Friday, February 03, 2012

Must the Rich be Lured into Investing? Who are the Real "Job Creators?"

Why should Mitt Romney and the fabled "one-percent"  pay only a 15% marginal tax on investment income ... half the rate charged to a dentist or auto mechanic on wages earned from work?  This was not the case until recent Republican Congresses slashed taxes on passive, unearned dividends and capital gains.

The rationale for that immense tax cut for (mostly) rich investors was simple and alluring - that super-low rates would entice more of the rich to invest in companies within the U.S., helping them to increase their productive capacity and hire more workers. Moreover, the resulting boom in economic activity would then result in so much new tax revenue, even at low rates, that deficits would disappear.

Let's put this in context with a term you may have heard. "Supply side" economic theory maintained that this flow of investment capital would pump up the factory end of things, increasing the supply of goods and services, offering them cheaper, thus stimulating demand.

In contrast, the standard Keynsian "demand side" model was to fight recession by ensuring that poor and middle class folks had enough cash ("high-velocity" money) in their pockets to buy - or "demand" - goods and services. Whereupon producers would be drawn into greater production.

For a more detailed description of the differences between these two economic models, see my earlier missive  A Primer on Supply-Side vs Demand-Side Economics. (It really is one of the top issues of our day and an informed citizen should know about it.) Here in this place, I'll try to be brief.

Who was right? Blatantly, the Keynsian approach worked in the 1940s, when massive government spending on WWII resulted in a boom that ended the Great Depression.  A boom that then continued for 30 years, till Vietnam crushed it against a wall. Throughout that period, high tax rates and stimulative spending seemed to work, whenever the economy needed a little help. Moreover, during that era, a very flat social structure - (CEOs earned only a few times what factory workers did) - combined with the most rapid growth of the middle class and the most vibrant era of startup capitalism in human history.

That does not make Keynsianism perfect! Critics like Friedrich Hayek, have indeed exposed some faults and blunders that later Keynsians, like Paul Krugman, openly admit and have striven to correct. Still, the Demand Side approach can point to many clearcut successes.

In particular, it is plain that during recessions, when economic activity lags and deflation looms, what you want is "high velocity" money in circulation - money that will pass from buyer to seller and then to another seller and so on.  Not money that just sits.

Does Supply Side have a similar track record? Not even remotely.  Not even once. Simple charts - and hard conclusions from the Congressional Research Service - show that the Supply Side assertion was... and is... utter mythology.  None of its predicted effects ever happened.  And let me reiterate.  Not ever, even once.

Specifically, cuts in tax rates for dividends and capital gains have never had any long-term effects upon capital investment, since records were kept in the United States.  (See this cogent article putting the myth to rest, once and for all. Also my article: A Primer on Supply-Side vs. Demand-Side Economics.)

In fact, this is no surprise, for several reasons:

1) Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it!  Now ponder that nonsense statement. Roll it around and try to imagine it making a scintilla of sense! Try actually asking a very rich person.  Once you have a few mansions and their contents and cars and boats and such, actually spending it all holds little attraction.  Rather, the next step is using the extra to become even richer. Naturally, you invest it.  Whatever the tax rates, you invest it, seeking maximum return.

Instead of enticing the rich to invest, these super low dividend and capital gains rates simply used money taxed from middle class wage earners to give bonuses for speculations wealthy folks were doing anyway.  If anything, the only major effect, other than budget deficits, was a pumping up of asset value bubbles.

2) Now to be sure, some of the rich ... a few... put a fair amount of their wealth into truly bold and risky new enterprises.  I know such men and women, who engage in Venture Capitalism or starting up creative new enterprises. And just so you know that I'm no socialist I believe this kind of investment truly should be encouraged by taxing it at a very low rate!  Not only because of the risk, but also because equity shares that are bought de novo directly from a new firm actually deliver nearly all of that value directly into capitalization and company development.

