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.


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