Supply-side economics sacrifices people to support corporations

Everyone knows the adage “you can take a horse to water, but you can’t make it drink.” In the case of supply versus demand-side economics, this analogy is instructive. As with many things in economics, the supply versus demand argument is often presented as a chicken-and-egg problem: there can be no demand without supply, and no supply without demand. There are exceptions to this rule. The Black Market is a perfect illustration of how strong enough demand forces supply to make itself available. On the other side, it seems that certain (seemingly unwanted) innovations such as the iPad can make their own market simply through their existence (and superior marketing).

The issue, then, is whether supply or the demand is the more suitable model to manage from a policy perspective. In each case, the market is called upon to make certain things happen without intervention, and the government intervenes in a different part of the market to stimulate this desirable behaviour. Arguments between the two schools mainly focus on the relative effectiveness of government intervention. In this simplified argument between the two, I also propose that the aims of the intervention in each school of thought are different.

Supply-side economics believes that increasing the efficiency of corporations ensures they are able to produce goods that are needed by society. This may involve tax cuts, subsidies, unencumbering the company from restrictive environmental laws, allowing for less legal “friction” in the market (e.g. not restricting banks from being involved in investments in financial instruments), and allowing unhindered financial transactions. In supply-side economics, the place where the government intervenes is fundamentally in paying for externalities of corporations. All of the initiatives listed above involve the government reducing its income to minimise corporate costs (e.g. tax cuts), or accepting to pay for unexpected corporate costs (e.g. environmental deregulation). A good recent example of this practice would be the federal government’s decision to accept the liability for Alberta’s orphan oil wells to the tune of almost $2 billion. The government accepts the externalities of the oil companies in order to ensure they can operate at higher efficiency - avoiding costs and maximising profits. The expected effect in the market is that efficient corporations can grow faster, expand their business, offer lower prices to consumers, and catalyse other businesses into existence.The problem? The fundamental goal of the system is economic growth. It chases a measure that does not have a direct correlation to employment, to health, or to personal satisfaction. Supply-side economics is a sham because it is one of the most harmful examples of Goodhart’s Law. Goodhart’s Law is officially stated as “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes,” but is perhaps best simplified as “when a measure becomes a target, it’s no longer a useful measure.” GDP is supposed to be a measure of how well the economy is faring, but it doesn’t take into account whether there’s hunger, homelessness, or disease. It simply records how much money moved. When corporations prosper, the measures that express their prosperity look good. Since they are denominated in dollars, they are easy to plot, simple to understand, and marvellously easy to use in projections. Not so human security, comfort, happiness, family harmony, or mental state. To relate back to the saying, we can measure how much water there is very easily, but we can’t measure the horse’s desire or ability to drink the water. Because the water is measurable, it’s easier to focus our measures on water availability than horse thirst. In sum, supply-side absolutely assists corporations, but there is no adequate way of proving whether it helps people. On the flipside, supply-side economics blames the consumer for not availing themselves of the plentiful and cheap products of the market. The problem with this concept is that a horse that can’t stand can’t drink.

Demand-side economics believes that stimulation of demand will increase supply, and that government intervention should be on the consumer (or product) side of the market than on the producer side. The core of the policy arguments in this blog has been that UBI rather than food subsidies or income tax cuts is the best way to stimulate demand. The demand-side argument will therefore centre on giving people the capacity to be consumers in the market. This means the government does not accept corporate externalities, does not relax environmental laws to privilege business, does not have to lower corporate tax rates, and doesn’t care if businesses fail. If innovation relies on creative destruction, we can’t depend on legacy businesses to take us there. Supporting the consumer in expressing their desires with money is therefore a better way to encourage economic advancement and fulfil consumer needs. This method also gives policy tools to the government that do not directly affect business. Instead of modifying corporate behaviour through innovation grants, tax incentives, and corporate fines, government will find it far simpler to induce consumers to purchase certain things. A simple thought experiment can illustrate the idea. Imagine the government wants to shift all cars to emissions-free models by a certain date. Would it be better to regulate, induce, and provide grants for corporations to make more inexpensive electric cars available? That would be the process under supply-side economics. Under demand side, governments ensure consumers all have cash to purchase the cars, and set a date by which any and all CO2-emitting cars are fined whenever they are seen on the road. Supply-side economics is far more unpredictable, and relies on the beneficence of companies - which typically runs counter to their self-interest. Demand-side economics uses the self-interest of the consumer and gives them the ability to exercise it. Corporations are conflicted about what to do with their windfall, consumers are not. In demand-side economics, it’s not the fault of the people that they don’t get the product they want - it’s the fault of the corporations. Instead of blaming a person for being poor and not getting what they need, we should give people money to get what they need and let the market adapt to fulfil it. In sum, we should empower consumers to say “I will pay for water here” and allow the businesses that fulfil that consumer demand to reap the benefits.

Focus on the people, not corporations

A fundamental agreement across the political spectrum is that wealth should be constantly redistributed throughout the economic system. Libertarians and Communists and everyone in between agree on redistribution. They just disagree on who should do it. Moving more to the centre of the political spectrum, where we find the policy range of the major Canadian political parties, there actually seems to be a consensus that corporations should do approximately 90% of the redistribution and government approximately the remaining 10%. This is, of course, based on the unemployment rate in Canada - typically hovering between 5 and 7% of eligible workers. Furthermore, this aid is supposed to be transitory. It is specifically designed to get people back into the corporate cash redistribution program. The differences between the parties on this specific piece of orthodoxy are virtually nonexistent. The most orthodox, i.e. the Liberals and the Conservatives, have modeled the economy on the basis of job preservation through the protection of companies that have large numbers of employees. The only fundamental difference in approach seems to be the companies they prefer to focus on, be they manufacturing in Ontario and Quebec or resource extraction in Alberta and Saskatchewan. The approach, however, is identical.
There are a number of policy levers that can be used to tweak the corporate status quo to achieve the goal of wealth distribution via corporations. Prime amongst these is tax law. There is a belief that decreasing corporate tax rates invites corporations to set up shop, and incentivising hiring through tax deductions is a good way to maintain a healthy workforce. Tax law is used to give innovation subsidies, incentivise pollution reduction, and allow for depreciation on working capital. Here is the problem: the labyrinth of corporate tax breaks are costing us over $40 billion per year. Let’s put that in human terms. That’s enough money to give 1 million Canadians - over 3% of the entire population - a salary of $40,000. To put that in perspective, the COVID crisis has created the worst job loss in recorded Canadian history. About 1 million jobs have been lost. If we eliminated corporate tax dodges, all of these people could have a salary and there would still be money left over.
The obvious objection to this equation is that increasing the amount of money that corporations pay in taxes would shrink the economy as companies would fail. This is because people buy stuff that companies produce, those companies hire people to produce that stuff, and if that stuff becomes too expensive for companies to produce, they go bankrupt. In this chain of consequences, companies appear to create the jobs. If you look closer, however, this is not true. Companies are created by consumer demand, not immaculate conception. The reason that companies produce stuff is because people buy it. People buy it because they have both the desire and the money. Where our models depend on corporations to create jobs, we are actually focusing on the wrong part of the economic chain of being. Stuff is sold because there is demand and money, not because there is supply. Companies are disposable intermediaries between people and stuff. Cash, however, is not a disposable intermediary. The more cash people have, the more demand can be expressed in the market. If we focus on the consumers and not the producers, we will allow the efficiencies of the market to correct for any corporate failures due to the change in taxation. If we support demand, supply will follow.