In contrast, most exchanges through the NYSE or NASDAQ are purchases from other stock-owners who happen to disagree with you about prospects for future capital gains and dividends. It is just as much a betting/gambling system as any Vegas casino, Your trades may marginally raise or lower the posted price, allowing the company to raise a little capital on the side, but almost nothing from your stock transaction actually goes to the company itself, or into new products or plants and equipment.

(Hence, that kind of investing - by far the largest portion - helps industry only at appallingly low levels of efficiency, but diverts management into spending nearly all its time trying to bribe stockholders with short term benefits, ignoring long-term company health.)

No wonder Adam Smith himself expressed contempt for passive investments that he called "rents"... compared to investments in which the owner actually gets involved in starting up or entrepreneurial development of long term company or enterprise health.

3) So what about "targeted investing"?  The towering hypocrisy of supply side tax cuts for the rich is that they are claimed (without a scintilla of evidence) to help create jobs. But then, why treat investments overseas equally to those made in domestic companies? President Obama proposes narrowing the super-low rates to U.S. companies that are (a) startups, or (b) demonstrably adding jobs, or (c) investing directly in new equipment or R&D.  For this he is derided for "picking winners and losers"... even though the list of targeted tax breaks for GOP-favored industries like coal and oil are myriad. (and outrageous.)

4) In fact, we spoke earlier about how stock and equities markets have lately become the tail wagging the dog.  Instead of serving the capital needs of companies, firms like Mitt Romney's Bain Capital show that productive corporations making goods and services are now like cattle, farmed by Wall Street, to be bled or dissected at whim.  Nor is the whim even human anymore! Most trades are now propelled by hyper-aggressive, parasitical "flash trading" computer programs that vastly amplify volatility, sap investor earning potential, and threaten our entire economic system in a dozen ways.

5) The reduction of dividend and capital gains tax rates almost to zero has coincided with the rapid ending of the relatively flat social structure that we inherited from the Greatest Generation of the 1950s and 1960s.  Back then, the rich managers of major corporations earned only ten or twenty times what factory workers got, a situation that still exists in Japan. Only now, American wealth disparities are approaching levels not seen since the American Revolution.

The last thing that the GOP or Fox wants you to do is look across the last 6000 years.  The class that they call "job creators" used to have another name. Lords.

6) The outrageous inherent unfairness of passive dividend-clipping getting far better tax treatment than earned wages is inherently suspect.  It is exactly what you would expect rich and powerful men to lobby for, whether or not their supply side rationalizations were true!  It should be no surprise that, in our money-drenched political system, those with such power and influence have benefited immensely.

But are the arguments and rationalizations valid at all?  At minimum, supply-siders should bear some burden of proof.  Their experiment has been run, now, for more than three decades, and never once has their core predication come true... that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit.

Yes, reducing deficits would be good!  Indeed, under Clinton they vanished. The middle class, according to all opinion polls at the time, wanted any surplus to go to buying down debt.  It was the upper caste who used the surpluses as an excuse to demand immediate tax cuts.  So where does maturity reside?

The results are utterly conclusive.

Supply side is disproved, top to bottom.

What we need in this depression - and by most of the metrics it has been a depression, not a recession* - what's needed is what ended the last one. The circulation of high velocity money that goes hand to hand very quickly, generating economic activity with every transaction. Not the exact opposite, money that sits in portfolios, not helping capitalize industry but simply fostering the aggrandizement of a parasitic caste.  One the the founding father of free enterprise - Adam Smith himself - quite despised.

"All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons."

Smith is not talking about charity, but the vigor of trade.  In this case, we "share" by buying from one another.  The middle class is very good at that.  It is the middle class that - assisted prodigiously by technology and science - propelled our economy to be the wonder of the world.

It is the middle class who should get whatever tax benefits can be doled out.  They'll use it to make small startups.  They'll use it to educate bright, competitive kids.  They'll spend it!

They are the real "job creators."

