Posts Tagged ‘supply-side’

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Kansas Gov. Sam Brownback’s “real live experiment” in supply-side economics has failed—and now the poorest in the state are going to have to pay the costs.

In the end, many Kansans will pay more in taxes due to an increase in sales and cigarette taxes, a freeze in income tax rates and limits for itemized deductions.

It’s well known that these tax increases were precipitated by irresponsible, top-heavy tax cuts championed by Gov. Brownback and passed in 2012 and 2013. An ITEP analysis of all Kansas tax changes over the last four years (including this year’s) found that the poorest 20 percent of Kansans, those with an average income of just $13,000, will pay an average of $197 more in taxes in 2015 as a result of the Gov. Brownback tax changes, and, even with the increases Gov. Brownback is expected to sign into law today, the richest 1 percent are still paying about $24,000 less.

Investment

Both sides of mainstream economics will likely claim support in the International Monetary Fund’s latest report, the April 2015 World Economic Outlook—especially chapter 4, on business investment.*

The Keynesians will certainly like the relationship between investment and output—in other words, the idea that private business investment has declined since the start of the economic crisis because aggregate demand has fallen. Even more: they’ll find support in claim that fiscal policy aimed at reducing budget deficits has actually undermined private investment (which is the flip side of the Keynesian crowding-in argument, i.e., the notion that deficit spending doesn’t crowd out private investment, as neoclassical economists claim, but actually spurs or crowds in corporate investment).

The neoclassicals, for their part, will be encouraged by the focus on “business confidence,” that is, the argument that uncertainty (e.g., with respect to government policies) has played a role in discouraging business investment.

In other words, for Keynesians, the problem with insufficient business investment is mostly on the demand side; while for neoclassical economists, it’s mostly on the supply side.

And, true to form, the authors of that section of the report suggest policy changes on both the demand and supply sides:

We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to precrisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus ‘crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.

What no one seems to want to admit—the authors of the report as well as mainstream (both Keynesian and neoclassical) economists—is that private corporations, which got us into this mess in the first place, have failed to get us out of it. They’re the only ones that have benefited from the recovery, as corporate profits have reached record levels, but they haven’t responded by increasing investment. Instead, they’ve been using the profits they’re accumulated to buyback their stock, engage in new mergers and acquisitions, and distribute them to high-level executives and shareholders.

They want us to believe they’re superman. But we know they’ve simply failed—on both the demand and supply sides.

*To be clear, the chart does not indicate actual declines in business investment and output. Rather, it represents percent deviations from forecasts in the year of recessions.

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Mainstream economists will do almost anything to avoid a serious discussion of the issue of inequality, even while discussing the issue of inequality.

Right now, we have two groups of mainstream economists: those who argue we need to stick with trickle-down economics (which is basically a neoclassical argument that the existing distribution of income represents “just deserts” and that, at some point in the future, everyone will benefit from the continued funneling of income to those at the very top) and those who argue we need to shift gears and grow from the middle-out (which is a more Keynesian argument that the expenditures of the middle-class can and should serve as the effective demand for consumer goods, which in turn will spur private investment and lead to more jobs). Mark Thoma argues it’s a false dichotomy, because the supply side and the demand side are dependent on one another, that there needs to be the appropriate balance between supply and demand.

That’s a nice way of seeming to resolve the problem on the terms of mainstream economics. But what mainstream economists simply don’t want to talk about is a third option: trickle-up economics. That’s the idea that those at the bottom, who produce all the goods and services consumed by themselves and everyone else, would have a say in deciding what and how much gets produced, where it gets produced, and once it’s produced how the proceeds will be distributed.

If that happened, the fundamental cause of inequality would finally be eliminated and we’d actually have a pattern of growth that trickled up—taking care of those at the bottom before everyone else.