases in payroll taxes even while the wage share of GDP fell by about 6%.

46 Art Deco September 7, 2016 at 12:03 pm

No Joan. You create loopholes by enacting deductions and exemptions for specified types of income. Marginal rate cuts do not do that (and, in fact, reduce the significance of the extant deductions and exemptions).

47 Joan September 7, 2016 at 1:18 pm

Wages, capital gains, dividends, home sales, and profits from businesses are spicific types of income.

48 JonFraz September 7, 2016 at 2:22 pm

I suspect Joan is confusing an across-the-board tax rate cut (a true supply tax cut) with the sorts of targeted tax cuts the Bush administration specialized in– that is, major cuts in taxes to unearned income. That can indeed create unproductive income-sheltering. The 1986 tax reform under Reagan was probably the best tax change we’ve had in my lifetime, following the general program of “Reduce rates but broaden the base (by eliminating loopholes). Sadly, Congress began almost immediately to undo it.

49 Art Deco September 7, 2016 at 4:22 pm

“Targeted tax cuts” was a Clinton-era locution. Bush the Younger favored marginal rate cuts. Differential rates for capital gains was his father’s shtick. (The problem with capital gains taxes is that nominal gains are taxed rather than real gains).

50 Cooper September 7, 2016 at 5:15 pm

Why don’t we just introduce an inflation deduction for capital gains taxes?

Buy shares for $100 and sell them 20 years later for $500.

If the CPI doubles in that period, your basis gets increased to $200 and we would tax the real gain of $300 at normal income tax rates.

51 Joan September 7, 2016 at 4:49 pm

Since corporate profits are subjected to double taxation, having the same rate on all income means whenever possible people will file as a individual not a corporation. That is indeed what happened after the 1986 tax reform. The revenue from individual returns increased (which suppysiders claimed proved their theory) but revenue from corporate returns fell by half.

52 Art Deco September 7, 2016 at 12:01 pm

Reagan’s cuts were large and not scheduled to expire. Bush’s cuts were modest and scheduled to expire. See John Taylor on this point.

The low-hanging fruit from this tree was picked 30 years ago, so there isn’t much point in revisiting the subject except as campaign advertising, and this year’s campaign is an early indicator that the Republican electorate has tired of Capitol Hill / K Street shtick. We should concentrate on removing the sectoral subsidies incorporated into the tax code and to replacing with tax rebates subsidies to groceries, housing, and utility bills, as well as replacing certain cash doles for the able-bodied working-aged population.

53 Ricardo September 7, 2016 at 12:44 pm

Cash doles for the able-bodied working-aged population such as…? The Earned Income Tax Credit and unemployment benefits are the only two cash-based programs of any practical significance left for able-bodied working-aged people and the former is structured as a tax subsidy that incentivizes work while the latter, by definition, is for people who were terminated without cause and are looking for work.

54 Art Deco September 7, 2016 at 1:15 pm

1. TANF
2. Disability awards on dubious grounds. Step one would be restricting awards on ‘psychological’ grounds.

55 Ricardo September 8, 2016 at 8:41 am

TANF isn’t a factor for most poor people. To a first-order approximation, you are suggesting something that was already done back in the 1990s. Cash assistance was cut to the point of insignificance while the Earned Income Tax Credit was expanded.

56 JonFraz September 7, 2016 at 2:23 pm

Replacing with what? A UBI?

57 Art Deco September 7, 2016 at 4:28 pm

A straightforward tax rebate. Calculate the taxpayer’s liability as a % of his income less a $ value per-person credit (with the $ value adjusted annually according to changes in prices or nominal incomes). A large share of taxpayers will have a negative liability. Cap the rebate to them at a % of their earned income but relax the cap re the elderly and disabled, so you have an income floor for the elderly and disabled and something akin to matching funds distributed to impecunious wage earners.

58 JonFraz September 8, 2016 at 2:48 pm

That largely defeats the purpose of this sort of thing, which is to increase the income of the poor in ways that do not disincent work and also do not distort markets, as, e.g., a minimum wage increase does.

