Ashby: I Guess the Emperor Does Have Clothes
I know it was inevitable, but it’s still sad. To placate the right wing of the Republican Party, John McCain has proposed a new corporate tax cut as a means of promoting growth. After years of sanity, McCain is now paying lip service to the fantasy of Supply Side economics.
Proponents of Supply Side economics present it as a bit of a magic potion. They argue that reducing taxes on businesses and the wealthy will increase the pool of capital for business investment and lessen the disincentive to taking risk, which results from high taxes. The additional investment in building new factories and plants, in increasing supply, would result in an increase in demand as well – more jobs in factories, more small businesses supporting the workers, more wealth generated for everyone. Supply Siders argue that this additional economic activity would also increase the government’s tax collection, making up for the revenue lost through the tax cut. Yes, the Supply Siders believe that cutting taxes for the wealthy benefits everyone and pays for itself.
High taxation could certainly keep companies and investors from taking risks; companies won’t bother trying to make more money if the government takes too large a share. Yes, access to capital is certainly a consideration in any possible expansion - companies need to be able to finance their new factories at a reasonable cost. However, there is nothing to suggest that either of these situations actually exist. The growth rate under Clinton was higher than under Bush, even though the tax rate was higher; clearly people were still taking risks. Nor is there a shortage of capital; even with the recent credit crunch, the world is awash in capital. More importantly, access to credit is a secondary factor in any consideration of adding capacity – the decision is instead based on the ability to sell the additional output. Giving businesses access to slightly more capital won’t cause them to build new factories if they don’t think they can sell what they make. Again, a comparison of the Clinton and Bush Administrations illustrates the point. According to the Supply Siders, business investment and new business startups should have jumped up after the tax cuts. They didn’t. There was no appreciable increase in business investment during the Bush Administration, nor increase in jobs. The Bush Administration certainly doesn’t highlight the point, but the tax cuts led to more job growth in China than in the U.S.
This is not to say the Bush tax cuts didn’t create economic activity. The wealthy, who received the bulk of the tax cuts, invested the money into private equity funds and hedge funds. The private equity funds used this investment with very high levels of debt to buy existing companies. The hedge funds used the tax cut money, again leveraged with massive amounts of debt, to speculate on gas and oil and to purchase high-yield sub-prime mortgage bonds. Unfortunately, it is hard to say if this economic activity was good for our country. Many of the companies bought by the private equity funds then had to reduce employment, to help cover their interest costs. While the sub-prime mortgage bubble did create jobs in the short run, all of these jobs are now disappearing and won’t be back for a long time. Our country has built all the housing it will need for the next several years.
Something else the Supply Siders got wrong was the ability of tax cuts to generate enough new activity and tax revenue to pay for themselves. Instead, we will have added $4 trillion to the U.S. debt, if the money borrowed from Social Security is counted. All of the money we had to borrow because of the tax cuts will still have to be repaid out of tax future revenues. The Bush tax cuts are in reality just tax deferments – future generations will have to pay more in taxes, even while getting less in government services.
McCain recognized the fallacies of Supply Side economics and the extreme danger of massive deficit spending - McCain actually voted against the Bush Tax cuts, earning him the hatred of Republican economic conservatives. McCain actually had the nerve to point out that the emperor had no clothes. Now he is running for President. Even if the Democrats continue with their self-immolation, McCain will still need support and turnout from the economics conservatives of the Republican Party. He will need the Supply Siders to think that he is one of them. It’s a shame otherwise sensible Republicans still have to pretend to believe the Supply Side fantasy. It’s a shame that John McCain has decided he has to say something he really doesn’t believe, just to have a chance to win the Presidency.
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15 Comments
CWEGuy
Thursday, 11th September 2008 at 7:55 AM
The world is awash in capital because it hasn’t taken by usurious tax rates as it is in the USA.
Apparently, Mr. Ashby missed the fact that Inbev’s purchase of AB was enabled by the lower tax rates in Belgium.
flyover
Thursday, 11th September 2008 at 8:40 AM
What an amateurish commentary. Perhaps the author failed to notice that New York, long the world’s financial hub, has been caught by London, which will soon surpass it. America has the second highest corporate tax rate in the world, first is Japan and look at their economy. McCain does not want to give tax breaks to corporations for the sake of giving away money, he wants America to be a competative playing field so companies don’t leave for places with lower tax rates.
Corporate taxes have always been an oxymoron. The left have demonized the term “corporation” and changed the meaning, much as they have done with workds like “choice” and “change”. Corporations are groups of people. If you want to be part of a corporation, it is vere easy. Buy some stock. Corporations are groups of people. If the corporate tax was eliminated, the result would be neutral. A tax on a corporation is a tax on the people who own the stock. A much better way would be to eliminate the corporate tax, pass the profits on to the shareholders and let them pay at their own rates.
The author’s lame attempt to compare and contrast Bush v Clinton fails to mention the cost of the war on terror and the impact of the global economy which was exacerbated by NAFTA signed by Clinton. Apples and Oranges.
