What is Supply Side Economics?
I cover law, justice, money, finance and economics.
LATE NIGHT WITH SETH MEYERS -- Episode 723 -- Pictured: (l-r) Senator Elizabeth Warren during an interview with host Seth Meyers on August 14, 2018 -- (Photo by: Lloyd Bishop/NBC/NBCU Photo Bank via Getty Images)
commonly resort to sophistry when their publics are no longer convinced by poorly reasoned, good faith apologetics. This is especially so, it seems, when what is under discussion is economic policy – in particular, policy with pronounced distributional effects.
As we all know by now, the distribution of wealth and income in the US has
dramatically to the top in recent decades. By the time
wealth and income flows had concentrated at the top of the distribution to a degree not seen since our last market meltdown and crash – that of 1929. Supply Side Economics , wealth and income flows had concentrated at the top of the distribution to a degree not seen since our last market meltdown and crash – that of 1929.
As those dates might lead you to suspect, there is a very tight causal connection between wealth and income skewing on the one hand, and market fragility followed by crash and wealth-destroying macroeconomic slump on the other. Many,
, have both demonstrated the robustness of the correlation and developed detailed explanatory models to account for it.
to our still quite dysfunctional – indeed, even worsened – income and wealth skew, and on the aforementioned
apologists who are predictably pretending to have good faith objections to it.
last week. This legislation, which Senator Warren
that produced our great middle class, makes several bold contributions.
, it requires ultra-large corporations, which are too big to be controlled by the states that charter them, to receive a federal charter as well. This provides an oversight role to that unit of governance in our federal system which is best-situated to oversee our largest limited liability firms.
, it requires the boards of these mega-firms to consider the interests of more than just mega-shareholders in corporate decision-making; they must also consider the interests of their workers and their surrounding communities. This is effectively to require them to act as good citizens and good neighbors rather than as pathological narcissists or
, Senator Warren’s proposal requires the mega-firms to include German-style worker-representation on their boards, to disclose their political lobbying activities, and to receive 75% board and shareholder approval before trying to influence our elections and our elected legislators through those forms of ‘laundered’ bribery and extortion known as ‘campaign contributions’ and ‘political expenditures.’ It also prohibits mega-firms’ officers from profiting by sales of their firms’ stock until after a ‘cooling off period’ that eliminates the incentive to engage in short-term stock price manipulation. These requirements add specific content to the second requirement, while also directly addressing, through our law, the most damaging and insidious behaviors of these out-of-control mega-firms that our law creates in the first place.
, the Accountable Capitalism Act is meant to begin to restore some semblance of that pragmatic balance among growth, inclusivity, and responsibility that was the
for decades – indeed, for over a century. That was a kind of ‘social contract’ pursuant to which workers and owners shared in the nation’s productivity gains, corporate officers looked out for their workers and surrounding communities in addition to their largest shareholders, and our elected representatives
‘strings’ attached to those extraordinary privileges
– including limited liability (a synonym for which is ‘limited accountability’) – which constituted the corporate charter: privileges that only we the people, through our elected officials, could bestow in the first place. What Senator Warren’s legislation does is first to remind us of
– which those who now routinely break it would like you to forget – and then to begin enforcing its terms once again. To restore
Great, you say, that all sounds commonsensical enough. So what is the problem? Who would object?
Well, those who break contracts, one supposes, will often be apt to object to a contract’s enforcement. And so, of course, will their hired guns.
Enter here the sophists with their playbook apologetics. Senator Warren’s bill has elicited precisely what one might have expected – and precisely from the expected quarters. And the sophists, in turn, have resorted to tried-and-true (though hardly truthful) methods of would-be mind-manipulation – methods as old as is bad faith argument itself.