59 Troll me September 7, 2016 at 11:20 pm

I guess if the largest military budget on the planet is a “modest” amount of money, then those tax cuts would also be “modest”.

60 Art Deco September 8, 2016 at 12:14 pm

We have the largest economy on the planet. Because we have a large military, Canadian ingrates can get along with an ornamental military.

61 rayward September 7, 2016 at 12:05 pm

Cowen let me down: I had expressed confidence in Cowen that he could continue writing dull columns at Bloomberg so that venture wouldn’t risk his commitment to this blog. I was wrong. He’s gone full McArdle on us. His latest column already has over 80 comments, more than all his previous columns combined. As for the substance of his column, Krugman would call it derp. I call it would it is: buffoonery. Of course, there is a big demand for buffoonery. And buffoons deserve to have their views aired.

62 rayward September 7, 2016 at 1:47 pm

I suppose that repeating the same conduct and expecting a different result is what makes us all alike – which helps explain why even perfectly rational, smart people are drawn to such conduct. Everybody does it so it appears less ridiculous than it is. It’s still ridiculous. Indeed, here’s Bloomberg’s Law: the number of comments to a post on Bloomberg is directly related to the ridiculousness of the post.

63 Daniel September 7, 2016 at 12:22 pm

>But too often they buy government securities, and so Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic. This confounds the traditional libertarian defense of free trade by indicating that we are not really getting market-oriented investments when the funds return.

minimizing the crowding-out effect seems like a significant benefit of foreign lending to our government.

64 chuck martel September 7, 2016 at 12:24 pm

“You may recall that the iPhone made its debut in 2007, and it sold very well during the tough economic times that followed.”

Cell phones/smart phones and the contracts enabling their use have been selling well for some time. A humongous portion of income and wealth have been diverted from other purchases to personalized phone service, which most people seem to regard as a necessity on a par with food or drink. So far, the expense of mobile phone service has been deducted from other purchases. At the same time, it’s likely that this phone service has had a minimal effect on increased productivity. It may be that mobile phone service, like automobile ownership, is now part of the fabric of society, although its infrastructure isn’t as pervasive as that of the car, and that its influence on personal budgets and other spending will be diminished. It’s odd that there hasn’t been more academic studies on this subject.

65 Harun September 7, 2016 at 2:38 pm

I’ve started using some business apps. Smart phones are becoming more useful.

66 Brian Donohue September 7, 2016 at 12:26 pm

Supply side reforms aren’t a synonym for tax cuts. Germany bit the bullet in 2004 and adopted a swathe of supply-side reforms. How’s that going?

67 prior_test2 September 7, 2016 at 12:43 pm

Pretty well, in the light of the fact that the German government is currently considering a 45 billion euro tax cut. Along with the fact of not needing to use deficit spending currently, along with a continuing low unemployment rate.

68 Brian Donohue September 7, 2016 at 4:32 pm

Whoops. Sorry Tyler…should have read the article first. You make this point quite well.

Good article.

69 Chuck September 7, 2016 at 12:51 pm

“Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic.”

So big government is not the fault of those who vote for it?

70 Per Kurowski September 7, 2016 at 1:03 pm

Edward Conard believes that the win-win situation of the U.S. trade deficit, resulting from the sellers investing the dollars back in the U.S.; would only hold if people who accumulate cash from foreign transactions invest their funds into risky, innovative enterprises. But too often they just buy “safe” government securities…

And that is precisely also applicable to current monetary stimulus. If QEs resulted in funds being invested into risky, innovative enterprises, these could help, but the risk weighted capital requirements for banks, only guarantees these are invested, by means of bank credit, in whatever is perceived, decreed or concocted as safe… and the safest according to regulators is the sovereign and the AAArisktocracy.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

71 Harun September 7, 2016 at 2:40 pm

Keep in mind, its not actual investors or owners of capital that are investing those deficits into US treasuries.

Its the central banks of China, Japan, Korea, et al.

