Zombie Economics

Today this meme on my Facebook feed.

The Kansas tax cuts happened in 2012, so “5 years later” would be 2017, and there is an excellent article from the Brookings Institution from 2017 that gives details about just how badly the Kansas experiment failed.

But honestly, this comes as no surprise. Supply side economics has never really made much sense. The idea that cutting taxes for rich people and corporations would stimulate economic growth has no real theoretical basis, and lots of logical reasons why it doesn’t work.

Let’s look at the basic premise to understand why it makes no sense. The basic premise is that if rich people get more money, that will motivate them to work harder, invest more and take more risks. But is that the way human motivation actually works? Or is it more likely that if you suddenly got more money for not doing anything different, you might slack off a little?

Indeed, the Trump tax act, The Tax Cut and Jobs Act (TCJA) of December 2017, cut corporate taxes substantially, The result was not an increase in investment, rather a surge in stock buybacks. (Buy backs are when a company goes onto the stark market and uses corporate cash to purchase its own stock, This raises the value of the remaining shares, without making any change to the actual value of the underlying company. While there is nothing wrong with buybacks, they are not the investment or job creation sponsored by the promise of the TCJA

This is why the TCJA hasn’t increased growth. Providing companies with more cash will only lead to investment and growth if companies have profitable investment opportunities, and lack cash to exploit them. The fact buybacks were growing before the TJCA was implemented, is evidence they lacked these opportunities.

If you want growth, you need to create demand. There are two good ways for government policy to do this.

  1. Give money to people who will spend it right away. People for whom the additional money will change their behavior. Typically this is lower and mid level incomes. The more money you have, the less likely the addition of a few more dollars will make a difference in your decisions.
  2. Directly create demand by building infrastructure or increasing government services

When thinking about the Reagan tax cuts, most people miss that two other things were going on. First, the Fed had raised interest rates to historic levels in order to kill inflation. By 1982 or 1983, inflation was under control, and the fed started cutting rates. Lower interest rates encourage more spending, Cars and houses that are unfordable at 11% can be very affordable at 3%. And second, there was a huge defense buildup, which created demand

Supply side economics has been disproven time and time again. Yet it is one of the zombie ideas that never dies.

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