5 Reasons the Rich Are Ruining the Economy by Hoarding Their Money

Why supply-side economics just doesn't work.

It has been nearly four decades since the Reagan revolution in supply-side economics came to power in the United States. Tax rates on the wealthiest Americans are at near record lows, asset values have been pumped up to record highs, and corporate America is sitting prettier than ever before. There can be no question but that the ideologues who promoted supply-side economics have succeeded in enforcing their vision policy on our lives. But their decades-long experiment has also proven to be structural failure at every possible level (except for padding the pockets of the top 1%.) Here are five things we know without doubt about supply-side economics today:

1. The money doesn't trickle down.

Of all the failures of supply-side economics, this is the most damning. Conservatives often excuse poor wage growth and high unemployment as part of the global competitive marketplace, saying that everyone needs to tighten their belts. But not everyone is struggling--in fact, the rich are better off than ever. They control half of all the wealth, and the top 10% control almost 9/10ths of it. Corporate profits are at or near record highs, disproving the myth that the middle class must suffer due to competitive pressures. The Dow Jones index is threatening to burst past 17,000. Meanwhile, wages have stagnated since the Reagan era, even though productivity continues to increase. Corporate executives, in other words, are forcing workers to toil longer, harder and smarter than ever, but all the proceeds are going into the hands of the very rich while the people actually creating the wealth are struggling harder than ever to get by. Republicans either wave away this phenomenon as insignificant, or desperately attempt to blame regulation and "crony capitalism." Of course, the last time economic trends were so disproportionately imbalanced against workers was the era before the regulatory and tax increases of the New Deal, nor is there any significant sense (outside perhaps of military contractors favored by the GOP establishment) in which government contracts play a larger role in the economy. Instead, the truth is obvious: corporations don't exist to create jobs but to rake in money, and most rich people didn't get rich by being generous. When you give corporations and the rich more money, they simply hoard it and find ways to make themselves even more money--preferably by employing as few people as possible, at the lowest wages possible.

2. The rich aren't investing almost half of their resources. 

This one is almost comical. In concept, supply-side economics is supposed to work by the corporate rich taking money gleaned by tax breaks and subsidies, and plowing it back into investments that theoretically employ people. Now, we already know that the economic life doesn't actually work that way: when wealthy individuals and companies invest, they tend to do it in financialized vehicles, mergers, acquisitions and interest-bearing accounts while employing the fewest people possible at awful wages.

But even if it did work as supply-siders theorize, the brutal reality is that the rich aren't investing almost half of their money (corporations aren't doing much better, as their record profits sit largely idle avoiding taxation). 40% of the assets of the wealthy are sitting in deposits: the rich person's equivalent of stuffing money into a mattress. Money sitting in deposits in Swiss and Cayman Islands accounts is essentially wasted wealth. It does as little good for the world economy as gold hoarded by a dragon in Middle Earth. It essentially sits there uselessly as an economic security blanket for the very people who need it least. By contrast, putting more money into the hands of the poor and middle class pays off immediately for the economy, as most people living paycheck to paycheck spend the money immediately or at least create a small backstop against bankruptcy and delinquency--thus creating immediate economic and social benefits. So not only does giving the rich more money not pay off when they do invest, it doesn't even have the opportunity to pay off at all since almost half of the money isn't even being invested.

3. Supply-side economics leads to a bubble economy with bigger and longer recessions. 

One of the most dramatic and intentional yet underreported effects of supply-side economics was to convert a stable wage-based economy into an unstable asset-based economy. An economy focused on wage growth and broad prosperity tends to have slower overall growth and is at somewhat greater risk for inflation. It was understandable after the 1970s that some political elites would want to steer far in the other direction. But one of the many downsides to boosting asset growth at all costs is that assets fluctuate in value. Stocks and real estate both tend to rise over the long haul, but in the short term they are subject to bubbles and crashes. And the more money gets thrown into asset markets, the greater is the risk of irrational exuberance, the larger are the bubbles--and the worse are the plunges and panics.

This is extremely problematic at both the individual and macro levels. Individuals whose investments are inadequately diversified and/or who lack enough liquid cash face ruin during downturns. Individuals who lack assets at all find themselves out of work and underpaid when increasingly large recessions slash both wages and jobs. At the broadest level, entire societies bear the burden of asset bubbles when the downturns are so devastating as to threaten the very solvency of the markets themselves. Taxpayers are then forced to shoulder the burden of socializing the market's losses even though its gains are privatized and go almost entirely to the top 1% of incomes. Lastly but not least, inflating housing markets by orders of magnitude within a generation may help those who already own homes to feel richer despite their stagnant wages--but at the severe social cost of making housing largely unaffordable to younger generations.

4. High inequality frays society and reduces trust in institutions. 

It is not an accident that trust in major institutions has declined on a linear track with rising inequality. Study after study has shown that trust in our fellow citizens and in institutions at large are dependent on the level of inequality and corruption in society. This stands to reason: people know when they're getting the short end of the stick, even if they can't agree on why. Conservatives wrongly blame government spending and regulation. Liberals rightly blame disproportionate rewards going to the very wealthy. Not surprisingly, then, high levels of inequality also create strong partisanship within society as politicians and pundits alike ratchet up the rhetoric of blame. As both secular and religious institutions seem equally powerless to address increasing economic and social insecurity, the social fabric begins to fray and people tend to self-segregate in many ways, including politically. Economic tension and social tension tend to go hand in hand.

5. Supply-side economics creates deficits. 

Keynesian economists like Paul Krugman will note up front that deficits don't matter nearly as much as most conservative economists claim they do, and that conservatives only seem to care about the deficit when Democrats are in power. Still, insofar as government deficits do matter, it's clear that supply-side economics exacerbates them. Remember that supply-side economics requires tax cuts for the wealthy in order to work. There was a time when conservatives could claim without derision that reducing tax burdens on the rich would lead to so much increased growth that government revenues would actually expand to cover and surpass the upfront tax losses.

That argument has been proven laughably untrue. Government deficits nearly tripled under Ronald Reagan. The tax cuts passed by George W. Bush dramatically increased the budget deficit without even considering increased military and homeland security spending after 9/11. We now know beyond a doubt that whatever the inflection point on the Laffer curve where decreased taxes do lead to greater revenues actually is, it's apparently far higher than the pre-Reagan marginal rates on the wealthy. Liberals often accuse conservatives of intentionally creating large deficits while in power, then using deficit hysteria to "starve the beast" and slash government spending--which in turn damages the economy, reduces consumer demand and slows growth, thus increasing deficits again. Regardless of the merits of that claim, however, we do know for certain today that conservative economics inexorably increases government deficits.


In short, whatever excuses there might have been for voters and policymakers to buy into conservative economic theories in the 1980s, those excuses are now gone. 


We know better. We know that supply-side money does not trickle down to workers. We know that corporations and the rich don't even bother to invest a huge portion of their wealth. We know that pumping up assets and investments leads to more unstable economies. We know that supply-side economics is creating larger deficits, and we know that the rampant political corruption and massive inequality caused by supply-side economics is eroding the very fabric of our society.


David Atkins is a contributor to the Washington Monthly’s Political Animal blog and president of the Pollux Group, a research and consulting firm specializing in politics and consumer technology.
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