That’s a big difference .

72 Barry Ickes September 7, 2016 at 1:28 pm

Why could it possibly matter if foreigners buy government securities? Do Tyler and Conard believe that US trade deficits cause governments to run larger budget deficits to soak up foreigners’ savings? Without that bizarre assumption the supply of government securities is unchanged, so if foreigners buy government securities those who would have purchased them still can buy risky capital. This argument is all partial equilibrium and nonsense. If foreigners buy government securities then others buy private securities. Supply must equal demand.

When the i-phone came out in 2007 was there no “bureaucratization of society, excess regulation, the high cost of moving talented labor into cities with building restrictions and thus expensive rents, overly cautious financial intermediaries (most capital isn’t venture capital), policy instability and a general fear of the future all may choke off entrepreneurship.”?

73 Harun September 7, 2016 at 2:41 pm

China bought $800 billion of Fannie and Freddie bonds.

You don’t think that extra demand, which was based solely on sterilizing export surpluses, doesn’t affect markets here, and there?

If it doesn’t, why is the central bank of China doing it then?

74 Troll me September 7, 2016 at 11:23 pm

If there is a large pool of buyers of US treasuries, then interest rates are lower, and any party will feel relatively more inclined to spend/borrow more.

75 Lit September 7, 2016 at 2:03 pm

What does the supply in supply-side economics mean? I’ve never understood. Wikipedia is no help.

76 rayward September 7, 2016 at 2:54 pm

Supply creates its own demand. Say says so. Indeed, aggregate demand is defined as the sum of all final goods and services produced (not demanded) in an economy; if it’s produced, it’s demanded. Therefore, policies (supply side policies) that induce firms to produce goods and services (such as tax cuts for business) necessarily promote prosperity and economic well-being. Anyway, that’s theory. And who are you gonna believe, theory or your lying eyes.

77 Jill September 7, 2016 at 3:01 pm

Depends on what ideology you are a true believer in.

78 Jill September 7, 2016 at 3:03 pm

“Don’t forget that there are decades of research in economics showing that tax incentives matter.”

LOL. No, there isn’t– not in this situation we have now, where taxes are already very low– and often effectively zero due to loopholes– for large corporations.

79 The Anti-Gnostic September 7, 2016 at 3:52 pm

Corporations are pass-through entities, which is why most countries’ corporate tax rates are a good deal lower than ours. They cut through the pass-through entity, so to speak, and just levy them directly on the people who actually bear the tax burden (income tax, VAT).

Income taxes in the US are pretty consistently around one-fourth to one-third of people’s income, like most First World countries. Above that, and people stop working or cheat.

80 anon September 7, 2016 at 4:24 pm

Tax as a percentage of GDP is pretty low, compared to other wealthy countries.

US 26%, Germany 40%, etc.

https://en.m.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP

81 T September 7, 2016 at 7:59 pm

What a worthless metric! Thank you for sharing.

82 TMC September 8, 2016 at 11:10 am

As linked to above, http://www.usdebtclock.org/

Spending is 36.7%

83 Dallas Weaver September 8, 2016 at 1:21 pm

Nonsense! Our real tax rate includes state taxes, implied taxes (health insurance), etc. In Germany, the gov’t pays the health insurance cost and you don’t have greedy states (income, sales and property taxes), and that 40% number includes a VAT (national sales tax).

That 26% vs 40% is apples and oranges, not on the same basis and meaningless nonsense.

84 Art Deco September 7, 2016 at 4:49 pm

Corporations do have retained income, though its a small share of what there is available to tax.

85 Ricardo September 7, 2016 at 11:01 pm

“Corporations are pass-through entities, which is why most countries’ corporate tax rates are a good deal lower than ours. They cut through the pass-through entity, so to speak, and just levy them directly on the people who actually bear the tax burden (income tax, VAT).”

Not true at all. Corporate tax revenue as a percentage of GDP in the U.S. is below the median of developed countries. U.S. corporate rates are high but there are also very generous deductions and exemptions available.

