Supply-Side Economics and the Return of “Economic Royalism”

Posted on June 18, 2011


The political label “economic royalist” has lived on in current memory via recordings and reading of the speeches of Franklin Delano Roosevelt from the 1930’s.  FDR, drawing on a populist tradition within the Democratic Party, used the label to portray the financial interests and Republicans who opposed the New Deal agenda during the 1930’s as essentially traitors to the intent of the US Constitution and the American dream.  In his speech to the 1936 Democratic National Convention, FDR drew a contrast between the economic powers that opposed him and ordinary small businessmen:

For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital – all undreamed of by the Fathers – the whole structure of modern life was impressed into this royal service.

There was no place among this royalty for our many thousands of small-businessmen and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of their obligation to their generation, could never know just where they fitted into this dynastic scheme of things. (complete speech here)

Echoing the language of the American War of Independence 160 years before, Roosevelt implicitly drew an equivalency between New Deal Democrats and American Patriots fighting for independence against the royalist sympathizers, also known as Tories, who sided with the British crown.

President Franklin Delano Roosevelt in 1936 in front of Madison Square Garden in New York. Unlike any politician since, Roosevelt was able in no uncertain terms to condemn financial and economic malfeasance while holding out a role for legitimate businesses and businesspeople.

At first glance, the use of the concept or label “economic royalist” today would seem to be a throwback to a time when people knew enough about American history to know what a “royalist” was.  Alternatively, it might sound like an old political debate overheard, with “economic royalist” the equivalent of “scoundrel,” a generic and perhaps outdated derogatory term.  Yet I believe that there is something in the label that goes beyond either nostalgia or finding the most effective way via a put-down to win political sympathy.  We have been experiencing over the last 30 years, a return to “economic royalism” which has led to the intensification of the commitments of its adherents rather than weakened it.

In the last few months, having listened to a number of the speeches and interviews from the extreme Right Republicans, such as Paul Ryan, John Boehner, and Scott Walker that now dominate the Republican Party, it occurred to me that the policy framework that they propose as well as the economic model behind it, consists of treating the wealthy and corporations as economic royalty, with the privileges of kings and queens.  Government should “make way for” the private sector, the “job creators”, and it appears as though these political representatives are happy to function as the courtiers who stand aside for the passage of a class of “higher ups” who will do as they please.  On a human level, there is also something sad and obsequious about the overawed treatment of the wealthy that does not, as it turns out, correspond to their real virtues and talents, or for that matter, the real virtues and talents of any human being.

These are not just the personal attitudes of right-wing leaders but are reflected concretely in policy recommendations repeated ad nauseam by the radical Republican Right as well as by many in the supposedly populist Tea Party that attempts to claim the heritage of the American Revolution for itself.  The piling on of tax cuts and other blandishments to the economic elite seem to function in current Republican cosmology as tribute to the rightful rulers of American society.   The selling off of public infrastructure by state and local governments to wealthy investors at fire-sale prices, with little consideration of the value of public investment in them, is another sign of the creation of a caste of economic royals.  The state of Indiana has sold the Indiana Toll Road to a consortium of wealthy investors, under a contract which stipulates that the state is constrained for 75 years into the future in building new highways or high speed rail that compete with the now-private Toll Road.  The privileges and power accorded the new caste of the super-rich may be justified in the minds of the Right by their readings of the work of Ayn Rand, which suggest that there exists a small elite of capitalistic individualists, who produce almost everything of value.

Rep Paul Ryan and Speaker of the House John Boehner are two of many Republicans who sprinkle their speeches with references to "job creators" while advocating massive tax cuts for the wealthy and cuts to social welfare programs. These politicians treat the tenets of supply side economics as holy writ despite the mountain of evidence that suggest they don't work to create jobs or grow the economy.

The instruments of regulation and criminal prosecution for fraud and other business wrongdoings of the business elite are then anathema to these worshipful political courtiers who would see in these efforts to contain or punish a contradiction of the kingly or queenly prerogatives of economic elites, who cannot rightfully be overseen by government.  The assertion of government’s legitimate authority in the economy contradicts the idealized picture of the business elite with which the Right, and through vigorous propaganda efforts, broader segments of the American political elite and population currently operate.  Within the context of a new “economic royalism” the political and economic prescriptions put forward by the Republican Right are made comprehensible as part of this daft philosophical system but yet are in no way justified by reference to the real world and real people.

