Enough with the Supply Side Already

Forbes.com recently (http://tinyurl.com/cpm8xf, 9 March 2009) carried the Limbaugh-like comments of Washington columnist John Tamny to the effect all the government ever needs to do in a downturn is cut taxes and get out of the way. He also said that he likes unemployment because it is a chance to get rid of "a lot of marginal, inefficient or simply mismatched workers." Also, "bargain-hunting businesses … are often able to hire--relatively cheaply--well-trained workers…"

Probably even most Forbes.com readers disagree with those tasteless remarks. Still, many misunderstand economics enough they attack the already passed Recovery Act. They are dogmatic "supply-siders." Since Ronald Reagan was sucked into this, we have been beset by it, and most of us have suffered greatly.

This school of thinking has the idea that reducing taxes on the rich makes them invest their added keepings on investments in new or expanded business. This supposedly increases overall economic activity and thus the total tax take. There are many fallacies here.

The biggest is that often downturns occur not because of choked supply but, as now, weak demand. The tiny rate of inflation today shows that demand is not there. Even if cutting taxes led the rich to invest in businesses, it would only make the problem worse. Businesses are not even trying to expand today, not borrowing. With lower taxes, the rich will put their savings into higher living or offshore accounts, and the federal deficit will go up with lost revenue.

A supply-side myth says the economy grows so much with lower tax rates that tax revenue increases! Only with very high top tax brackets (found in computer models—like 75%) does that happen in theory. Real world top brackets are half that in the U.S., so the major effect of lowering taxes without lower government spending is more deficit.

Finally, more money to the rich never trickles down to the middle class and the poor—the rich have a far bigger piece of the pie now by far than when Reagan was president.

In Reagan's time there was a kind of supply side trial. Prices went way up, as people hoarded against inflation provoked by an oil price spike, and supply could not keep up. We had a stagnant economy with inflation—"stagflation." Naively, the Federal Reserve put its foot on the money supply, to reduce inflation, not realizing that actually caused inflation. The result was no money to expand production, and more inflation. Reducing taxes was the chosen remedy, although it caused big deficits. Production expanded over a few years, mostly as the government pumped money into defense contractors, and OPEC cut oil prices. Inflation came down, followed by a low-demand recession.

Conservatives and Republicans like this fellow Tamny today flog lowering taxes to enable expansion on the supply side. Whatever may have worked in a hoarding situation, it won't work when demand goes away, as it has.

Companies need to sell products and services, and have marketed heavily to sell what they produce. So consumer spending has gone up, from about 62% of GDP in 1959 to near 70% in 2006, on average over 3% more dollars every year. Spending by all levels of government, including defense, plus business is down to near 30% of GDP.

Marketing is great at increasing consumer spending. The past decade many of us borrowed against the cash value of our homes to get money to spend. While home prices grew in a bubble that worked, but eventually we had an economic disaster.

In 2006, as the housing bubble leaked and burst, people turned around and started saving instead of spending. We have been losing jobs and production since then, and prices of some goods and services have gone down. We are near to hard-to-reverse deflation. There is not enough demand to keep prices up. Now what?

Should we try primarily to spur demand by consumers, as with the "stimulus" of spring 2008? People wisely paid off debt or banked the stimulus. Also, consumer over-spending is what got us into this mud in the first place, by running us out of money and credit. We need a non-consumer demand-side solution.

Since the 1980s, we have deferred maintenance of public facilities—like schools, roads, public transportation, water and sewer systems. They are in bad shape. Why? Because the federal government cut taxes, listening to supply-siders. It shifted costs to the states, which made it up by deferring maintenance.

There is a perfect way to increase demand: repair our public facilities and create new ones (as we did with the Interstates starting in 1956, a tremendous boost to the economy)—a demand-side, non-consumer solution. Americans are clever, and will figure out how to perform these new jobs. Make way for coming prosperity.