86 Art Deco September 7, 2016 at 4:32 pm

The ratio of corporate profits to domestic product is about 0.11 and a large slice of that is to limited corporations. The notion ‘large corporations’ are some huge untapped cash cow cannot be taken seriously.

87 Anon7 September 7, 2016 at 10:12 pm

Yes, Harvard, MIT, Yale, Stanford, etc. are large corporations with large income/assets (gorging at the public trough), too much influence, and pay no taxes.

88 Ray Lopez September 7, 2016 at 5:04 pm

TC says:”That is the kind of argument that few people are willing to accept” (that foreigners simply recycle US dollars into government paper, causing imbalances to get bigger). But it should be noted FT columnist Martin Wolf wrote an entire book on this theme, so count him among the ‘few people’.

89 Donald Pretari September 7, 2016 at 7:50 pm

I get a little confused by this, but I’ve been assuming all of my policies are , at bottom, supply side. That’s why I don’t call myself a Keynesian. I have to say that I don’t really understand demand side policy. I consider investment the basis of our economy, and the goal of economic policy.

90 Ray Lopez September 8, 2016 at 2:49 am

Are you prominent? Why the first person? Who cares what you think Don?

91 Donald Pretari September 8, 2016 at 9:09 am

Why does anyone have to care for me to post my comment? Either they’ll read it or not. Either they’ll like it or not. As I’ve said, it’s a way of supporting the blog. Why do I have to be prominent? Why should I care? You have a very strange attraction to the argument from authority. We don’t need to be experts to comment on this blog. Only readers who might learn from each other. The point was to bring up the notion of supply side being fundamental.

92 msgkings September 8, 2016 at 12:26 pm

He’s a little salty because he knows no one cares what he thinks about anything.

93 Patrick Laske September 7, 2016 at 8:23 pm

The demand curve for US government spending is highly inelastic in the 21st century (If interest rates were 1% higher, would we have not done Obamacare? The bailouts? The war in Iraq or Afghanistan?). Reducing the cost of borrowing money doesn’t really change things that much. Foreign trade cannot take the blame. We have no one to blame for the size of the government except ourselves.

The argument probably has more weight in the 20th century, where high bond costs actually reduced the growth of government. However, during these periods we saw record expansion of trade with Asia and North America, these trade agreements often correlated with reduction in the growth of government, since politicians who liked reducing government also tended to like freer trade. Call it mood affiliation if you want, but if you’re against the liberty of citizens to trade with foreigners without interference, then there all sorts of other things you’re more than willing to interfere with in their lives.

94 Art Deco September 7, 2016 at 8:45 pm

Call it mood affiliation if you want, but if you’re against the liberty of citizens to trade with foreigners without interference, then there all sorts of other things you’re more than willing to interfere with in their lives.

Nice try. Trade liberalization over time has advanced coincident with the ruin of freedom of contract and freedom of association in this country. BO has been making an exhibit of his trade liberalization schemes (if that’s what they can be called) while the Democratic Party lawfare squad is busy harrassing its cultural adversaries. Among the few prominent presidential candidates in recent decades who would conceivably advocate repealing anti-discrimination laws, one is partial to free trade (Ron Paul), and one is among the most protectionists candidates to stand for the office in the post-war era (Pat Buchanan).

95 Abelard Lindsey September 7, 2016 at 11:33 pm

Like Spengler (David Goldman), I live and die by my belief in supply-side economics.

96 Enquiring Mind September 8, 2016 at 10:36 am

Supply side economics may be thought of as a salvo in the eternal fight for economic supremacy. Producers got less notice in the past age of consumer sovereignty, with old agents like Berle, Means and others looking at industrial organization arcana. Then some creative people asked themselves, What if we look at the target first? That made for some interesting discussions about how to extract consumer surplus, which led to how to apply producer surplus. Nowhere in that process was there any consideration given to the actual human beings involved in the consumption equation, and little to those in the production equation other than as fungible and costs to be addressed, with extreme prejudice.