Addendum: November 3, 2012 - R.I.P. "supply side economics" 

In a November 1 report we learn that that Senate Republicans applied pressure on the nonpartisan Congressional Research Service (CRS) in September to withdraw a report finding that lowering marginal tax rates for the wealthiest Americans had no effect on economic growth or job creation

"The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical," the Times reported. Democrats in Congress resurfaced the report. Republicans objected that it underminde the governing fiscal philosophy of the party, that tax cuts for the wealthy will spur growth and benefit everybody.

Changes over 65 years in the top marginal tax rate and the top capital gains rate do not correlate with economic growth. Reduction in top rates appears to be uncorrelated with saving, investment, and productivity growth. However, top rate reductions do associate with increasing divergence of national income going to the top 0.1%

This is important... and was always obvious.  Even in 1776 Adam Smith described what the rich actually do with sudden cash infusions. They put it to work in "passive rent seeking" and only rarely into capital equipment or risky new products and services. (Risk taking can be rewarded in other ways.) And that cash flow to the rich reduces the velocity of money. If there were ever a time not to do that, it is during a recession, when we want high money velocity, put cash in middle class pockets! (In fairness, during runaway inflation, largesse to the rich - reducing money velocity - actually makes some sense.) 

George H.W. Bush called Supply Side "voodoo economics. It was and is.


Tim H. said...

Supply side doesn't work in this world, in a closed economic entity, a wealthy individual with a shiny new tax cut might create jobs, whose employees would pay at the full rate, maintaining revenue levels. In this world, investors can take their money elsewhere, and usually do, so the stimulus accrues to somebody else. So supply side economics seems to be either a pitch for trade restrictions that seem ludicrous to me, or a one world government.

Anonymous said...

"that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit"

I recall a time during the Clinton presidential years where the deficit vanished. I think you would do well to at least mention this, rather than say it never happened.

I also think that whether or not your argument is correct in terms of "does it create jobs," it would be nice to see how it fairs in terms of middle class retirements. For example, my middle class parents are looking at a comfortable retirement soon. If the tax rate on their investments had doubled, it would not be comfortable at all, and in fact they would need to work many more years to make it comfortable.

In that regard, if it doesn't create jobs but benefits society in another way, it's worth investigating.

Acacia H. said...

The irony is, there was a Republican President who did engage in minor Keynesian economic incentives when he was first in office. He did this to try and ward off a recession that was hitting the nation during his first term in office. His name? George W. Bush. And his policy? Giving every single American who made under a certain amount $400 each to spend as they felt. And you know something? It did some some minor economic stimulus.

I'm willing to bet that if the Bank Bailout instead had been opening Savings Accounts in these troubled banks, with the amount in Savings being split evenly among every man, woman, and child who was a U.S. citizen, the end result would have been improved bank liquidity and then improved economic stimulus as people spent that money. In return, the increased spending would have lessened the number of layoffs and Unemployment would have not jumped to around 10% (especially as state governments wouldn't have needed to lay off as many people to make ends meet, and thus increase unemployment and lessen revenues).

I always was puzzled that Obama didn't try something like Bush's "mini-stimulus" as it was perhaps the one thing Bush did that I felt was actually good. Especially as it put immediate money into people's hands, not just drips and dribbles over time.

Robert A. Howard, Tangents Reviews

LarryHart said...


"that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit"

I recall a time during the Clinton presidential years where the deficit vanished. I think you would do well to at least mention this, rather than say it never happened.

But Clinton RAISED tax rates. Remember, Newt Gingrich predicted that it would kill the economy, but instead we had a pretty good run for the rest of the 90s.

So yes, the deficit vanished and then some under Clinton (and Gingrich, to be fair). But it was when taxes had been increased, not slashed. So aren't you making Dr Brin's point for him?

David Brin said...

Robert, no "mini stimulus" would work this time. The economy was in freefall off a cliff and people were in blind panic.

Obama should go on TV now, as things are looking up and say "People, I could not say this before, because we had to talk up confidence. But this was not a recession. By every metric, it was a depression. Our stimulus and monetary easements and other measures kept it shallow, but a depression is exactly what we inherited. Normal business cycles aren't like this at all.