It would be one thing if the piling on of tax breaks for the wealthy, selling public institutions to private interests, and slashed regulations on business would in fact help the economy grow and generate good jobs but this has not been the case.  Numerous analyses of the economic data of the last 30 years have pointed to slowing economic growth and widening economic inequality with a particularly obvious negative trend in the last 10 years.  The legacy of the Bush tax cuts provides as clear a test as any of the employment and growth effects of cutting taxes on the wealthy.  The “Bush Boom” of 2001-2007 provided in comparison to other economic expansions much lower employment and GDP growth.  Apparently this program of treating powerful business leaders and wealthy donors like kings and queens is not working.

Royals, Real and Imagined

On a political level, an absolute king or queen is a sovereign that essentially owns an entire country or has rights over that country, which he or she never fully exercises.  Royals unite in one person or family economic and political power, even though in historical reality, merchants and other aristocrats had a good deal of political and/or economic power.  The entitlement to anything and everything within his or her kingdom is a mark of what we think of as an absolute monarch.  An absolute monarch has the right to entirely unilateral decision making, as supposedly no one within his or her kingdom is his or her equal.  The rule of royals rests in part on the ability of their subjects to identify with and empathize with the royals themselves; their subjects are supposed to vicariously enjoy the royals’ triumphs and losses, acted out on a grand stage.

Royals, kings and queens are rich figures within our cultural mythology and individual fantasy worlds because they can represent within our imaginations fantasies of power, ownership, and self-sufficiency which many find attractive or interesting.  One doesn’t have to believe in monarchy or be interested in royalty to have access to thinking in terms of prerogatives and qualities that are “like” royalty or what we imagine royalty to be like.  We have an intuitive understanding of what royalty is because it corresponds to some narcissistic fantasies that are for the most part, part of being a human being, though rarely enacted.  Being sovereign or having sovereignty is one important point of reference for individuals as well being the model and basis for parts of international law.

An important political difference between the ends of the political spectrum comes into focus much more clearly if we think about to what degree a group or person feels entitled to sovereignty as regards the ownership of things and business entities.  The political Right, in particular the libertarian Right, sees the ownership of property as a form of almost complete individual sovereignty which is violated by government regulations.  For the political Right ownership is sacrosanct and absolute.  The political Left is more inclined to see exceptions or modifications in the relationship of people to things; the Left allows for the community to have some subsidiary rights with regard to the exercise of ownership.  In particular, the Left is more inclined to distinguish between personal property or small holdings and corporate or large-holding property rights.  There was an extreme Left position, which after the horrors of the 20th Century in Stalinist and Maoist regimes is pretty much no longer existent, that was for the abolition of private property.  The inhumanity and impracticality of this position have been exposed but the moral and economic failings of its opposite, property rights as absolute and inviolable, still run rampant.

The political Right tries to protect the prerogatives of corporate or large property holders by associating their cause with the almost universally accepted rights of small holders to exercise their property rights with minimal government oversight and intrusion.  The political and juridical strategy of the Right to blur differences between very large and corporate property holdings and small property holdings has in the last 30 years been very successful.   The Right tends to reduce the complex nature of a society with enormous disparities in wealth and complex interactions between social groups to a highly idealized 17th century pre-industrial capitalist society without huge qualitative and quantitative disparities in wealth. There is then a dual attitude on the Right which serves political expediency very well:  an alliance is forged with small businesspeople even as policy and political action benefits the continued reinforcement of the power of the most privileged.

Supply Side Economics, the “Scientific” Basis for Economic Royalism

Supply-side economics (SSE) is essentially the operative economic philosophy of the Republican Party as well as segments of the Democratic Party and is a meme that is prominent in the minds of the American electorate via incessant repetition by politicians and media figures.  SSE is the now familiar theory that cutting taxes on the rich and businesses and reducing government regulation of business would increase supply of goods and services, thereby igniting economic growth.  Formulated and popularized in the 1970’s by Jude Wanniski and Arthur Laffer, SSE was proposed as an alternative to the Keynes-influenced orthodoxy of that time which focused on the management of demand rather than supply and focused as well on government intervention in the domestic economy as a necessity.  With its anti-tax rhetoric and policy recommendations, SSE became a highly successful political strategy, as particularly in the United States, the image of an oppressive and inefficient central government that imposed too many taxes became a reliable political scapegoat for conservative politicians.