The first of these methods is to recycle a bad argument that has already been discredited and rejected, after dressing it up in what looks superficially to be more acceptable garb, in hopes that now it might ‘pass.’ Think of this as the underage kid who tries to buy liquor and is ‘carded.’ The same kid comes back with a borrowed i.d. and a pair of mustachioed
The second method is the old ‘slippery slope’ routine. This one’s especially favored by those who are seeking to undermine ‘sensible middle’ positions along some continuum found between two extremes. What you do here, from your favored extreme, is to accuse the position you
If, for example, you were a communist attacking that uniquely American form of ‘accountable capitalism’ that prevailed in, say, the 1950s, you would say that this form of capitalism is ‘on the way’ to anything-goes, ‘cowboy capitalism’ of the sort that immiserates all but a rich few and thus tends to culminate in violent revolution. If, on the other hand, you were one of those rich few who resented our uniquely American ‘
,’ you would accuse it of … wait for it … yep, ‘communism.’
People who argue like this – the 'cowboys' and communists alike – of course have something in common with one another and with old George W. Bush. They ‘
.’ Unlike Senator Warren, who seeks to moderate the extremes of state-planning and out-of-control capitalism while being immoderate only in her commitment to our besieged middle class, they are unmoved by the sage Benjamin Franklin’s great motto: ‘moderation in all things – including moderation.’
Both of the sophists’ preferred styles of argumentation are on full display in the objections now raised to Senator Warren’s Accountable Capitalism Act.
Let’s start with the first strategy – what I’ll call ‘the retread.’ The first, rejected form of the argument here is that wealth and income
to accumulate at the top of the distribution – that we should
dramatic inequality – because those at the top of the distribution are ‘
This was of course a popular line taken by the ‘robber barons’ of the late 19
century before the 1907 crash, by Calvin Coolidge (‘
’) and Herbert Hoover before the 1929 crash, and by those intoxicated by ‘deregulation’ and ‘tax-reform’ before the 2008 crash. Its highbrow form was dubbed ‘
’ by Reagan groupies during the 1980s, and rightly repudiated by George H. W. Bush – who, unlike his son,
’) in 1980 and practically (via the tax code) during his presidency.
Where corporate governance is concerned, the old supply side economics feeds into the ‘
back in the 1970s and 1980s. Since the ownership of more than 84% of American corporate shares is
of our population, calling for ‘shareholder value’ maximization and greater wealth inequality were and are more or less extensionally equivalent. Operationally they come to the same thing.
. It simply cannot be argued with straight face any longer, now that we have literally decades and decades of empirical evidence showing that skewed wealth and income fuel asset price bubbles and busts rather than real Supply Side Economics , sustained, and inclusive macroeconomic growth. And shareholder value maximization,
until we spread share-ownership itself far more equitably
, just is more wealth inequality. This is the kid who got carded at the liquor store. Nice try, kid.
worn by the kid now, in his second bite at our economic apple? Why,
is essentially a ratio comparing the values of firms with the values of their capital assets. The idea is to get some rough estimate of the value that a firm, with its particular mode of organizing productive activity, ‘adds’ to the value of what it uses in that productive activity. The idea to track this relation actually originates with Kaldor, in the form of what Kaldor called ‘
There are sundry variations on Tobin’s particular rendition of this ratio – e.g., assets’ market value relative to replacement value, assets’ and liabilities’ market value relative to book value, and, at the ‘macro’ level, aggregate stock market valuation relative to corporate net worth. But what they all have in common is their attempt to get at how much value our firms, as would-be synergistic systems of wealth-producing capital-use, add.
We do well to keep those questions in mind as we consider the first, retread argument raised against Senator Warren’s Accountable Capitalism Act.
faniliarly enough, ‘is simply the ratio between the market value of a company and the book value of its invested capital.’ Hence, ‘[p]ut simply, a Tobin Q ratio higher than 100% means that a company is creating economic value, and a Tobin Q below 100% means that a company is destroying value.’ That is indeed to put the point ‘simply,’ but again, close enough. Yet now comes the
From the two trivial observations just noted, we are told,
that ‘[t]he most fundamental social responsibility of a company is to add value to the capital it employs, so the most fundamental job responsibility of a corporate CEO is to keep the Tobin Q ratio of the company he or she leads above 100%.’