"Now that we are regaining confidence, let's call a spade a spade. Okay, then. Let's get scientific and ambitious again and put it - and the loony notions that brought us into that mess -- behind us."

Stefan Jones said...

Putting taxes on capital gains on par with earned income would also make getting rich through working for a living more attractive.

You know, by making innovative new products and services.

Imagine if all the "quants" currently employed in creating bizarre new financial instruments and trading strategies instead found work creating statistical models for plasma behavior in a fusion reactor. Or optimizing search strategies for useful protein structures.

'bralt': He-Man's arch nemesis in Season Five.

Ed Seedhouse said...

I think you should take a look at some of the newer schools of economics that are developing. For instance, Bill Mitchell, an Australian who is one of the leading advocates of "Modern Monetary Theory" (, or professor Steve Keene who has shown a straightforward disproof by contradiction of the neoclassical economics model( and is developing a model based on real mathematics that shows how depressions can occur. Keene predicted the great crash before even Krugman did.

In order to understand how an economy works you must first understand what money is and where it comes from, a matter that the "neoclassical" and "neokeynsian" schools simply leave out of their models.

It is not just "supply side" that is wrong, it is the whole edifice of the "neoclassical" or "neoliberal" economics. Deficits are used to scare people, but a country sovereign in it's own currency should almost always be in deficit, and this is not a problem, but a benefit.

David Brin said...

Since there is an extremum in which debt and deficits are absolutely bad... and since excess debt and deficits tend over time to be bad practice for individuals and companies... is therefore incumbent upon those who declare them to he harmless or beneficial to bear a burden of proof.

Now don't get me wrong. Debt and deficits are the right tools when you must stimulate a sluggish economy, or else invest in excellent productive capacity. But the later Keynsians now admit one should buy down debt in "fat years" as Clinton started doing... so that fat is available to borrow against in lean years. This comes under the category of "duh."

What was treasonous was the Bushites plunging us into staggering debt loads in good times, inflating ridivulous asset bubbles and making the economy fragile, then leaving us with nothing to spend or borrow when we had to.

These were criminal morons and no one should ever be allowed near power who had or has or will have anything to do with such monsters.

And make no mistake. "Maverick" McCain as soon as he was nominated appointed all Bushite advisors. All the current crop except Paul would do exactly the same.

Ian said...

David, I'd be interested in seeing exactly what those metrics are that demonstrate America (or is the world?) experienced a Depression and not a recession - bearing in mind that there's no real technical definition of what constitutes a Depression.

(People tempted to cite Greece, Ireland or Portugsl as examples of the folly of demand-side economics might want to pause first and note that all three states both taxed and spend significantly less than the OECD average.)

Ed Seedhouse said...

" is therefore incumbent upon those who declare them to he harmless or beneficial to bear a burden of proof."

You are correct, but government is not a business or a person. To think that the U.S. Federal government must act monetarily like individuals, businesses, or subsidiary governments is to commit a fallacy of composition.

A state that is sovereign in it's own currency can always pay any obligation denominated in that currency. You and I can't. Businesses can't, and states not sovereign in their own currencies can't. But states sovereign in their own currencies can.

This is why I posted a couple of links for you to peruse if you have the time. As I read them they offer just the proof you are asking, but maybe I have missed some obvious logical error and if I have I would love to hear it.

Now there is a constraint on how much money such a government should create, and that is the eventual onset of inflation. But inflation may be avoided or ended by fairly straightforward government actions.

Once again, I am talking only about governments that create their own currencies and can enforce the use of those currencies for transactions within their area of governance.

Jacob said...

Deficit spending is taxing our children's future. It is the most vile form of taxation.

I agree with increasing spending in economic downturns but only when the legislation that authorizes it also increases taxation to compensate within the decade.

Future investment is also good, but only when deficit hawks agree that the return on investment will be equal or greater than the added cost of interest.

Tim H. said...