Larry Kudlow, a business journalist, is a tireless advocate of supply side economics. Like a number of business journalists who cater to stock-traders and investors, he sprinkles his commentary with supply side shibboleths which are considered to be "pro-business" but it turns out undermine demand for the products and services delivered by businesses.

As the brand of Keynesian economics practiced in the 1970’s did not have straightforward answers to the stagflation of the time, political elites turned more and more to anti-Keynesian economists and pundits, among whom were supply side economists.  In all fairness, supply-side economics might have been considered a legitimate economic hypothesis in a discipline in crisis:  it may have been that some businesses in the US were inhibited from investment by the power of government or unions.  Additionally, the anti-tax and anti-regulation rhetoric of supply-side economists and political advocates paradoxically latched on to counter-cultural currents that emphasized distrust of government in the post-Vietnam era.

However, as turning to a supply-side hypothesis meant a dismissal of the Keynesianism that had created a stable and growing economy for over thirty years, policymakers were engaging in a high-risk open air experiment with the economy as they started to cut taxes and social programs.  Assuming the shared prosperity and growth of the post-War era would continue, the curbing of inflation became the top economic priority for which it appeared to some that was worth throwing out Keynesian approaches.

Additionally, the switch from Keynesian to supply-side economics meant a shift away from an attitude of compromise between labor and capital towards one where the owners of capital were given greater benefits from government policy, as well as moral and economic justification in openly fighting unions and wage labor more generally.  In actual policy and attitude this meant a decrease in the power of organized labor both in government and in relationship to management in the private economy.  With aggressive anti-union policies by Republicans and union-busting efforts by many companies in this period, union membership went down and unions were also increasingly blamed politically for economic problems.

Within the economics profession, the label “supply-side” is now in disuse in part because the more adventurous hypotheses of the theory have in a spectacular manner been disconfirmed by their application.  In the past 30 years, no relationship has been shown between the level of upper income taxes and economic growth.  The paradoxical theory of Arthur Laffer, that government revenues would increase if taxes were lowered, has also not been borne out, in part because the lowering of taxes did not accelerate GDP growth overall.    While the benefits from supply side policies have been lacking, the costs of the policy have been all too real, as share of income flowing to the wealthy has dramatically increased, middle class incomes have stagnated, and wealth overall has continued to be concentrated.  Embarrassingly, at least to professional economists with some scruples, “supply-side” as a label has become too closely associated with a naked transfer of wealth from the less-well-to-do to the more well-to-do, a Robin Hood in reverse.

Nevertheless, a more broadly construed neo-liberal consensus that government actions and powerful unions distort or suffocate markets and dampen economic growth has become much more influential within the economics profession over the past three decades, coming under a variety of doctrinal labels.  “Chicago-school”, “fresh-water”, “Friedmanite”, “neo-liberal” and the “Washington Consensus” are some of the schools of economics that shares with supply-side an antagonism to organized labor, a blindness to the processes that weaken aggregate demand via income inequality, and a preference for a weaker government role in the domestic economy.

Whether or not labor was over-powerful in the 1970’s and profits were squeezed, thirty-years of supply side economic policies and political rhetoric have now weakened both organized labor and the bargaining power more generally of those who work for either salaries or wages:  the overall proportion of national income that wage- and salary-earners take home has sunk to levels not seen since the late 1920’s, just before the Great Depression.  Even some conservative economists and political figures like Bruce Bartlett, a former Reagan budget directory, now recognize that weakened aggregate demand is the primary fault in our current economy.  If part of a never-ending political struggle between economic classes, supply-side economics has been extremely effective to help the wealthy increase their slice of the pie but it appears to be no general economic theory for the common good.

Deficit Hysteria and Cuts to the Welfare State:  Supply-Side Economics Post 2008 Crisis

The current scare about public budget deficits shares many assumptions with supply-side economics but with ideas tailored to an era of diminished growth and expectations.  Those who advocated for supply-side economics previously did not express much concern about budget deficits at all, assuming that economic growth would follow their proposed tax cuts.  Alternatively, there remained with these efforts simultaneously a wish to cut government’s role and size.  Others within the broader neo-liberal consensus continued to press for cuts to social services which became part of the wider strategy of privatizing the economy.  After the great economic crisis of 2007-8, budget deficit hysteria has set in as a dominant reaction within the spectrum of right-leaning economists and political advocates, where the supply-side prescriptions for the economy continue to be pressed for along with more savage cuts to social spending by government.

