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Supply side to the 1% only grows the 1%, and it’s false financial economy, part I.

by on February 26, 2013

Supply side economics suffers from what I am calling the “common sense fallacy”. As of now it is a fallacy I am going to use to describe when people use their common sense to come to nonscientific conclusions. Just think of the view of a flat Earth prior to Christopher Columbus deciding to sail across the Atlantic Ocean. At that time it seemed like common sense to conclude that the Earth was flat, because one’s own vision couldn’t see the curvature of the Earth. So today’s supply side economists and politicians are yesterday’s flat Earthers.

The argument from supply siders is that if you decrease taxes on the rich they will start to hire people. And this definitely appeals to ones common sense. It is highly likely that your CEO is rich, so it seems that the right policy to increasing employment would be to give your rich CEO more money so they could hire more people. Unfortunately this is not how your rich CEO became rich. At one point your CEO had to develop a service or product that people wanted to purchase. Your CEO had to work their ass off to find customers to purchase their product or service. Eventually after all this hard work the CEO had enough demand of his product it started to generate enough sales to hire help, so that this CEO could meet expected demand by producing more.

Do you see what happens at the most basic micro-economic level? The CEO wanted to meet the demand from customers and so it become necessary to hire help to create the supply to meet that demand. What supply side attempts to do is supply the CEO with more money without having the demand available to purchase that supply, so in essence this money that the CEO receives will just sit there. CEO’s will not hire more people when they have more money, there needs to be demand for their products for them to do this.

So when we supply them with more money, either from tax breaks or some other form of stimulus we get a situation that looks like this:

The graph clearly shows that corporations that are able to sell their products are doing quite well, just look at their profits above. But they aren’t hiring, so what gives? Profits aren’t meant to accumulate or to sit idle, they are there for investing in further growth to obtain more markets share. CEO’s are not going to spend their profits on hiring until they see that there is more demand for their products, and there won’t be more demand for their products with such high unemployment. So in order to release those record profits unemployment has to go down, and customers need more income, not the CEO’s.

And as the article I linked from the graph also shows, is that wages are also declining as a share of GDP, so to lower expenses CEO’s are cutting wages to meet their decreased demand, without laying them off. So CEO’s are nice people, they are going to try their best to keep you and hire you, but they can’t when there is no demand to warrant giving you a raise or hiring you. You would do the same if you were in their shoes, so they are not to blame. What is to blame is the notion that rich people create jobs, that is obviously not the case. Sales create jobs, sales create rich people and sales can only occur if we improve the unemployment rate or add more currency (which increases demand).

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