, since ‘America’s Tobin Q ratio has averaged more than 100%’ since 1995, ‘while Germany’s Tobin Q ratio has averaged about 55%,’ that ‘America’s … corporations are creating economic value, while Germany’s … companies are doing the equivalent of burning 45% of the euros entrusted to them.’
That’s pretty remarkable, isn’t it? The US, which has the
outcomes relative to the rest of the developed world while
careening from bubble to bust and bubble to bust like a manic-depressive
, is doing just fine where ‘creating economic value’ is concerned. Meanwhile Germany, whose economy, education system, and social safety net are
its pragmatic, can-do, Warren- and formerly American-style corporate social contract, is simply ‘burning value.’
So what is the problem with this argument? How can its conclusion be so at odds with what anyone looking – or reading – can see?
Well, actually, there are multiple problems with it, some of them stemming from problems with
’s numerator – typically operationalized as the market price of shares – assumes that price is equivalent to long-term value. But nobody who’s lived through our recent decades of boom and bust can seriously believe that any longer – not, that is, unless they are willing to go full Ptolemy by arguing that not
inexplicably sudden changes in firms’ ‘fundamental value’ itself
’s denominator – typically taken for the value of firms’ assets – tends to miss many intangible assets like non-monetized ‘intellectual capital,’ new modes of organization, and firms’ ‘goodwill’ value.
But far more important than any of these problems, which stem from imperfect valuation methodologies and bad finance theory, is something far more egregious. That is that the argument doesn’t add anything - doesn't, dare we say, 'add any value' - to the argument it pretends to replace. This is what makes it what I’ve called a retread. It simply but surreptitiously
‘value’ with share price, then purports to ‘conclude’ from that
(a) that corporate officers, along with our system of corporate governance itself, are obligated to aim for a maximal
– that is, to maximize ‘shareholder value’ – and (b) that economic powerhouse Germany, of all countries, has simply been ‘burning’ 45% of its companies’ inputs.
Why resort to an ‘argument’ of this sort? What drives the sophistry? Two things, I’ll wager. One is the need for
. The old arguments are discredited and long since discarded. Hence they have to be tarted up and refurbished – they must be retread – if they’re to be recycled and reused. The other driver doubtless is the ‘scientific’ whiff of an argument that employs terms of art used in technical disciplines.
If you want to come across as an ‘authority’ on some matter of psychological interest, for example, you’ll throw around magic words like ‘transference,’ ‘cathexis,’ ‘sublimation,’ or ‘penis envy’ if you want to
, or perhaps ‘stimulus,’ ‘response,’ ‘conditioning, ’ and so on if you want to sound Supply Side Economics
. Just so, if you want to sound authoritative on matters corporate or financial, you say things like ‘something something
.’ Then your puzzled listener, you hope, concludes ‘wow, this guy’s an
.’ Or she looks up the word, sees it explained in a manner that employs mathematical or statistical formulae, and
But though you might hope this, your readers will eventually get wise to you. They’ll see that you’re actually just ‘putting lipstick on a pig,’ or better yet pulling a Woody Allen in
’ is no more than a cheap retread of the old trickle-down, ‘shareholder value’ argument – because it is simply a kid wearing
– it is deserving of no more respect than that earlier argument itself. The fact that generations of earlier politicians and corporate officers
the old argument in its earlier guises is precisely
our great middle class, and begun to look like the ‘
’ of the developed world – a once-great economy and society in decline.
Senator Warren is doing no more and no less than working to
this degenerative disease. To argue against her that this will ‘lower our national
ratio’ is accordingly like ‘objecting’ to the firemen that ‘that there water is liable to put out the fire.’ It simply isn’t an argument against the proposal.