The irony that those who pressed for cuts to taxes for decades are now concerned about budget deficits is not registered by these advocates, who seem to lack shame or self-awareness.  Privatizing the economy as much as possible seems to have been the fundamental agenda of this broad range of economists and political activists all along, despite various claims they made for their approach about economic growth and job creation.  Destroying something that is useful (i.e. government social programs) as a fundamental agenda is less politically palatable than claiming that one will spur economic growth and create jobs.

The cuts in spending during a downturn will also have substantial negative effects in the economy which will have impacts far beyond the direct beneficiaries of public benefit programs.  Much of the economy that depends on producing things and delivering services now or in the future will, in high probability, be negatively impacted by cuts now to public spending.  Deficit hysteria then, by extending and enacting the fundamental agenda of the spectrum of political and academic right-wing, will damage overall the productive capacity and living standards throughout the economy, reducing wealth and income for almost everyone in the economy.

Investments in the Past vs. Investments in the Future

In retrospect, whatever the profusion of labels for various conservative economic ideas over the past 35 years, the current focus on budget deficits has called attention to some of the primary beneficiaries of the 30 year experiment with supply-side and neo-liberal policies.  Recently economic commentator Bob Kuttner and now economist Paul Krugman have pointed out that a very specific group of, for the most part wealthy, investors, who might be called “rentiers”, benefit most from the constellation of policies that have stymied economic growth and threaten now to permanently stall the economies of developed countries via public debt hysteria.  With little regard for economic welfare overall, rentiers push ahead by fueling deficit hysteria in the hopes that their portfolios will retain their value and/or they will retain a hold over the political process.

Rentiers are a class of large creditors including banks holding large amounts of debt that may be devalued by inflation or debt-forgiveness.  Rentiers are focused on transactions that are being paid off over time but that have occurred in the past.  These bond-holders are not eager to accept less than full payment plus interest for the obligations that they have bought or for which they are the primary creditors.  One part of the rentier class are financial institutions holding portfolios of underwater mortgages, i.e. mortgages based on inflated past valuations of the property for which they were issued.  If these mortgages, that usually are in the current situation the products of fraud on a number of levels in the finance industry, were to be marked down to what they were worth on the current market, these institutions would most likely go bankrupt.  The efforts of the Bush and Obama Administrations in 2008-2009 with regard to dealing with mortgages and “too-big-too-fail” banks is best understood as support for rentiers while glossing over the interests of debtors.

In the current situation, governments have acted to date largely in accord with the interest of rentiers, with the costs of bailout borne by taxpayers.  For rentiers, the initial purchase has already been made so concern about the future viability of the economy is only interesting insofar as payments continue to come in the same amounts as obligated and also, they hope, undiluted by inflation.   The preference for a return to a precious-metal currency standard is in line with the preferences of rentiers for the value of money and the economy more generally to remain fixed in time. By contrast those in businesses focused on delivering products and services in the present and future are more concerned about the growth of demand for new products and services.  These businesses may want to incur new debt obligations or sell equity to expand their operations.  Thus in the current economic situation, there is a conflict between the productive and the rentier segments of the economy.

A young John Maynard Keynes urged compassion on defeated Germany after WWI and warned against governments pursuing a narrow rentier agenda that placed Weimar Germany in a "debtor's prison," saddled with British, American and French war debt. After WWII, the mistake of the Treaty of Versailles was not repeated by the Allies but only after untold horrors and bloodshed.

To date, the owners of productive capital have not spoken out loudly against the rentier agenda but this may change as the efforts of the deficit hawks who seem to hold the rentier agenda close to their hearts, flirt with crashing the economy once again.  The narrow rentier agenda is wedded to an anti-tax and anti-regulatory agenda that has broader appeal among segments of the wealthy as well as those who identify with rentier concerns.  Large corporate conglomerates that have divisions that produce goods and services also often have finance-driven divisions that have been very profitable in the financial and asset bubble of the last decade.

The rentier role is not in itself, “bad”, but as Kuttner has reminded us, the capture of the summit of political power by the rentier agenda has led to monumentally short-sighted political and macro-economic policy.  Not only economists on the left side of political spectrum are aware of the disastrous consequences of debt “absolutism”: legendary investor Jim Rogers has recently called for governments and central bankers in Europe and the US to write down debt rather than insist that it be repaid in full. As Keynes reflected in his 1919 book “The Economic Consequences of the Peace”, placing Germany under a crushing debt load after the First World War, would lead to a Second World War.  The assumption by the US, British and French governments of the rentier perspective on past debts sowed the seeds of interwar German resentment and the rise of the Nazi Party in Germany.  A similar sentiment of short-sighted economic policy has now captured government and financial elites in both Europe and the United States.