These deficit hawks seemed so undisturbed about the Wall $treet bailout, strange. They make little fuss about tax cuts, or shiny new ways to make smoking holes in the ground (For a few years, then get parked at Davis-Monthan.). The only expenditures they object strenuously to are ones that might increase the general prosperity.

Jumper said...

I fear deficit spending no more than I am appalled at fractional lending. In either there is a "sweet spot" which maximizes long term results. Excess in either is foolhardy as we see from the recent housing market collapse, and, say, Greece. But I'm no expert...

Jumper said...

Don't know if Greece's tax levels are accounted for (in Ian's 4:39 analysis) taking this into account:

Jack said...

"Deficit spending is taxing our children's future."

Simplistic nonsense at that.
It is not the borrowing that is evil but the spending allocation.
Few people seem to get that.
Much like this, are you borrowing money for gas so you can get to work or are you borrowing money to get drunk tonight. One has a return the other doesn't.


Jack said...

The supply side/Keynesian battle is self defeating as both are correct in the right circumstances and these are almost always extreme situations. (yes 2008, was an extreme situation that called for keynesian solutions.)

How ever, One of our biggest problems right now is our antiquated tax system. They are built for the nineteenth century. when capital moved at the speed of a sailing ship. now a days capital can move across the world in a micro second.
A good example.
The capital gain I took when I sold my Caterpillar stock was earned anywhere in the world.
As it is tougher to grow in a mature economy like the US rather than a developing one like China,a tax break for CAT or any other multinational stock is most likely to encourage foreign investment rather than domestic investment.


LarryHart said...


Deficit spending is taxing our children's future. It is the most vile form of taxation.

Funny though, how you deficit hawks only manage to consider deficit spending to be evil when DEMOCRATS are (nominally) in power. For six years, when Bush not only controlled the White House but had a Republican congress, we got "Reagan showed us that deficits don't matter." Only when Democrats took back the congress, and then the White House, were you all suddenly "shocked...shocked to learn that deficit spending has been going on!"

And before you claim that you deplore deficit spending from EITHER side of the aisle, the onus is on you to explain why that fact only gets expressed when Democrats are in power.

LarryHart said...


"Deficit spending is taxing our children's future."

Simplistic nonsense at that.
It is not the borrowing that is evil but the spending allocation.
Few people seem to get that.


Not all that long ago, Republicans slammed Democrats for being "tax and spend liberals". However, the R's didn't actually spend any less. What they did was "borrow and spend" rather than "tax and spend." And because it didn't (directly) raise taxes, this was considered--by conservatives, I mean--to be a superior way of doing things.

Dick Cheney said specifically that "Reagan showed us deficits don't matter."

There are times when government HAS to spend money, and one good example of that is during a Great Depression. It is disingenuous in the extreme to claim that Democrats must not do so because Republicans already borrowed as much money as we can possibly afford, and then to blame Democrats for the state of affairs.

I will bet good money that if a Republican manages to win the White House in 2012, we will suddenly be hearing from conservatives about how deficits are no big deal. They won't even acknowledge that they ever held a different position. It will be as sudden and as thorough a flip-flop as "We have always been at war with Eastasia."

Jacob said...

Jack you are simply wrong. Borrowing is inherently wrong when you aren't responsible for paying back what you've borrowed. If that debt is passed on without something to show for it, you've acted irresponsibly.

There is a hell of a difference between an individual borrowing money and a nation. Investment and Trauma are the only good reasons for the later and both should be short term if possible.

(Good reasons - Schools, Dams, reasonable research investment, stopping an world conquest from an actual aggressive threat - not the 2nd rate nations.)

LarryHart You are projecting in the wrong direction. I will vote D in the foreseeable future because Republicans are fiscally responsible. They have been so for the last 30 years. There is no sign of that changing. Being small government has nothing to do with being a deficit hawk or being fiscally responsible.

duncan cairncross said...

"Deficit spending is taxing our children's future."