It’s also quite incorrect, since a restored middle class will be able to
buy more, restore real macroeconomic growth, and thereby boost corporate profits
out there, that Senator Warren 'would destroy trillions in market value,’ is as incorrect as it is irrelevant. But let’s leave this to one side rather than beat the now long-dead dead animal.
champions are raising against Senator Warren – the slippery slope argument? This one’s the funniest of all right now in its wild-eyed fantasies and zany hysteria.
, is simply a ‘form of communism.’ And ‘[b]oth progressivism and socialism,’ we are told, ‘inevitably lead to totalitarianism.’ This is the
version of the argument, the one that results in your
out there, to the effect that the Accountable Capitalism Act would ‘fundamentally upend the way the most productive companies in the American economy work.’ And then there’s an ironical, pot-calling-the-snow-black variant of the argument that calls Senator Warren’s proposed legislation ‘
accountable capitalism now gutting our middle class has led many to note that we’re
But hold on there, fellas, don’t panic just yet. This is all simply hysteria or, if not being put forth in good faith, old fashioned McCarthyite red-baiting. Were progressivism simply a form of communism, then we’d all have been ‘communist’ even before the Soviet Union, during the presidencies of
Woodrow Wilson, for example. Many Americans know that our country was in many ways ‘ahead of the curve’ during what generally is called ‘
century. But it will be news to most everyone that
Woodrow Wilson were ahead of Lenin and Trotsky in bringing communism to an advanced nation.
Similarly, if progressivism and socialism lead ‘inevitably … to totalitarianism,’ then totalitarianism had better get a move on. For, over a century after the TR and Wilson presidencies, there seems no totalitarianism in sight – unless, of course, that would come from the present administration, itself the product of our middle class’s hollowing-out. It seems to be late in coming to Britain, Denmark, Finland, France, Germany, Italy, Norway, Spain, Sweden and other social democrat countries as well, all of which adopted American-style mixed-capitalism after the Second World War, and all of which do better at delivering prosperity to their great middle classes now than does the one country that has abandoned the American model – America itself.
One also wonders, of course, how we’ve managed to avert totalitarianism since the 18
socialist local, state, and federal legislatures and executives
. Actually, almost no one wonders about this at all – because almost no one finds Chicken Little style, slippery slope hysteria on steroids persuasive.
What about the less breathless slippery slope warning, then – the one about ‘upending’ how our ‘most productive’ companies work? Here too a deep breath and deep data dive should calm the nerves of the knock-knees.
some 1.7 million C Corps in the U.S. Of these, about 1,900 public companies and perhaps 200 private concerns have sales over $1 billion – the triggering condition for Senator Warren’s bill to kick in. This means
of U.S. businesses would be affected by the legislation.
smaller firms are the primary drivers of growth and employment in our economy
, and you see at once that Senator Warren’s Accountable Capitalism Act is ‘narrowly tailored’ to cover precisely those firms that it ought – namely, those slow-growth mega-firms that are too large for states to oversee, and so large that their officers can do mega-harm, exacerbate mega-inequality, and unaccountably spend mega-bucks they don’t own on their own compensation packages and our elected officials. Unaccountability on this massive a scale simply isn’t sustainable. It is precisely what ultimately brings far-right and far-left extremism – the antithesis of
and Ben Franklin’s ‘moderation in all things’ - to a society once ruled by common sense.
capitalism again. And that is to say we must make it accountable again. This, and only this, is what Senator Warren's new legislation is both intended and well-calculated to do.
Robert Hockett writes on legal, financial and economic subjects and serves as a regular advisor to regulators and legislators. His book,
I teach legal, financial and some philosophical subjects at Cornell University in New York, where I am the Edward Cornell Professor of Law and a Professor of Public Policy. I also am Senior Counsel at Westwood Capital, a socially responsible investment bank in midtown Manhat...
0 Reviews:
Post Your Review