The Right’s Sense of Entitlement to Rule, Loyalty to Political Patrons

So strongly does the political Right hold to its ideology, including the notion of property rights as sovereignty, as modeled on the privileges of kings and queens, that many political operatives and politicians on the Right are animated by a sense of entitlement to run government that outstrips their competence or ability to govern.  Alternatively they feel that they are representatives of the “true class” of rulers of society, the economic “royals” that contribute mightily to their campaigns and offer them a career “insurance policy” if they are voted out of office via the offer of favors.  In the last 30 years, in particular, the political Right has demonstrated a determination to win in the area of political conflict that is not justified by the policy proposals they offer or the quality of leadership they provide.  This sense of entitlement may have something to do with a core conviction that they have developed that a defense of property rights and the economic elite, their patrons, can trump all other considerations.

The tactical and strategic superiority of Right wing political operatives as often observed by liberal or Left commentators has often attributed to a willingness of these operatives to break rules, both informal ethical rules as well as the law.  Starting with the efforts of Nixon in the Watergate break-ins, it seems likely that Nixon as well as others on the Right were more likely to feel a sense of entitlement to office which placed him “above the law”.  While Nixon himself was not an ideologue, the formation after Nixon of a more passionately held moral system on the Right than on the American Left has probably reinforced an internal sense of confidence to exercise power in service of an ideology.  The striking difference between the actions of the Bush team in 2000, aided by Fox News, as compared to that of Al Gore leads one to suppose that operatives on the Bush team felt an (unjustified) sense of entitlement to win the Presidency, as compared to Gore’s team.

The notable disregard for speaking the truth and truthful representation that is particularly pervasive on the Right may stem from a sense of entitlement to office without regard for respect for rules, opponents or the integrity of public discourse.  Self-justification either by reference to a passionately held ideology (libertarianism perhaps) or a sense of personal entitlement would in many people make it easier to continue to lie and erect elaborate fabrications in order to achieve and hold onto power.

The Almost Complete Capture of Government by Economic and Financial Elites

Unfortunately, at this point in time, it is not necessary for the impassioned believers in Right wing ideology to win office in order for financial elites to exert substantial influence over government decision-making.  Both political Parties in the US are to a large degree dependent upon donations from or fear the retribution of large corporate donors and financial elites.  In turn, members of these parties either do not fundamentally challenge or actively promote the favored legislative agendas of economic rentiers and backwards-looking business elites invested in political gridlock or roll back of century-old “social programs” like public education.  Obama has shown himself to be a fast friend of the financial industry and a Republican President would in most matters be as closely allied with bankers and other corporate elites or more so.

So accustomed to a “kid gloves” treatment by political leaders are financial leaders that they protest when President Obama made one reference to “Wall Street fat cats” in an interview.  These utterances as well as the tepid efforts of the Administration to institute regulations of the financial industry after the financial crash of 2008 have triggered outsized reactions of outrage in some financial heavyweights who now talk of Obama as an enemy after supporting him in 2008.  Such hyperbolic reactions bely a kingly sense of entitlement, as well as perhaps, their own internal sense that they are doing “God’s work” in the area of finance.

Many would claim that governments have almost always served elites preferentially to ordinary people.  However, there appears to have been a shift over the past few decades in the degree to which government serves the interest of and is staffed by economic royalists.  It used to be in the middle of the 20th Century, that government was in some sense a counterweight to the perspectives of business elites, even if, in the end, government policy better served their interests than the business leaders initial preferences would have.  Now we are facing an almost complete collapse of the space created by the tension between government and private interests.  We see this concretely in the troubling trend of the privatization of public infrastructure, now a major growth area for private investment.

Combating “economic royalism” is as pressing a concern as it was in the 1930’s during Roosevelt’s Presidency.  What remains of an American commonwealth is being undermined by those who believe that what is publicly owned should be in private hands.  The vision of a society of independent, sovereign small holders offered by the Right functions in practice as a diversionary tactic in their efforts to deliver more wealth and power to the wealthy and powerful few. These new economic royalists should meet increasing resistance from those who wish for a more prosperous, sustainable and just future in public debate, in the academy, at the ballot box, and on the street.