I now work in local government - when we spend money on long term assets (Water Treatment Plants, Sewers...) there is always a discussion about how to pay for them
If we pay from our current property taxes (rates) future ratepayers get something for nothing - paid for by the current ratepayers - is that fair?

The other aspect is as soon as we build something we start putting money into the sock to pay for its replacement in 40 years time

Here we use a mixture of loans (deficit spending)and taxation to pay for things - but it is a bit of a balancing act and different local authorities use different balances

Something to think of - is it unfair to tax our children for something they will use?

Ian said...

Jumper, unfortunately your link doesn't appear to work.

Let's see if mine do:

For 2009, the last year for which the OECD had complete data, Greece collected taxes equivalent to 30% of GDP. Ireland collected taxes equivalent to 27.8% of GDP. The average for the GDP as a whole was 33.8%. Goign back to pre-GFC days the results are similar. (You actually need to use the menu on the right to choose the data set to display. The two i'm using are "Total government Revenue" and "National accounts - general government."

Spending in recent years in Greece and Ireland has been dominated by bank bail-outs so a better picture is gained from pre-GFC figures.

In 2006, Greek government spending was 44.6% of GDP, Ireland's was 33.8%. The EU average was 46.7%.

If either taxation levels or government spending was the cause of the current crisis, the Germans and the French should be begging the Greeks and Irish to bail THEM out.

Jacob said...

Hi duncan cairncross,

You quoted line 1, but line 3 addressed the type of spending you are talking about. I will go further to say that immediately saving for future expenses is the best way to go about it. I wholehearted approve of the behavior I believe you are practicing.

David Brin said...

Ed is right that there is a certain small level of deficit spending that is harmless to a great nation that needs to upgrade infrastructure and invest in science and the productive potential of generations. Nevertheless, it was good for Clinton to spend a few years in the black. If we had done that a while longer, then the reserve would have been flush when we needed it.

Anyone who looks at the budget blowouts committed by the GOP... two hugely stupiodly clumsy land wars of attrition in Asia, gigantic, Supply Side tax cuts that never stimulated a penny of increased revenue... then the Medicare Prescription Drug Plan which (unlike Obamacare) contained no provisions at all for how to pay for it....

There are two issues here. (a) what we ought to do... and I am willing to discuss many things including tax simplification etc.

(b) who to trust with even a burnt match, let alone the tiller of a great nation.

We can argue over (a). But (b) is stunningly clear. Never again the neocons and oligarchs and Fox-propelled madmen who drove us off a cliff, again and again and again. At best(!) they were and are morons. At worst utter traitors. Jesus said "By their fruits you shall know them."

LarryHart said...


Borrowing is inherently wrong when you aren't responsible for paying back what you've borrowed. If that debt is passed on without something to show for it, you've acted irresponsibly.

The operative phrase is "without something to show for it." Spending which helps thwart a Depression would pay for iteslf.

LarryHart You are projecting in the wrong direction.

Ok, glad to hear it.

I will vote D in the foreseeable future because Republicans are fiscally responsible.

I'm not sure I understand. It seems to me you dropped a "not" in that sentence, but I can't tell which way you meant to say it.

Ed Seedhouse said...

A government sovereign in it's own currency does not have to borrow what it may spend in deficit. It can simply create more money by fiat. And as observable fact that is how it always spends. No debt required.

Not that issuing debt is necessarily a bad thing, I think it is mostly good, because the only way you can actually save money is to lend it. So it is generally a good thing that the government provides a source of bonds that are extremely safe (since they can always be paid in full), for those who want low risk savings.

But there is no necessity for it to borrow to spend. To repeat, in actual fact government never borrows to spend, it spends by issuing currency to the seller, money which is created by fiat, out of "nothing". Then it may or may not, as it wishes or thinks wise, issue bonds to provide safe savings to people and institutions who want a risk free savings instrument.

When you save you are always lending. If you save your greenbacks under your mattress you are loaning to your bed. For every amount saved there must be an equal amount loaned.

Jacob said...

That was suppose to be irresponsible. (sigh)

Anonymous said...

