The Pandemic Has Just Destroyed Supply-Side Economics
I remember those heady days just after Ronald Reagan was elected in 1980. I remember how back then, the government was the problem, not the solution. Who among us has forgotten how those gigantic tax cuts would be the solution to our problems back then? Everyone smiled. We all just knew we were going to prosper together.
The ideas promoted by Reagan and his merry band of profiteers were that if we cut taxes to the bone, that the economy would boom and everyone would prosper. Everyone would have more money in their pockets and more money to spend. Oddly, not a word was said to suggest that we might want to save our money and have enough saved to weather any contingency. What we got after four decades was a nation with half the people living on subsistence wages and the other doing somewhat better. All the while, a small and privileged few, chosen by the government, amassed giant fortunes.
Fast forward to the pandemic today. Millions of people have lost their jobs. Millions can’t make rent or the mortgage. Millions could not sustain a long period of unemployment due to a virus that no one can see directly. 90,000 people have died as a result of our lack of preparedness. This is what it means to live by quarterly profits. It’s great if you own the business. Not so great if you can’t go to work or pay your medical bills.
The basic premise of Supply-Side Economics is that lower tax rates would encourage greater business investment. This, in turn, would lead to greater gains in productivity. Greater productivity would lead to higher wages and in the end a greater supply of high quality, lower-cost products.
They didn’t tell us that instead of investing in domestic production, that they would be moving manufacturing overseas. They didn’t tell us that big businesses would be merging and consolidating instead of investing in production here. They didn’t tell us that they’d be buying back their own stock with the money gained from the tax cuts.
After 40 years, you’d think we had enough. Well, signs are beginning to emerge that Supply Side Economics has betrayed us. Reagan, and all of his fans, have betrayed us. How do we know this?
Some people have started to wake up and notice that the economy is powered by demand, not supply. Why else would every adult American with a Social Security number have received a $1200 payment from the government in the last month? Somebody noticed where the giant sucking sound was coming from — a lack of demand. Why else would a billionaire like Mark Cuban be talking about sending $1,000 every two weeks to 128 million families with a condition that the money must be spent in 10 days? Use it lose it, he says. Cuban is a billionaire so I think he knows something about money. And he estimates his plan would cost only $500 billion. It sounds like a bargain to me.
Mark Cuban isn’t the only one. Marc Benioff, co-founder, and CEO of Salesforce says that all companies should adopt an 8-point plan to fight the pandemic. The most important point of his plan? No layoffs for 90 days. Benioff understands that if people don’t have money to spend, even more people will lose their jobs.
Further evidence that Supply Side Economics doesn’t work is that Congress has authorized a $600 a week in addition to each state unemployment benefit for up to four months. The federal and state governments now recognize that by giving the money they need to get through the pandemic is less expensive than not giving it. I’m really surprised that Trump signed those bills since he’s already made his money.
There are now more than 33 million unemployed. Those people will have time and money. They are evidence of the stagnating wages left to them by Supply-Side Economics. A tax cut is not the same as a raise. Seriously. If tax cuts leave more money circulating the economy, why didn’t wages track with productivity for 40 years? Because business owners wanted all the gains in productivity due to technological advances, to themselves. There is no other reason to explain why CEO pay is roughly 300–400x what the average worker makes.
Early on in the pandemic, as our hospitals began to swell with patients, we had trouble getting the ventilators, the masks, and other supplies needed to support a sustained fight against the coronavirus. We still don’t have a vaccine, and we don’t have a cure yet. We’re still learning how to deal with it because different people respond differently to the virus. I think it’s interesting that, relative to the bailouts, we’re not spending that much money on research. I guess the government is expecting that private organizations, incentivized by patents, will come up with a vaccine. Here again, we’re expecting the supply side to just magically appear.
When I think of Donald Trump and how he has managed our response to the coronavirus, I see someone engaged in magical thinking. Trump thinks we’ll wrap this up in time for the election. The two nations that have made the most aggressive and fastest responses to the pandemic, South Korea and Singapore, have leaders who think otherwise. They acknowledge that they had to destroy their economies to save lives. They also acknowledge that they’re dealing with a second wave, and they don’t expect the virus to run its course for another couple of years.
Supply-Side Economics is not going to save us from the pandemic. Supply-Side Economics weakened our country to the point where we were completely unprepared for the pandemic. Magical thinking gave us a president who did not follow the guidance he had received about the potential for a pandemic. Magical thinking told our president that the coronavirus was not a big deal. Magical thinking told our president to dismantle the organizations that President Obama had put in place to prepare for such an event. Notice that zero businesses were prepared. That’s a clear indictment of Supply-Side Economics. It should now be obvious to anyone that no amount of tax-cutting would have incentivised the business community to prepare for a pandemic.
A tax cut is not the same as a raise. Not even close. If wages had tracked with productivity, then most Americans would have been able to save enough money to weather the pandemic. Whether or not they have the mental capacity to save their money wisely is for another article. I’d love to see my country filled with people who have a year of expenses saved up. I know it’s possible. Just ask Mr. Money Mustache.
Supply-Side Economics has another name: neoliberalism. Neoliberalism is a moral philosophy for selfishness. Neoliberalism has one aim and one aim only: to devise a system of laws and economic structure that distributes the national income upwards. It’s a Conservative Nanny State. Neoliberalism suggests that when people have more money, they will spend it. That seems true until you realize that when people earn more than enough money for their immediate needs, they tend to save their money.
I know this for myself. The vast majority of the money that I received from the stimulus package went to savings. We only spent as much as wanted to spend. I’m not wealthy, and I’m not poor, I’m somewhere in between, and I know how to save money.
Wealthy people know how save their money. What tickles their heart is to see one more digit on the bottom line — they know the power of 10. Whether or not they care if their workers are happy is a subject of debate. What we can know for sure is that Supply-Side Economics was killed by the coronavirus.