The argument could be made that it worked based on the fact that both GM and Chrysler used the bailout to restructure and recover, and that both manufacturers are still in business and successful today thanks to the bailout. Both met their obligations for repayment and the Fed made some money off the whole deal, so win-win. While the market certainly could have covered the loss of GM and Chrysler, it also stands to reason that less competition in the market, especially from lower-cost American manufacturers, could have driven prices up across the remaining manufacturers, which would have hurt consumers in the long run.
But again, the auto industry and banking industry bailouts were special cases, targeted to stave off possible recession/depression, and were limited in scope. The GOP wants to simply give money away to corporations and the super wealthy on an ongoing basis, with no grounding in any evidence that it benefits the economy in any perceivable way. That’s just stupid.
As I said, folks can hypothesize all they want about the various potentialities which could have happened. This is why most economic policy discussions don’t end in agreement and resolution.
If GM and Chrysler had collapsed, you almost certainly would have had massive layoffs within those companies themselves. While other companies would have likely bought out parts of them, and certainly we’d still have cars, you’d also see massive economic problems for all of the tangentially connected parts of the auto industry. Car sales for those brands would have fallen (further) through the floor, as folks avoided buying them due to uncertain futures of the brands. This would have percolated through the various retail elements of the industry.
Certainly, when it was all said and done, the world would keep spinning. The industry would recover. It may even recover in a better form which was more healthy from a longterm perspective.
But you almost certainly would have had a significant deepening of the already deep economic collapse we were experiencing at the time, and given how deep in the hole the economy already was, I am skeptical that we could have endured that additional hardship, at that particular time in history.
But again, the trickle down theory isn’t about propping up businesses. The idea is if you give company A (or an investor) ten dollars it turns into 100 dollars and goes to this area and this area takes that money and x factors it again. The only thing I hear about this bailout is hey look, they’re in business and fed made money on the deal… but what was the factor to the economy? That we can measure after the fact. The idea is the end result is MORE than giving the money directly to the consumers, so to use it as a proof trickle down works, you’d have to show that.
And again I am not talking about whether or not the bail out was necessary or whether or not the money should have been spent, the question is, was it better to give it to someone like GM or Chrysal rather than give consumers the money to say go buy a car.
And if you want to do a test case of stimulus versus austerity in a recession, we had a pretty good natural experiment there. Just compare the US post 2007 to the UK. Both heavily industrialized nations, wealthy, with large service and banking sectors. If you were looking for the country most similar in economic makeup to the US, then the UK is almost certainly it.
They pursued austerity, and as a result their economic recovery was slower, weaker, higher unemployment, and nowhere near as successful. It is clear that pursuing austerity led to worse outcomes both at the macro scale, and at the individual level.
As much as I may complain about the specifics of how the bailouts were done, and the banking industry in particular needed far more teeth, and really go after the fuckers, the auto bailout is almost a perfect example of why it was good policy. Really my biggest counter argument to them is that we really should have put the top brass of BoA and Citigroup in jail, and cut the executive salaries off at the knees.
I think it’s silly to refer to targeted bailouts as “trickle-down” economics. There are plenty of situations where government makes capital investments or expenditures. “Trickle-down” sensibly refers only to policies that make the investor-class as a whole wealthier in order to encourage general economic growth. With that definition it is much harder to find success stories.
It’s also true that impoverishing the investor class as a whole, as they’ve tried in Venezuela, is generally disastrous for economic growth.
Targeted bailouts are absolutely a case of supply side economic principles at work. Without question.
You are giving money to the supply side of the economy, with the goal of them using that money to increase employment. This is the fundamental basis of supply side economics. It’s the flip side of the coin to keynesian economics, which would instead favor taking that money and giving it to the DEMAND side (consumers), with the hope that they then purchase goods and that increased demand results in increased employment as a response from the supply side.
Again, you can try to separate off “trickle down economics” from supply side economics, and say that “trickle down” is the bastardization of the idea and conversion into dogmatic political talking point bullshit, and that’s fine to discount that. But you need to be clear then that you aren’t talking about the broader basis of supply side economics, because originally “Trickle down economics” was just another term used to try and explain supply side economics.
