Monday, December 14, 2009

Supply side nonsense

Greetings good citizen,

Happy Monday, such as it is. Uh, the ‘Stupidity Index’ advanced 29 whole points today but most commentators don’t expect that to go on much longer.

We’re confronted with the proverbial ‘Boy who cried Wolf’, only this time the boy cried it was all over…Well, people took what he said at face value, but now it’s six months later and we still can’t point to any positive economic activity. Did the boy lie to us like he’s done countless times before?

It’s sure looking that way.

Moving along we come to tonight’s offering for an in depth look at the properties of money…as well as why you end up holding the, er, ‘dirty’ end of the stick.

The supply-side tax con
By Henry CK Liu

In recent decades, an counter intuitive myth has been pushed on the unsuspecting public by supply-side economists - that low taxes encourage corporations, employers and entrepreneurs to create high-paying jobs. The counterintuitive historical truth is that a progressive income tax regime with over 90% for top-bracket incomes actually encourages management and employers to raise wages. The principle behind this truth is that it is easier to be generous with the government’s money. [And that the ONLY reason the ungrateful bastards handed it over. Once Reagan let them keep more of what they stole, workers stopped getting raises that kept abreast of inflation.]

In the past, when the top corporate income tax rate was over 50% and the personal income tax rate at over 90%, both management and employers had less incentive to maximize net income by cutting costs in the form of wages. Why give the government the money when it could be better spent keeping employees happy? [This is slightly off the mark…the reason for paying your people more was it increased the number of customers you had for your products. The ‘Ford Principle’ if you will.]

The Reagan "revolution", as inspired by voodoo supply-side economics, started a frenzy of income tax rate reduction that invited employers to keep wages low because cost savings from wages would produce profits that employers could keep instead of having it taxed away by high tax rates.

It follows that the low income tax rate regime leads directly to excess profit from stagnant wages, which leads to over-investment because demand could not keep pace with excess profit due to low wages. Say's Law [1] on "supply creating its own demand", which supply-side economists lean on as intellectual premise, holds true only under full employment with good wages, a condition that supply-side economists conveniently ignore.

To keep demand up, workers in a low-wage economy are offered easy money in the form of subprime debt rather than paying consumers with living wages, thus creating more phantom profit for the financial sector at the expense of the manufacturing sector. This dysfunctionality eventually led to the debt bubble that burst in 2007 with global dimensions.

The State Theory of Money (Chartalism) holds that the acceptance of a currency is based fundamentally on a government's power to tax. It is the government's willingness to accept the currency it issues for payment of taxes that gives the issuance currency within a nation. The Chartalist Theory of Money claims that all governments, by virtue of their power to levy taxes payable with government-designated legal tender, do not need external financing and should be able to be the employer of last resort to maintain full employment. [Um, ‘certain conditions apply’ and today, none of those conditions are being met…but you’ll see as you read along.]

The logic of Chartalism reasons that an excessively low tax rate will result in a low demand for the currency and that a chronic budget surplus is economically counterproductive because it drains credit from the economy. The colonial administration in British Africa learned that land taxes were instrumental in inducing the carefree natives into using its currency and engaging in financial productivity.

Thus, according to Chartalist theory, an economy can finance its domestic developmental needs to achieve full employment and sustainable optimum growth with prosperity without any need for foreign loans or investment, and without the penalty of hyperinflation. But Chartalist theory is operative only in closed domestic monetary regimes.

Countries participating in free trade in a globalized system, especially in unregulated global financial and currency markets, cannot operate on Chartalist principles because of the foreign-exchange dilemma. For a country participating in globalized trade, any government printing its own currency to finance domestic needs beyond the size of its foreign-exchange reserves will soon find its currency under attack in the foreign-exchange markets, regardless of whether the currency is pegged to a fixed exchanged rate or is free-floating. The only country exempt from this rule, up to a point, is the United States because of dollar hegemony.

Thus, all economies must accumulate dollars before they can attract foreign capital. Even then, foreign capital will invest in the export sector only where dollar revenue can be earned. Thus the dollars that Asian economies accumulate from trade surpluses can only be invested in dollar assets in the United States, depriving local economies of needed capital. This is because in order to spend the dollars from trade surplus, the dollars must first be converted into local currency, which will cause unemployment because the wealth behind the new local currency has been shipped overseas. The only protection from such exchange rate attacks on currency is to suspend convertibility, which then will keep foreign investment away. [snip]

History of personal income tax

When personal income tax was introduced in 1913, the top bracket was 7% for income over $5,000. By 1918, the top rate had risen to 77% for income over $1,000,000.