The author’s contention that the world is “awash in capital” was correct two years ago. Private equity deals have dried up, IPO’s are nearly non-existant and venture capital investment is down. One big reason for this the markets are spooked by the prospects of even high taxes if the Dems take over the White House and Congress. They will wait on the sidelines until the outcome is certain. Then, if the Dems raise corporate taxes and cap gains, they will deploy that capital elsewhere.
This country needs to figure out how to build something here again. Until we replace all those jobs that used to be filled with people who didn’t go to college, but lived good lives as a result of these jobs, this is what you will get.
Douglas Duckworth
Thursday, 11th September 2008 at 5:46 PM
Build something here again? Why would we do that? We benefit from cheap goods overseas and our purchasing of them is what finances these growing economies abroad. In turn they buy our bonds.
flyover
Thursday, 11th September 2008 at 5:51 PM
And they become our slum lords.
butterfly
Friday, 12th September 2008 at 11:04 AM
The author’s contention that the world is “awash in capital” was correct two years ago. Private equity deals have dried up, IPO’s are nearly non-existant and venture capital investment is down. One big reason for this the markets are spooked by the prospects of even high taxes if the Dems take over the White House and Congress. They will wait on the sidelines until the outcome is certain. Then, if the Dems raise corporate taxes and cap gains, they will deploy that capital elsewhere.
I would say a bigger reason that the capital markets have dried up is that banks have committed, for lack of a better word, fraud, in their packaging of loans to sell to other banks. (Borrowers committed fraud, too.)This is especially true in the mortgage market. Their AAA rating got downgraded far too often far too quickly. Interest rates are low, worldwide and at home, but the lack of borrowing has little to do with the possible increase in tax rates and more to do with banks being far more selective with their spigot.
flyover
Friday, 12th September 2008 at 11:23 AM
When I speak of the “capital markets” I refer to investment capital, not “debt”. You are correct that banks have serious liquidity issues which has had a very negative impact on the economy, however that only indirectly impacts the capital markets. Investment capital comes from various sources, pension funds, insurance companies, profits on other investments, etc. Those with this capital willing to inevst in the private equity firms that were buying everything a few years ago have dried up. The same investors usually participate in IPOs and there just isn’t the demand. Banks do not usually, if ever, buy stocks or make bank investments. They lend to borrowers who are supposed to provide collateral who then make the investments. It would be a tough sell to get a bank to lend you money to buy stock, for example. Looking back, I think there were social issues that were partly in play in the bank failures/fraud. Bush wanted to exapand the American dream. Fannie and Freddie were pressured to lower the historical standards which opened the gates for these mortage vendors to stick people into loans they couldn’t afford. Its like the Duke Brothers told Eddie Murphy: the good part is whether the market goes up or down, Duke and Duke get their fee.
jim
Saturday, 13th September 2008 at 8:00 PM
“Looking back, I think there were social issues that were partly in play in the bank failures/fraud. Bush wanted to exapand the American dream.”
I understand there are many interpretations of “The American Dream”, but to propose that Bush allowed those at the top to reap the short-term benefits of loose lending policies for the “social benefits” is a little far-fetched to me.
Are you proposing that the CEOs, etc. didn’t understand what irresponsible lending policies would do to the economy in the “not too distant” future (when they were ready to take their money and retire)? Or did they understand and do it anyway for the “social benefit” of those whose houses are now being foreclosed on?
When Bush speaks of “The American Dream” he is not speaking of my American Dream.
flyover
Saturday, 13th September 2008 at 10:00 PM
what I am saying is Bush put politics ahead of conservative values and encouraged finacial institutions to loosen the requirements for home ownership. whether he did it for political reasons, or whether he is a nice guy, doesn’t matter, he did it. Given an inch, about every third person you know became a mortgage broker and they only cared about selling the loan and collecting the fee. The paper was bundled and sold to people and insititions who in most cases, had no idea what they were buying, thinking the odds were that most people would pay their mortgage. What they didn’t realize was the people who had been brought in who wouldn’t have qualified ten years ago couldn’t make the payments, or couldn’t make the balloon note the mortgage vultures sold them. When we bought our first house in 1982, the lender wanted to verify everything six times. I swear I thought they were going to ask for a prostate exam, too.
notalacyfan
Sunday, 14th September 2008 at 12:49 PM
flyover,
That’s how things should be done, as a former bank regulator, we had to dot all the i’s and cross all the t’s to protect the bank’s assets and minimize its loan loss reserve against internal and/or external abuses, especially after the Savings and Loans collapse.
In banking it’s called the three C’s of credit where a loan applicant’s risk of default was determined by their credit history, capacity to repay and backup capital which was replaced by no documentation loans as a back door way for subprime borrowers to gain entry into the market place with the assistance of unscrupulous loan officers, mortgage brokers, real estate agents, and appraisers.