But again, the bailouts were not trickle down economics. You are arguing in circles. The point I was making is that trickle down as implemented by the GOP does not work. You seem to agree with that, so I think we are on the same side of the argument as a whole. The bailouts did work, but were not trickle down (and also not the idea of the GOP). Conflating the two is confusing the issue.
I question this. :-) I would argue that bailouts like the auto and bank industry were NOT good examples of supply side economic principles, but rather the opposite.
Supply side economics is generally defined by it’s indirect intervention in business as a whole. By using things like tax incentives and tax cuts, as well as deregulation, supply side economists believe that businesses and the wealthy will use the money saved to expand, re-invest and generally be more successful, thereby stimulating the economy from the top down.
Demand side, or Keynesian, economists believe that direct intervention in the economy through subsidies, regulation, stimulus and direct investment is the key to jump-starting a stagnant economy. Basically they say that the government is responsible for shepherding a nation’s economy, giving a nudge here and there when needed.
The auto industry bailouts of GM and Chrysler, as well as the bank bailouts that followed, are very good examples of government directly investing in the nation’s economy to avoid recession and promote consumer confidence. The bailouts were a stimulus package directly to specific companies within an industry. That comes pretty close to the very definition of demand side economics.
I am not arguing in circles; I am arguing against Timex using it as an example of what the GOP is trying to sell, supply side/ trickle down. The bailouts were rather unique, and even then there is no proof they actually worked better than giving the same amount some other way… other than those two companies are still in business, which is not the purpose of a GOP trickle down.
You seem to be ignoring the fact that the name of the principle is actually describing a core aspect of it… that is, whether you are investing government resources in the supply or the demand side of the economy.
Certainly one aspect of supply side economics is deregulation, in order to provide more resources to the industrial producers by reducing their required expenditures in meeting regulations, but the other general approach is reduction of tax liability. But the ultimate point is to infuse resources into the supply side of the economy. Hence the name “Supply side economics”.
This is in contrast to Keynesian concepts like Demand Management.
Now, in practice, they both end up ultimately achieving similar effects, because of course they are both working on different parts of the same core economic equation.
The auto bailout was an effect of the government infusing resources into the supply side of the equation. It was merely done in a much more targeted manner than what is generally advocated by the GOP these days… But they were not attempting to regulate demand. They were attempting to prop up the supply side.
[quote=“Timex, post:91, topic:129073, full:true”]
You seem to be ignoring the fact that the name of the principle is actually describing a core aspect of it… that is, whether you are investing government resources in the supply or the demand side of the economy.[/quote]
The names are a simplification of the philosophies and principles behind the practices, they’re not an absolute. In the example of the auto industry bailout: had the government used deregulation, tax incentives and tariffs on imports to influence the markets to indirectly give GM, Chrysler and Ford more money and a competitive advantage it would have been textbook supply side.
Instead they directly influenced the markets by loaning cash to only GM and Chrysler, thereby allowing them to stay in business in the short term and keeping the domestic market afloat for consumers. While the money went to a supplier (two actually), it most benefitted the consumer as it allowed competition to stay viable in the domestic market and thereby prices to remain competitive for consumers. The government didn’t loan GM and Chrysler money because they love Buicks and Ram pickups, they loaned them money because American consumers needed those companies to stay in business both to service the already existing market of sold vehicles and to keep the domestic market going so that consumer confidence and prices both remained steady in a time of financial crisis. The reason behind the loans was the direct benefit of the demand side, the supply side just got a cheap loan they still had to pay back, not a direct infusion of free cash or regulations/incentives that amounted to as much.
Those are merely specific implementations of supply side economic principles. They are the policy recommendations typically associated with supply side advocates, but they are not the defining aspects of the school of thought.
What you are saying here is basically the textbook phrasing of the consumer benefits derived from supply side economics, just so you know.
The fact that it benefits consumers does not make it Keynesian.
The biggest problem with the theory of supply side economics is that companies will spend the money that you are giving them via tax breaks. In the case of the bailouts, they didn’t have a choice; the money that was given to them had to be spent on getting their business in line. The government was literally one of the decision making bodies in how the bailout money was spent. Without controls over how the freed up money are spent, you end up with companies hording the cash or giving it to their own top 1% via huge executive bonuses (or dividends, in some cases). In 1965, average CEO pay was ~20x (20:1) the average employee salary. That ratio in 2006 exploded to 400:1.
