22 Sep 2013: Ideologically Driven Policy
Posted by: Frank Moraes
The biggest political theory of the last 30 years is supply side economics. It was the basis of the policies of all Republican presidents from Ronald Reagan onward. The idea is that if the rich are given more money, they will use it to invest in business and thus create jobs. According to the theory, if you give money to the poor, they will just spend it. The rich, on the other hand, will help businesses to grow and this will help the poor.
The idea is nonsense as anyone who has ever run an actual business should be able to explain. Businesses expand when they see a lot of demand for their products. If a computer repair business has to turn away business for lack of resources, it will hire another tech to be able to take the extra work. This is as simple a notion as there is. Now it is also the case that in rare instances, a company may see a market opportunity but not expand to meet it because they simply don't have the start up capital to do it. Maybe expanding would require buying more property and the cost of a loan is too high. But that is a rare case. In general, businesses are demand constrained.
But this isn't a matter of conjecture. If businesses really acted the way that conservatives claim, then businesses should invest a lot more when profits were high compared to when they were low. That's why I found the following graph from Dean Baker so interesting. It shows corporate profits and investment as a share of GDP since the end of World War II. The thing to notice here is that there is nothing to notice:
In general: corporate profits don't seem to have any effect on investment. In there is any effect at all, in the long term, it seems that high profits lead to lower investments, not the other way around. So it seems that the very basis for supply side economics is wrong. In fact, look at the 1980s. As taxes went down (not seen on the graph), the share of investment went down. When taxes went up in the 1990s, investment went up. I'm not saying that high taxes cause investment to increase. Rather, tax policy doesn't seem to have much effect on investment at all.
Associated with this is the conservative obsession with budget deficits (at least when a Democratic is in the White House). Again, the argument against deficits is that government borrowing "crowds out" private borrowing and thus investment. It is certainly true that if the government is borrowing a lot of money while the economy is booming, borrowing costs may be high and thus cause the private sector to invest less than it normally would. The problem is that conservatives rarely complain about deficits when the economy is doing well. Instead, they complain about them at times like now when the economy could use government spending. Right now there is all kinds of money sitting around looking for places to invest. Unfortunately, there are few private sector takers for that money because businesses don't see any reason to invest when demand is so poor.
Bobby Jindal was right when he said that the Republicans had become the stupid party. It is very strange. I understand that not everyone agrees about policy. But the Republicans have lost any grip they once had on good policy. Their policy is entirely driven by ideology. They don't push free market solutions because they think that they produce the best results. They define free market solutions as good and don't care what results come from them. That's no way to run a country. We saw where such thinking brought the Soviet Union. That is where the Republicans are headed.