Big Recovery Act Spending is an Investment

There is a difference between a company spending hundreds of thousands to redecorate its CEO's office suite, and spending that money to buy new production equipment. The latter is calculated to produce profits that return the investment and then some. Still, either way, well chosen spending is essential for businesses.

Somehow, however, to some people—like extreme conservatives who are now common in the GOP—government looks different. All spending is bad unless it is for defense and then it is all good. (Incidentally, all taxation is also bad unless it is paid by the poor and the middle class.)

OK, some government spending is wasteful. But most is, like business spending, to pay for employees, facility space, equipment, heat and light, etc. It is good or bad depending whether it furthers the mission. Some government spending is, as when business does it, an investment that will provide a future benefit for the stakeholders, namely us.

When a business spends considerable money, an amount that is a big fraction of annual revenue, that can have a big impact on current stockholders' value, especially if it is borrowed. But stockholders often recognize the value to the company—in bricks and mortar or in new staff that can create new products to sell or in other forms. Any brief sell-off is followed by a rise in share price

When the government spends a large amount compared with annual revenue, as the US will the next few years, the immediate reaction to large numbers needs to be tempered by asking what if any value will be added to the country, and be available over the years to those who must repay the borrowing. Another question is what if anything might happen without the big borrowing.

The Free Market Screws Most Stakeholders

The problem with laissez faire economics or dependence on the "market" to regulate is that it screws most of the stakeholders.

In a laissez faire system, the market is said to control. But in fact, millions of decisions of companies are made by owners and by boards answering only to stockholders. But the interests of many others are at stake. That includes customers and those with land next to factories and many more.

All of us have a stake in the outcome of the recent escapade with sub-prime mortgages, mortgage tranche securities and "credit default swaps" (CDS's). As weighty as may be the outcome on everyone, the important decisions were made by no more than two dozen people, probably fewer.

How could that happen? In large part because a wave of belief swept over at least the US population beginning in the Reagan years and ending this past November. The belief was that, as Adam Smith supposedly wrote, business should not be regulated, because the market will cure all problems. Of course, he never wrote that. Also, he was writing in a political economy in which the king or queen's corrupt ancillaries routinely used "pay to play" in handing out monopolies.

We were undone by decisions during the Democratic Clinton administration, when banks, insurance companies and stock brokers were allowed to intermingle their businesses, and when the federal government was prohibited from regulating hedge funds such as CDS's. Now we need to get back to a balance between owners' rights and those of all the other stakeholders, with reasonable regulation.

60s Redux

There is history in the recent battle over the Recovery Bill. American conservatives are still fighting the battle of the 60s. The 1860s.

Then it was put as a demand for states' rights—the right to secede or to decide on slavery state by state. Now it is a battle against 'big government.' Either way, conservatives just don't like a strong central government. It frightens them. (Oddly, they are very comfortable with large, centrally governed business corporations, maybe because the inefficiency of democracy does not intrude.) Having the federal government spend over a trillion dollars between TARP and Recovery sends them up the wall.

We progressives can empathize, but we do not agree and we should not yield. Like it or not, this is a huge nation—300 million people and third or fourth largest by area. Having every state, county, school district and individual go off and do their own thing to cure this economic crisis is nuts. (For awful example, the governor of South Carolina plans to take much of his state's share and put it into ... paying off state debt, not improving their infrastructure and putting people to work. He plans to do nothing and let the state economy take care of itself.)

Conservatives still pine for when the Confederacy offered, briefly and bloodily, the vision of a nation really a salad of states and counties. As Aesop said, united we stand but divided we fall. Conservatives need to put country first and quit their futile quest for the past.

The First Amendment Will Smite Prop 8

California Proposition 8 and the others like it in other states stink. That is because large religious institutions, which are like any large institution mostly into getting their own way while hiding behind God, are pushing around gays and lesbians. Decades ago, "God arguments" were used hypocritically to justify messing over black folks and outlawing interracial marriage. They were garbage then and are garbage now. Still, saying that will not fuel a successful legal battle.

