Most of conservative economics consists of correlation presented as causality … or outright fantasy. (More)
Mythonomics Part II: Supply-Side Fantasies
This week Morning Feature looks at common economic myths. Yesterday we began with Mike Masnick’s ‘grand unified theory’ for why news, books, music, and movies should be free. Today we gaze into the abyss of supply-side economics, and why conservatives promote it. Saturday we’ll conclude with why you should be wary when someone claims “It’s Econ 101.”
“Incomplete analysis, contrafactual assumptions, and false analogy”
Canadian-born economist William Vickery died in 1996, months after receiving his his Nobel Prize for research on incentives in conditions of asymmetric information. That same year, he wrote an article debunking key elements of supply-side theory. It opened:
Much of the conventional economic wisdom prevailing in financial circles, largely subscribed to as a basis for governmental policy, and widely accepted by the media and the public, is based on incomplete analysis, contrafactual assumptions, and false analogy.[…]
Some of the fallacies that result from such modes of thought are as follows. Taken together their acceptance is leading to policies that at best are keeping us in the economic doldrums with overall unemployment rates stuck in the 5 to 6 percent range. This is bad enough merely in terms of the loss of 10 to 15 percent of our potential production, even if shared equitably, but when it translates into unemployment of 10, 20, and 40 percent among disadvantaged groups, the further damages in terms of poverty, family breakup, school truancy and dropout, illegitimacy, drug use, and crime become serious indeed. And should the implied policies be fully carried out in terms of a “balanced budget,” we could well be in for a serious depression.
He began with the myth that deficits “represent sinful profligate spending at the expense of future generations,” debunking the myth that governments should behave like responsible households. He notes that peacetime deficits mostly fund benefits that provide disposable income for individuals, who spend that money and thereby boost consumer demand. Other deficit spending funds research and infrastructure projects that create new opportunities for future generations. Even if the government-as-household analogy were true, he argues, families and businesses borrow to finance long-term investments: homes and children’s college educations, factories and new product launches.
He also dismisses common conservative aphorisms such as: “Government spending crowds out private investment” (it closes the gap between aggregate savings and profitable opportunities): “Full employment would trigger inflation” (inflation is caused by other factors and it’s not always bad); and “Eliminating capital gains taxes will boost investment and growth” (which kinds of capital gains, and why give the rich more loopholes to exploit?). But my favorite is his rebuttal of “structural” and “voluntary” unemployment:
To anyone acquainted with labor market conditions, it is abundantly apparent that a large proportion of those currently officially registered as unemployed, as well as large numbers who are not, are ready and able to take most, if not all, of the kinds of jobs that would be opened up by an increase in market demand. In the absence of such an increase, at current levels of unemployment, attempts to move selected unemployed individuals or groups into jobs by training, instruction in job search techniques, threats of benefit withdrawal or denial, and the like, merely move the selected individuals to the head of the queue without reducing the length of the queue. Merely because any one traveler can secure a seat on a flight by getting to the airport sufficiently early does not mean that if everyone gets to the airport sufficiently early that 200 passengers can get on a flight with seats for 150.
“A secret cabal of bankers to wreck the US economy”
The government really doesn’t “print money” in any meaningful sense. Most of the money in our monetary system exists because banks created it through the loan creation process. The only money the government really creates is due to the process of notes and coin creation. These forms of money, however, exist to facilitate the use of bank accounts. That is, they’re not issued directly to consumers, but rather are distributed through the banking system as bank customers need these forms of money. If the government “prints” anything you could say they print Treasury Bonds, which are securities, not money. The entire concept of the government “printing money” is generally a misportrayal by the mainstream media.
He also dismisses the notion that expanding the money supply will inevitably trigger inflation:
But banks don’t make lending decisions based on the quantity of reserves they hold. Banks lend to creditworthy customers who have demand for loans. If there’s no demand for loans it really doesn’t matter whether the bank wants to make loans. Not that it could “lend out” its reserve anyhow. Reserves are held in the interbank system. The only place reserves go is to other banks. In other words, reserves don’t leave the banking system so the entire concept of the money multiplier and banks “lending reserves” is misleading.
And he ridicules conspiracy theories about the Federal Reserve:
The Fed is a very confusing and sophisticated entity. The Fed catches a lot of flak because it doesn’t always execute monetary policy effectively. But monetary policy is not the reason why the Fed was created. The Fed was created to help stabilize the US payments system and provide a clearinghouse where banks could meet to help settle interbank payments. This is the Fed’s primary purpose and it was modeled after the NY Clearinghouse. Unfortunately, the NY Clearinghouse didn’t have the reach or stability to help support the entire US banking system and after the panic of 1907 the Fed was created to expand a system of payment clearing to the national banking system and help provide liquidity and support on a daily basis. So yes, the Fed exists to support banks. And yes, the Fed often makes mistakes executing policies. But its design and structure is actually quite logical and its creation is not nearly as conspiratorial or malicious as many make it out to be.
“Think of this as the supermyth”
Mother Jones’ Kevin Drum and Dave Gilson offer six more common right wing economic myths, including that lower taxes will boost growth:
No one likes paying higher taxes. But do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country’s growth rate since then. His conclusion? There’s virtually no correlation. Recent US history backs this up too.
They also highlight the Ur Myth of supply-side theory:
If you unshackle the rich, they’ll rev up the economy.
Think of this as the supermyth – the one underlying so many other fallacies. But here’s a pesky fact neither corporate America nor the GOP establishment is trumpeting: After-tax corporate profits are currently at an all-time high. The problem businesses face isn’t lack of cash but rather a lack of confidence that consumer demand will pick up in the future. So they’re not expanding or hiring at the rate they should be.the Ur Myth of supply-side theory:
But cutting taxes for the rich – the essence of supply-side economics – is very popular with the rich, and they dominate our political dialogue. They present their self-interest in econometrics so it sounds like science, but as Roche writes:
Economics is often thought of as a science when the reality is that most of economics is just politics masquerading as operational facts. Keynesians will tell you that the government needs to spend more to generate better outcomes. Monetarists will tell you the Fed needs to execute a more independent and laissez-fairre policy approach through its various policies. Austrians will tell you that the government is bad and needs to be eliminated or reduced. All of these “schools” derive many of their understandings by constructing a political perspective and then adhering a world view around these biased perspectives. This leads to a huge amount of misconception which has led to the reason why I am even writing a post like this in the first place. Economics is indeed the dismal science. Dismal mainly because it’s dominated by policy analysts who are pitching political views as operational realities.
Tomorrow we’ll see that there’s a lot of good research in economics … but that has little in common with what people mean when they say “It’s Econ 101!”