In 2016, U.S. corporations had an estimated $1.68 TRILLION on horded cash. 72% of that is stashed away off-shore. That’s a vast increase of $742 billion that was being held on to in 2007. Horded money doesn’t do anything for the economy. Offshore money doesn’t do anything for the economy. To think that giving companies even more money will somehow trigger them to expanding operations, hiring more people, increasing salaries… that’s absurd.
If there is going to be any cut to the corporate tax rate with the goal of stimulating the economy, the cuts need to be tied directly to stimulation efforts. Increase the write-off rate for employee salaries, for example.
As for the top tax brackets receiving big tax breaks, it’s been proven time and time again that it doesn’t do anything for the economy. The IMF, for example, had consistently found that when the top 20% of income earners are given a tax break, it actually lowers the GDP. This is because the rich don’t spend their money. They sit on it. Or, if they do spend it, it tends to be in a money shuffle; they spend it by giving it to other rich people. It’s a shell game that looks like spending but, in practice, doesn’t introduce the money back in to the economy in enough volume to stimulate growth. Cutting rates for the other 80%, on the other hand, typically has a large impact on GDP that causes ripples for years.
It’s also probably the reason our tax code is so completely fucked and so many people say, “Let’s just go with a flat tax” even though it would utterly fuck them over.
In my specific case, no. I’m the son of a tax accountant. I was listening to way too much about tax codes well before I ever filed a tax return. Strangely, my father was the biggest proponent of change to the tax system, despite it being a big part of his livelihood.
I hear you, though. I’ve had a number of conversations with people who are for flat tax that don’t understand how our current progressive tax system works, at all.
As we’ve established, the American electorate on the whole are a bunch of fucking idiots.
It’s not that hard to understand the concept of progressive marginal tax rates on income. It’s almost certainly the single least complicated aspect of our tax code, and yet that’s the target of the useful idiots’ ire when it comes to “tax reform.”
The 1040EZ is not a hard form to fill out and figure out what your tax burden is if your financial situation is simple. But weirdly enough, people would rather deal with the 1040 or 1040A to pick up the carve-outs and deductions they are entitled to, because they’re free money.
Me, I’d be all for nuking everything but:
Standard deduction
Child tax credit
Tax-deferred investment vehicles like IRAs, HSAs*, etc
Other than that? Burn it the fuck down. We’d be way better off giving out one-time grants instead of the labyrinth of half-assed Pigovian taxes and industry/rich-person handouts that make up the majority of the tax code today. Natives are disadvantaged because of a ton of reasons? How about build (and FUND) schools and job training where they live. Want to encourage home ownership? Expand the FHA to make better loans available to more people at lower rates. Want to encourage career mobility among older adults? Put some money into training programs, grants for adult education, etc.
Deferring this all to tax time lowers the behavior-inducing effects (time-shifting rewards HUGELY reduces their psychological impact) and puts the administration and enforcement on the IRS, which is hilariously underfunded to start with (who likes the tax man, anyway?). It’s just stupid.
Of course, capital gains are taxed as regular income at whatever marginal rate, and there’s a whole new agency tasked with fucking over corporations that try offshoring income/assets with a rusty spork. And HSAs ultimately get phased out when proper goddamn (single-payer) healthcare gets implemented.
And the fact that it benefits manufacturers does not make it supply side by default either.
We agree on a lot of stuff @Timex, but on this subject of where the bailouts fall in the economic philosophy spectrum we’ll just have to agree to disagree my friend. If ever we meet in person I will buy you a beer and we can discuss further. :-)
Swinging back to the main topic of Republican tax reform, I have to admit I am very curious to see what sort of proposal they come up with. 12 years ago when most Republicans were still fiscally conservative, reduction in federal government/debt/involvement supporting, reasonable thinking kind of people it would have not been difficult to guess what sort of tax reforms they would support. Now that the party has been usurped by socially challenged, Jesus spouting, 'Murica loving morons who couldn’t critically think their way out of a D.C. traffic circle…who knows what incredibly idiotic and potentially disastrous legislation they’ll produce.