Bravo, sir, bravo! you are saying something I have been telling people for quite some time now: tax cuts for the wealthy do NOT create jobs. The problem is, those who support this idea have learned very well from Mr. Goebbels amply demonstrated 70-odd years ago, that if you tell a lie often enough, and convincingly enough, people will eventually begin to think it is the truth. That people actually believe this fiction, that they are unwilling to see the evidence to the contrary when it all around them, is a truly sad statement on the gullibility of humanity in general.

J. Daniel Sawyer said...

David --

It seems I owe you a concession--a couple posts back I stirred things up with you regarding Obama's signing of the NDAA. It appears (upon further research) that I was wrong in lamenting its unconstitutionality. For those of your readers who've been following the issue, Richard Carrer does an excellent analysis, with detailed references to the relevant precedents, caselaw, and constitutional scholarship, which you can find here:

On the issue of supply side/demand side and Keynsianism vs. its competitors, I think it bears pointing out something that Clinton got right that nobody since has:

Clinton too the Hayekian critique of the top-down aspects of Keysianism seriously, and trimmed thousands of pages of obfuscatory regulation from the different alphabet soup departments, which made a HUGE difference in operating interstate businesses over the internet, in fostering smaller-scale agriculture, and in allowing lattitude for experimentation in ossified industries that had been highly regulated in a way that disincentivized technological innovation (i.e. the regulations obsoleted, and thus became an obstacle to progress rather than facilitators OF progress, which is what good regulation does).

EVEN IF the supply-siders are correct at the margins, any growth-slow-down that Clinton's tax increase might otherwise have contributed to was completely wiped out by his regulatory reforms (and I still find it bizarre that we've had three presidential terms in a row that have been so inept that I'm defending Bill Clinton's Presidential performance).

That's the flip side of a vigorous economy: not tax cuts or tax breaks for businesses (though, as a small business owner, they are nice to have around), but lower regulatory barriers to entry for disruptive and innovative technologies.

Obama has (so far) missed the boat on this one. Perhaps he'll get hip in the next few months as the election season heats up. One can hope...

Thanks for the great post

David Brin said...

Dan, thanks. You support my notion that the thing about moderate democrats like Clinton is not some fealty to leftism. It is that they are MANIC in personality. If you want a problem attacked, give it to them. And if the problem is over-regulation? History shows they are the only ones who can be convinced to actually slash useless government.

I set aside the slashing of finance industry regulation that was designed simply to allow wholesale theft and destruction of our economy. THAT was the GOP, top to bottom.

Mind you, not all liberals "get" this distinction and too many nod their heads when the mad lefties among them rant things almost as absurd as Fox. But the effect is plain. the DP is the only American political institution still run by its moderate wing. When that changes.... duck!

Stephen D. Covey said...

Here is an alternate aspect.
There is no such thing as savings (we all must live on the productivity of current primary producers), but there is investment, where you give up some portion of your current productivity (income) to invest in increasing someone else's future productivity - in exchange for a share of that productivity. To increase OUR wealth, we must also spend and invest as locally as possible - otherwise you are increasing someone else's productivity (and wealth).
One problem with demand side economics is that too many of our dollars are spent on "Made in China." And, as David points out, too many of our supply side investment dollars are spent on foreign investments - which do not boost our economy.
It makes a great deal of sense to only reward USA investments and spending - free trade be damned, until and unless we have (as we once did) a positive balance of trade, and near-zero federal debt.
Stop sending our hard-earned money overseas - until we have a surplus.

David Brin said...

Stephen, once you have excluded foreign investment at 15% then you have admitted that "targeting" is valid. Then it is perfectly legitimate to favor startups over passive dividends. Long term holdings over short span trading. Sci-tech over carried interest. And so on.

Kathy said...

Back in the 80's my parents were living on the interest of a handfull of T-bills, along with Social Security & Dad's pension.

They were really pissed when Clinton was elected and interest rates on T-bill went down. But they managed ok. Bet they'd be furious at the nearly negative rate we have these days.