While some consumers were clearly duped by agents they hired to protect their best interests and chose to forgo their fudiciary responsibilities to their clients to pad their own pockets. Other consumers were willing participants in defrauding these financial institutions because they just wanted to experience the American Dream of homeownership by any means necessary; thus, all share the blame for this mortgage/economic crisis facing America today!
jim
Sunday, 14th September 2008 at 1:20 PM
flyover,
agreed. I have a question for those of you who are geared more towards the financial world. Who does the “bailout” money for Fannie and Freddie go to? The lenders themselves? The same ones who gave the bad loans? If so, wouldn’t it make more sense to evaluate the loans that they hold and give a little assistance to the homeowners who might be able to make most or part of their payments but not all? (Maybe caught in a balloon payment or something) That way, the homeowners could keep their homes, continue to work (pay taxes), contribute to the economy, etc. Meanwhile Fannie and Freddie could continue to function while they gradually (not too gradually) tighten up their lending practices. Just asking.
flyover
Sunday, 14th September 2008 at 4:01 PM
I agree it should have never have happened. Extending credit to uncreditworthy consumers isn’t doing the consumer a favor. A bankruptcy is like a decade long tattoo. While many people jumped at the chance, some were persuaded to accept terms meant only to close the transaction, with the broker knowing the guy could never make the balloon note, or refinance with a higher rate fix.
My understanding is the debt of Fannie and Freddie were protected, not the shareholders. You are correct, the government is still holding the paper. they will attempt to “work out” solutions and someday, they may get their money back. The government, which has printing presses can wait a few years, Wall Street doesn’t have that luxury (although I am beginning to wonder).
kjoe
Monday, 15th September 2008 at 12:38 PM
Obama:
This morning we woke up to some very serious and troubling news from Wall Street.
The situation with Lehman Brothers and other financial institutions is the latest in a wave of crises that are generating enormous uncertainty about the future of our financial markets. This turmoil is a major threat to our economy and its ability to create good-paying jobs and help working Americans pay their bills, save for their future, and make their mortgage payments.
The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.
I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years – one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It’s a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.
Well now, instead of prosperity trickling down, the pain has trickled up – from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.
This country can’t afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market – rules that would protect American investors and consumers. And I’ve called for policies that grow our economy and our middle-class together. That is the change I am calling for in this campaign, and that is the change I will bring as President.
McCain:
The crisis in our financial markets has taken an enormous toll on our economy and the American people — first the decline of our housing markets followed by the collapse of Bear Stearns, Fannie Mae, Freddie Mac and now Lehman Brothers. I am glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bailout Lehman Brothers, a position I have spoken about throughout this campaign. We are carefully monitoring the financial markets, including the duress at Lehman Brothers that is the latest reminder of ineffective regulation and management. Efforts must also be focused on ensuring that the deposits of hardworking Americans are protected.
It is essential for us to make sure that the U.S. remains the pre-eminent financial market of the world. This will be a highest priority of my Administration. In order to do this, major reform must be made in Washington and on Wall Street. We cannot tolerate a system that handicaps our markets and our banks and places at risk the savings of hard-working Americans and investors. The McCain-Palin Administration will replace the outdated and ineffective patchwork quilt of regulatory oversight in Washington and bring transparency and accountability to Wall Street. We will rebuild confidence in our markets and restore our leadership in the financial world.
notalacyfan
Tuesday, 16th September 2008 at 4:18 PM
Obama secured more than $14 million dollars to his friend, slumlord and convicted felon Tony Rezko who earned his “Slumlord” name because of his failed housing projects that preyed on the poor.
When Michelle and Obama wanted to purchase their dream home that costed $1.9+ million dollars, Obama solicited the help of his friend, slumlord and convicted felon Tony Rezko, because the sellers refused to sell the house separate from the land adjacent to it.
Therefore, the Obamas paid $1.3+ million dollars for the house and Rezko paid $300+ thousand dollars for the land adjacent to it. Shortly afterwards, Rezko sold the land to the Obamas for less than the purchase price Rezko paid to the original sellers.
America’s regulations are the best in the world they just need to be enforced to minimize the occurence of abusers such as Obama himself!
I bet Obama’s campaign won’t speak out on whether or not the U.S. should use taxpayers’ dollars to bail out the giant insurance company ING. Fox News is already reporting that a British company is bailing out Lehman Brothers!
Change starts at the local level where we need to get rid of the corrupt politicians who were hired to protect and serve the people but sell them out to the highest bidders; rather than promote these politicians to Washington.
As for the state of America’s economy and leadership throughout the world, it will survive and become stronger!
notalacyfan
Tuesday, 16th September 2008 at 4:30 PM
Make that $600+ thousand dollars Obama’s friend, slumlord and convited felon Tony Rezko paid for the land adjacent to the Obamas house so that the Obamas could complete the purchase of their dream home!
Jackson
Tuesday, 16th September 2008 at 5:28 PM
Ashby says: “While the sub-prime mortgage bubble did create jobs in the short run, all of these jobs are now disappearing and won’t be back for a long time. Our country has built all the housing it will need for the next several years.”
These jobs have not disappeared completely. Check the building permits in the city, Blake, and see that there are still many projects getting underway and most involve housing. Other places have been harder hit than St. Louis, but the housing market is not dead.
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