TRICKLE DOWN ECONOMICS = SUPPLY SIDE ECONOMICS

Posted: May 12, 2014 in Current Events, Election, politics, Statistics and Lies

I’m far from an expert on economics. I have a few university economics courses and have been trying to read up on various issues. So I may be a bit better informed than many, but quite willing to accept debate, criticism or correction.

Trickle Down Economics is a bastion of the Right Wing. Right now it is the strategy of choice by the Ontario Progressive Conservative Party and their leader Tim Hudak. It claims that economic growth works best in an environment that encourages the supply side of the economy equation. This would include business owners, corporations and manufacturers. The benefits are claimed to be more employment, lower prices and more government revenue with which to pay down debt. The last of these plays double duty as it is also a rationale for smaller government and public sector cuts. On that side, the means by which to accomplish this is to reduce government spending and programs plus reducing tax rates for corporations and businesses.

Except it doesn’t work … for quite a number of reasons.

1. Reducing tax rates for is supposed to make investment in Ontario more appealing and therefore encourage more businesses to locate here. (Hudak is proposing to cut provincial corporate taxes by 30%. No mention is made of personal taxes.) However Ontario tax rates for businesses is already one of the lowest around, competing favorably with other Canadian provinces and most U.S. states. It would be a very small number of businesses that would be enticed to move here if the rates were decreased even more.

2. Whatever increase in business which might be attracted to Ontario would add an additional expense to the infrastructure needed to maintain it, which is paid for by tax dollars. With the corporate taxes cut, additional expenses would either be paid by greater personal taxes or by redirecting massive funds from public service areas (like education).

3. There is no guarantee that reduced taxes will transfer into reduced prices, greater employment or economic growth. It is just as likely that it will simply be transformed into greater profits. There is actually considerable evidence for this alternative, which I will point out later.

4. In order for businesses to produce more goods or services, they have to have the market. That’s a central problem with Supply Side Economics. It addresses the Supply side of things, but forgets about the Demand side. Pink slipping 100 000 public sector employees doesn’t exactly stimulate spending. Don’t forget that this subtraction will have a domino effect on the health of other businesses. Aside from workers who have lost their jobs no longer having money to spend at restaurants or buying new products, further cuts in things like the school budget will impact those companies that provide school supplies, books, etc. This negative trickle down effect is well documented and more certain than the positive one the Right is counting on.

5. There is considerable statistical data showing that this formula cannot be regarded as straight forward as most politicians would like. For example the Laffer curve in economics (often referred to by Right Wing politicians) states that there is an optimal taxation rate for government revenue , above an below which that revenue diminishes. If that rate is 30%, that means going above 30% diminishes government revenue. But it also means that going below it does as well, because of reduced income. This is very significant to an agenda that wants to reduce tax rates to stimulate the economy and pay down the debt.

6. But wouldn’t the increased employment counter that? That would depend on whether decreased corporate taxes translates into increased jobs. If there is no larger market, barring export, why would it? And the data tends not to support that at all. In the first graph I looked at (http://nealjennings.files.wordpress.com/2011/05/employment.jpg)
which showed corporate tax rates plotted against employment rates, the general correlation is that the lower the tax rate, the lower the employment rate, and the higher the tax rate, the higher the employment rate. Granted, when comparing countries there are probably a multitude of other factors, however the point is made.

Looking at tax rates plotted against employment in the same country (the U.S., as data like this for Canada or Ontario is hard to come by),
http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/
over time, we find no correlation between corporate taxes and employment, although we do find that (as has been pointed out frequently) there is a notable increase in the share of wealth possessed by the top earners. That increase has to come from somewhere.

7. The one convincingly pro tax cut graph that I encountered stated that tax cuts modestly stimulate employment and economic growth when they are received by small businesses, but not when given to large businesses. This makes sense as small businesses are coping with difficulties different from large businesses, and very often have an untapped market due to limited resources. Giving small businesses a break allows for growth and new employees. I suspect that the same would be true of start-ups. However this can often be better done through grants or tax credits, aimed directly at these demographics. (It is noteworthy that the Hudak proposal is planning to balance the 30% tax cut by eliminating the grants and tax credits, -which he refers to as corporate welfare.)

8. How exactly does cutting 100 000 public sector jobs translate into more jobs? It certainly will reduce government spending and therefore help to reduce the debt, but what does that have to do with jobs? Will a smaller debt make Ontraio more enticing as an investment opportunity, or encourage existing companies to expand?   I’m having trouble understanding how. In fact if smaller government and curtailed services lead ineffective beaurocracies or inferior infrastructure, then I can see it being a strong negative. People have to want to live here.

As I read from one commenter, what is needed here is a scalpel rather than a machete. Not just smaller government, but smarter government. I don’t think that is what is usually proposed by trickle down economic policies, and certainly not by Hudak’s P.C. party in Ontario. In fact Hudak seems to have just bought and slightly renovated Rob Fords’s whole “gravy train” philosophy. Corporate taxes in Ontario are low compared to our competitors (unless we want to emulate the labour conditions in China or Mexico). Job creation in Ontario has been progressing at a decent rate. At best the P.C. plan proposes to pay off the deficit one year earlier than the Liberals, -and they’re probably both lying. But underlying that is the fact that our current provincial deficit is far from the worst it’s been and is quite serviceable. It’s always good to pay it down, but it’s not the crisis that so many people want to make it. And studies show that, unless it goes off the deep end, it has absolutely no relation to employment, corporate investment or GDP. Not all cuts are good cuts. Government has to provide certain services not just to benefit corporations, but also individuals. Nobody wants another Walkerton.

And then there is the whole question of exactly what kind of economics we want in the province of Ontario. Do we want an economic policy where money is the most important thing? Or should be be including the environment in the equation. Does society exist solely to provide resources for the economic aristocracy, as in the Middle Ages, or do we recognize a social responsibility to spread wealth and opportunity in a more equitable way?

Economics is complicated.  It probably shouldn’t be reduced to a few talking points or a simplistic policy.  It’s hard to say what combination of factors will have what effect.  But it is fairly easy to see what is likely to be folly.  Without some kind of explanatory note, cutting 100 0 jobs and decreasing corporate taxes by 30% looks like just another tactic to widen the income and wealth disparity in our society.

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  1. […] TRICKLE DOWN ECONOMICS = SUPPLY SIDE ECONOMICS […]

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