David Brin said...

Absurd. Civilization does not owe a return on investments. The US government has already bent over backwards to assist people saving for retirement. 401K and Roth plans. SEP plans that let you shelter $25,000/year from all taxes!

Plus the safety net underpinning of Social Security... plus the mortgage interest deduction.

And in return? Bilious venomous hatred of the satan of all satans - Franklin Roosevelt, who set up our modern world where retirement holds only modest worries, not outright terror.

Dig it, the only problems with the old system derive from people living far far far far longer than they used to.

Stefan Jones said...

Tangential to this post, but very interesting, from the Guardian:

Why economic inequality leads to collapse

The lesson of the Great Crash was that unequal enrichment provokes asset bubbles, excessive demand for debt and, finally, economic failure. Now we are painfully learning that again

sociotard said...

I thought that "lure them into investing" meant "lure them into investing HERE."

That is, favorable tax rates could induce the wealthy to invest here and not in other countries.

I have no idea how effective that is, but that is the impression I got.

David Brin said...


rewinn said...

1. It might be interesting to ponder whether flash trading systems are programmed to be "aware" of each other, in the sense of detecting and reacting to market behavior occasioned by their rivals, and whether out of this may grow some form of self-awareness.

2. The wagging of the dog of markets in actual goods by the tail of ineffectively regulated capital markets should concern any student of history, but I wonder if the historical division of the factors of production into labor and capital masks the growth of the significance of a 3rd factor: information technology.

Certainly the Lords love to concentrate capital, because it's easier to control than labor (...labor fights back or runs away, and has to be fed during slack time instead of sitting quietly in vaults. We humans are so messy!) And certainly the Lords' control of Capital is no guarantee that society as a whole will prosper; supply-and-demand can balance at many different levels of activity, and Lords have reasons to prefer a level of activity low enough to discourage the growth of a middle class willing to oppose the lords (as happened in 1776.)

Facing down the Lords of Finance is always difficult, but today we might make them less relevant not just thru traditional means such as granges and credit unions, but also through the newer, technology-enabled kickstarters and kivas. As a progressive, I like them as a means of freeing us, in a small way, from the Lords, but why wouldn't sincere freemarketers ALSO like them as purer expression of the marketplace?

Anonymous said...

"But the later Keynsians now admit one should buy down debt in "fat years" as Clinton started doing... so that fat is available to borrow against in lean years. This comes under the category of "duh.""

I can't speak for Mitchell, not being familiar with his work, but Keen would absolutely agree with you on the above point, I've heard him say as much. Like you, he believes that prior administrations should have been banking surpluses in preparation for the inevitable cyclical recession/depressions. I don't believe Keen has ever said that government deficits don't matter. However, currently he claims that the level of personal debt that is present in the US is more problematic than the level of public debt, being IIRC, about triple the amount of public debt, just as personal debt was the primary problem during the Great Depression (along with asset financialization).

Aric said...

One small critique of a good post.

At the beginning you say:
The rationale for that immense tax cut for (mostly) rich investors was simple and alluring - that super-low rates would entice more of the rich to invest in companies within the U.S., helping them to increase their productive capacity and hire more workers.

Then you say:
1) Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it!

This is one aspect, but the other is part is luring them to invest IN THE US. Sure, they will invest, but where? Taxation as a way to encourage or discourage investment in a particular country is a big part of the discussion. At best, this logic is simply wrong. At worst, it is correct, but will lead to competition between countries where the rich take their money to the lowest bidder and gain an even bigger share of the pie.

gmknobl said...

Thank you for addressing this issue again. I'd given up reading your blog for a while because it was not looking at issues I though most important. I'm glad this has been addressed again. And Paul Krugman is brilliant. I love that you referenced him.

Anonymous said...

One other aspect of recent political history is that the Bush administrations own economic advisors were not convinced of the Supply side arguments regarding tax rates and revenue.

No, the Bush Tax Cuts Have NOT Generated Higher Revenues