Now we find ourselves at a waypoint in the post-modern world. Humans have been noticing, and have become more vocal about the inherent inequities that have been hitherto assumed or explained away. Assumptions won’t cut it much longer, as people are demanding truth and accountability instead of bread and circuses. One future waypoint involves blood in the streets or, for Dylan fans, Blood on the Tracks.

Economics needs to stop its posturing, dismiss the charlatans like Krugman, and honor its initial presentation of Homo Economicus in more than name.

97 Per Kurowski September 8, 2016 at 11:07 am

And we also need stand up to charlatan regulators who think that what’s perceived risky is riskier to bank systems than what’s perceived safe? http://bit.ly/1TgB6EJ

98 Enquiring Mind September 8, 2016 at 3:43 pm

One solid regulator choice is Bill Black.
He does have the drawback of not being a servile, lackeyesque tool in service to the FDIC and their masters.
See his writing on the following site: http://neweconomicperspectives.org/

99 Dallas Weaver September 8, 2016 at 1:13 pm

Perhaps in mature economies, where we have all the steel we can possibly use, and enough scrap steel around the world to satisfy normal demand, neither a supply side or demand side viewpoint makes much sense.

Innovation and creativity have become the relevant drivers with respect to per capita ecomomic growth, but this only fits in existing economic models as effectively an error term. However, this is where the future real economic gowth will occur. Banking/finance/Federal Reserve near zero interest money doesn’t flow into innovation that has huge risks and high rewards, making banking/finance/monitary policy somewhat useless for understanding real percapita economic growth in mature economies.

We do have angle investors (AI), VC’s and individuals to take these risks, however outside the permissionless sectors of our economy (software, apps, IP, etc. where no permissions from agencies are required — Silicon Valley), we still have the fastest growth rate of scientific knowledge the world has ever seen, but don’t see this scientific opportunity converted into real world innovation that helps humanity and the economy.

It looks like the slow step in innovation and application of these scientific opportunities is controlled by the regulatory system designed for the past which now effectively blocks future innovation and protect the incumbants. For example, the root zone of plants are a “war zone” and it is scientifically easy to make a corn plant that will defeat weeds by moving genes from more competitive species into the corn roots. The “new GMO” weed resistant corn could be done is a year or two with AI then VC level funding. However, to get it through the regulators would take 10 years and a 100 million dollars, which kills the ROI. Monsanto maintains its freedom from truly innovative competition by regulatory delays and costs and the world is stuck with roundup.

100 blades September 8, 2016 at 2:42 pm

“But too often they buy government securities, and so Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic.”

How the hell does that happen?? Agree with Patrick Laske above that government spending is not that responsive to interest rate levels.

Here’s my story, seems at least as good as the quoted sentence: massive Asian bond buying decreased returns in a safe asset, rippling through the economy to induce people to seek returns elsewhere, making the economy more “dynamic”. Not always a good thing as one of the effects in the ’00s may have been to contribute to apparently awesome conditions to invest in securities tied to the housing market.

101 Boonton September 9, 2016 at 8:59 am

But too often they buy government securities, and so Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic. This confounds the traditional libertarian defense of free trade by indicating that we are not really getting market-oriented investments when the funds return.

That is the kind of argument that few people are willing to accept, yet they typically don’t have a good rejoinder to it either

1. I reject the ‘feed the gov’t’ model of gov’t spending. In other words, gov’t spending is determined by how much money the gov’t collects in taxes or in this case the market is willing to lend it. But that’s another story..

2. What would be more likely to cause you to increase your spending per month; a $1000 per month raise or a letter from your credit card letting you know that they are increasing your credit limit by $5000? If China’s trade surplus disappeared US consumers would buy more goods from domestic firms. Domestic income would go up a lot and as a result the gov’t would collect a lot more in income and sales taxes.

3. After scoring a lot of US dollars from selling goods to the US, why would China necessarily fund the US gov’t? Why not buy shares of US companies, or US real estate, or goods and services from the US?

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