Since the Great Recession, macroeconomic discussion has been dominated by discussions of aggregate demand, and how to create more of it through monetary and fiscal policies. That has led to a strange state of affairs where those topics still dominate the debate, even though they’ve done the job economics expects of them.
The U.S. is fairly close to full employment and seeing continued positive momentum. Supposed remedies such as making interest rates negative, with the goal of accelerating monetary circulation, seem better suited to 2010 than 2016.
Maybe it’s time to start paying more attention to other approaches, specifically those based on the supply side. Supply-side economics has been discredited since the Bush tax cuts failed to boost economic growth, but there is another way of thinking about the problem. It is not enough for funds to be left in the hands of the wealthy; rather they must be invested in risk-bearing equity capital, focused on innovation.
So argues Edward Conard in his new book, “The Upside of Inequality: How Good Intentions Undermine the Middle Class.” Think of it as a revamp of supply-side economics but with the concept of risk-bearing at the core, a fitting perspective for an author who was a founding partner of the private equity firm Bain Capital and a former business associate of Mitt Romney.
In this view, traditional demand stimulus is at best defensive in nature. It may limit further collapse, but it won’t much revitalize risk-taking.
Weak demand is not a cause in and of itself. It is a symptom of a shortage of equity willing and able to bear risk.
You may recall that the iPhone made its debut in 2007, and it sold very well during the tough economic times that followed. Had there been more innovations of import, a simultaneous growth of production and market demand could have been self-validating and pulled the economy out of recession more quickly.
This framework makes Conard a revisionist on the U.S. trade deficit. The traditional story is that Americans buy goods from, say, East Asia, and the sellers respond by investing those dollars back in the U.S., a win-win situation. Conard believes that analysis would hold only if people who accumulate cash from foreign transactions invest their funds into risky, innovative enterprises.
So how can we stop savings from being deployed in too risk-averse a manner? To provide my own personal list, let’s target the bureaucratization of society, excess regulation, the high cost of moving talented labor into cities with building restrictions and thus expensive rents, overly cautious financial intermediaries (most capital isn’t venture capital), policy instability and a general fear of the future all may choke off entrepreneurship.
Keynesian economics focuses on sticky nominal wages as one obstacle to increasing production, but especially these days that seems like only one small part of a much bigger story. Some good news is that the Chinese are interested in further diversification into equity and away from government securities.
Maybe supply-side economics isn’t as wrong as its reputation indicates. Maybe the earlier supply siders just spent too much time focusing on one supply obstacle – high taxes – when other barriers were bigger problems.
Conard recognizes that there are many factors behind slow innovation, but for my taste he plays up tax cuts too much, believing that the wealthy are sufficiently willing to bear risk and dynamically invest. Consistent with this view, Conard argues that the American middle class has in recent times experienced bigger real income gains than the numbers indicate, once job benefits are counted properly.
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