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.
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.