In 1921, the administration of Warren Harding lowered the top rate to 58% for income over $200,000. A year earlier, under Woodrow Wilson, income over $200,000 was taxed at 68% while the top rate was 72% for income over $1,000,000. In 1924, the administration of Calvin Coolidge lowered the top rate to 46% for income over $500,000. In 1924, the top rate was dropped sharply to 25% for income over $100,000. This rate stayed unchanged until to produce the Roaring Twenties of sizzling speculation on margin while wages stagnated that ended in the crash of 1929.

In 1932, the top rate rose back to 63% for income over $1,000,000 and the rate for income over $100,000 was raised to 56%. It was academic because very few people had income of these brackets. In 1936, the top rate was 79% for income over $5,000,000 while the rate for income over $1,000,000 was raised to 77%. But there was no employment and no corporate profit to make a difference until the war started after Pearl Harbor on December 7, 1941. Until the war started, people were willing to work just for food so there was no demand for goods to produce corporate profit. [Is this where we’re returning to, good citizen?]

In 1941, the top rate was raised to 81% for income over $5,000,000. In 1942, to help pay for the war, the top rate was raised to 88% for income over $200,000 in a wartime price control regime. In 1944, the top rate was raised to 94% for income over $200,000. In 1946, the top rate was lowered to 91% for income over $200,000. The post-war economy took off to produce a new middle class as the majority of the population. There were waiting lines, not at the unemployment offices, but long waiting lists for new cars and houses and television sets. [Rather than turn the money over to the government, they built a prosperous society instead! Another important ‘dividend’ reaped by paying decent wages was crime rates dropped to unheard of levels.]

In 1955, the top rate was 91% for income over $400,000 to adjust for inflation. That rate stayed until 1966 when it was lowered to 77% for income over $400,000. In 1965, the top rate was lowered 70% for income over $200,000. That rate stayed until 1982 with minor rise in the top bracket to income over $215.400. The period between 1965 and 1982 was the gold years of US economy, with high employment and high consumption, a period when guns and butter was both in ample supply.

Year Top rate(s) For income over (,000)
1981 59% $85.6
1982 50% $85.0
1987 38.5% $90.0
1988 33% and 28% $71.9 and $149.25
1991 31% $32.0
1993 39.6% $250.0
2001 35% $311.95
2009 35% $372.95

Wages began to stagnate, while the financial elite was keeping luxury-goods maker busy by using the pension funds of workers to move jobs to low-wage economies overseas. As American workers marveled at the low-price imports at Wal-Mart, and their pension funds were giddy with high returns, their own jobs at home were disappearing as the wages and benefits of those still working fell below living wage levels

The average American wage earner has very little reason to support a lowering of the top rates in a progressive income tax regime if they understand that employers would rather give tax savings to employees in higher wages than pay high taxes to the government, given the same after-tax net profit. [There’s another dynamic at play here, one brought on by ‘market saturation’ that will keeps jobs, er, ‘migrating’ to the cheaper there…even though these places exist solely through ‘currency manipulation’…illegal currency manipulation to be precise! Peak oil may be arriving ‘just in time’.]

But the Wall Street Journal or CNBC would never tell workers that basic truth. Rather, workers are told that high taxes lead to high unemployment to scare wage earners into voting for still-lower progressive rates that only benefit those who have been oppressing workers with the workers' own pension money.

1. Say's Law, or the law of markets, is an economic proposition attributed to French businessman and economist, Jean-Baptiste Say (1767-1832), which states that in a free market economy, goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of real income is created in order to purchase the economy's entire output.

Henry C K Liu is chairman of a New York-based private investment group. His website is at

Again, it doesn’t matter what the ‘workers’ think, workers don’t write policy…it’s our stupid politicians that need to be aware of the damage done to society through ‘self-interest’.

Um, kicking that can a bit further down the road, we have recently witnessed strong evidence that the ‘ballot box’ won’t save us either because once elected the public is powerless to ‘punish’ an elected official. If they fail to live up to the campaign promises…OFW.

What? Your still not depressed enough? Here’s a piece titled ‘America's Race to the Bottom’ by David Michael Green. If you’re not depressed by the time you reach the end of that article, you must work on Wall Street!

That’s all she wrote for tonight, good citizen!

Thanks for letting me inside your head,


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