Surprisingly, the best approach to defeating Prop and its siblings may the First Amendment.

When Prop 8 passed on 11/4/08, people were talking about some razor-sharp lawyerly distinction between "amending" and "modifying" the California Constitution. That argument has got juice like a laptop after a coast-to-coast trip with no place to plug it in. But is the argument the opponents used, strangely in the recent Supreme Court of California argument.

Another argument is that not allowing same sex marriage denies Equal Protection since heterosexuals can marry. It persuades me, but I am not a supreme court. Courts treat Equal Protection as something much less than absolute. Yes, when the distinction is racial, where the 14^th Amendment was born, they require the discrimination to be justified by a compelling governmental interest to protect, and no possible better way to fulfill the interest. A similar standard operates in gender cases. However, legislatures discriminate between classes all the time. Those laws have merely to support a rational government interest, with a method to fulfill it that is related rationally. So, a legislature, or here an electorate, that is not flat out of its gourd will be upheld. Sorry, folks.

It's time trot out the heavy legal gun. First some history—war history. Everyone knows religious difference can cause civil war. See, for example, Shia v. Sunni in Iraq. Also, religious fear causes extreme repression. As in the Spanish Inquisition, which promoted Catholicism at the expense of Jews and Protestants. Later, Protestants (Huguenots) were hounded from France, and settled in many parts of the U.S., including Manhattan, Central Pennsylvania and Louisiana ("Cajuns" or "Arcadians"). Catholics escaping repressive Anglican England in large part settled Maryland. Pilgrims, who were separatists from the Church of England and thus repressed, founded Massachusetts.

With all this history fresh in mind, In 1791 Congress and the states passed the First Amendment, among other things banning religious intolerance on the part of the government, saying it could not interfere with religious expression or establish one or more state religions. (By the way, The 14^th Amendment applied the same rules to the states.) That was even if the majority people said, as they often do, "But we really want to, really, really, really."

Of course, individuals may express intolerance individually. Often Christian fundamentalists express that it is God's will expressed in the Bible that marriage is solely for procreation. Thus, they hold, those who try to marry while being queer are violators of God's design and are to be thwarted. Members of other faiths have expressed similar intolerant ideas.

However, many quite religious people read sacred texts as allowing such marriages, allowing their officiants to perform them, and inviting the marriage participants into their faiths. Actually several protestant denominations in the U.S. are today fighting internally over same-sex marriages and whether to bless them or ban them.

Most challenges of public religious activity, such as Ten Commandments cases and nativity scene cases, focus on "establishing religion." The same-sex marriage prohibitions establish religion. They use the government's power over the process of marriage—such as certificates, listing who may officiate, and the benefits of marriage (inheritance, decision making in serious illness, social security, marital rights to alimony, etc.)—to impose orthodox views of "God's Will." Nothing could more clearly entangle the state in implementing religious doctrine.

However, there is more. By interfering with those congregations who want to do same sex marriages, these laws also interfere with their free expression, another Constitutional no-no. That supposedly the 'people have spoken' is no counter. The First Amendment (and several others) are there specifically to protect people from majorities or well funded and agitated minorities.

While done without physical violence, these laws are every bit as harmful as the pressure governments working hand in hand with religious bodies put on what they called heretics centuries ago. Today's victims are loving couples who wish to live their lives as couples, and have the multiple benefits of marriage, but who vocal religious orthodox who insist on having their way prevent them. This causes untold misery supposedly in the name of God. As it would have shielded the innocent from the pain and harm of the Inquisition, the First Amendment will today powerfully shield the innocent from these vicious laws against same-sex marriage.

Philip L. Marcus is a Maryland attorney of about 35 years experience, primarily in private practice. Currently he specializes in First Amendment matters, intellectual property and business transactions. Besides a law degree, JD, from the University of Maryland Law School, he hold SB and SM degrees in engineering from the Massachusetts Institute of Technology.

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