Supply Side Economics is a Fraud

In interesting showing in a very concise form that the data does not support the theory of supply side economics:

The biggest political theory of the last 30 years is supply side economics. It was the basis of the policies of all Republican presidents from Ronald Reagan onward. The idea is that if the rich are given more money, they will use it to invest in business and thus create jobs. According to the theory, if you give money to the poor, they will just spend it. The rich, on the other hand, will help businesses to grow and this will help the poor.

The idea is nonsense as anyone who has ever run an actual business should be able to explain. Businesses expand when they see a lot of demand for their products. If a computer repair business has to turn away business for lack of resources, it will hire another tech to be able to take the extra work. This is as simple a notion as there is. Now it is also the case that in rare instances, a company may see a market opportunity but not expand to meet it because they simply don’t have the start up capital to do it. Maybe expanding would require buying more property and the cost of a loan is too high. But that is a rare case. In general, businesses are demand constrained.

But this isn’t a matter of conjecture. If businesses really acted the way that conservatives claim, then businesses should invest a lot more when profits were high compared to when they were low. That’s why I found the following graph from Dean Baker so interesting. It shows corporate profits and investment as a share of GDP since the end of World War II. The thing to notice here is that there is nothing to notice:

While correlation does not imply causation, as the saying goes, a lack of correlation does imply a lack of causation, and in this case, we have what appears to be a slight  negative correlation.

Economics is frequently called dismal science for reasons that are patently obvious, but supply side economics does not even rise to that meager standard.

It is instead a reflection of Calvinist theories of predestination, which, among other things believes that wealth and material success are indications that one is part of the “elect” and hence bound for salvation.

Calvinism believes that wealth is a (though not the only) sign of virtue, and supply side economics is an outgrowth of a philosophy that came over with the Pilgrims at Plymouth Rock.

It’s an article of faith, and as such it should be accorded no more intellectual weight than the precepts of the Church of the Flying Spaghetti Monster. (Maybe less, because Pastafarians don’t want to screw it up for the rest of us.)

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