I’ve gotten tired of explaining why supply-side economics — i.e., voodoo economics — don’t actually work. So I’ve decided to write up a quick-and-dirty version that I can just link to as necessary. This is not meant to be a definitive statement on the subject. It’s not even an air-tight argument of the principles being espoused. It’s just me pointing at some pretty fundamental absurdities in voodoo economics and saying, “Hey! Look! Have you even thought about this? It doesn’t make any sense!”

(1) Money is a form of power. Power tends to accumulate more power. Thus, in a capitalist society, wealth tends to flow up, not down. The rich tend to become richer and the poor tend to become poorer. Supplying the wealthy with even more money doesn’t cause that money to flow down to the poor — it just accelerates this natural trend. Which is why, every time supply-side economics have been attempted, the divide between the rich and the poor has grown wider.

The argument has been made that a “rising tide raises all ships”, but the reason this disproportionate distribution of wealth is a problem leads us to…

(2) The modus operandi of capitalism is consumer spending. In a capitalist system you have multiple products available, and those products which have the greatest value to the consumer succeed (because they buy them) and those which have less value fail (because they don’t). In a very real sense, capitalism is a democracy in which you vote with your dollars for the products you like best. And although in practice a capitalist system can become flawed in many ways, capitalism has widely proven itself to be the best system for encouraging quality, efficiency, and innovation.

You need an unequal distribution of wealth for this system to work, but when that inequality becomes sufficiently disproportionate the reduced spending power enjoyed by the majority of your consumers results in a less efficient system. Not only are the quality of decisions which emerge from such a system degraded, but the system’s ability to encourage increased value and quality becomes quashed.

This all leads us to the fundamenal problem with supply-side economics…

(3) If you want to stimulate a capitalist economy, you should be giving tax breaks to the poor, not the rich.

The reason for this is the difference between spending and investing. Republicans argue that giving tax cuts to the rich allow them to invest in business. By investing in business, the argument goes, the economy grows and the workers end up benefitting in the long run.

But while investing is an important part of capitalism, it’s the secondary mechanism of the capitalist system. The primary mechanism of a capitalist system is spending.

If you give money to someone and have them invest it, that money may or may not eventually result in economic activity and capitalist success. (Whether it does or not will depend entirely on how the money is invested. If it’s invested in a better, cheaper product that people want, it will stimulate the economy. If it isn’t, then it won’t.)

But if you give the money to someone and have them spend it, that money immediately results in economic activity and capitalist success. This result is guaranteed.

In other words: If you give the money to an investor, you are injecting that money into the economy in an inefficient manner — that money may or may not end up growing a business producing products that consumers want.

If you give that money to a consumer, on the other hand, you are injecting that money almost directly into the economy — that money will automatically end up growing a business producing products that consumers want (because the consumer will spend it on the products that they want).

(4) The name “trickle down economics” is actually truth in advertising. Money in a capitalist system flows reliably from the consumer to the successful business/investor/capitalist. Movement in the opposite direction, however, is not reliable.

Which actually brings us full circle: In capitalism, wealth tends to flow up and trickle down. If you want to stimulate an economy, you want to make the money flow and, thus, encourage better ideas and more valuable products.

And that means tax cuts for the poor and the middle-class, not the rich.

THE OTHER FALLACY

Of course, this conclusion simply opens the door to the larger question of when such tax cuts are appropriate. The other fallacy of voodoo economics is the claim that lowering taxes will always result in sufficient economic growth to raise overall tax revenues. This is self-evidently not true for several reasons:

(1) If you reduce the tax rate to 0%, it doesn’t matter how much economic growth you enjoy as a result: You still won’t end up with increased tax revenues (since you’re not collecting any).

(2) Even if you replace “no taxes” with “infinitesimal taxes”, the conclusion is still palpably absurd. If you have an average tax rate of 30% and you lower that to an average tax rate of 1%, you’re claiming that the economy will grow to 30 times its current size entirely as a result of the tax cuts. (That means you can’t count inflation or the normal economic growth that would have occurred even if you hadn’t cut taxes.)

The underlying fallacy here is the belief that the social institutions and infrastructure created by our government have no positive role on economic growth. Common sense alone should tell you that a certain degree of social infrastructure (e.g. law and order), physical infrastructure (e.g. roads), and educational infrastructure (e.g. univeral education) is beneficial to the economy (even if one ignores all the other societal benefits). And even the most cursory analysis of history shows this to be true: Anarchy is not conducive to economic growth.

On the other hand, it is equally trivial to demonstrate that the opposite extreme is equally absurd: The benefits brought by government cannot possibly outweigh the problems caused by an average tax rate of 100%.

The inevitable conclusion is that there is a sweet spot in which both the benefits of low taxes and the benefits of the societal infrastructure provided by our government are maximized.

Or to look at it another way: The problem with both extremist libertarians and communists is that they equally fail to appreciate the sweet spot between anarchic liberty and absolute central control.