The following video, which, judging by the title, aims to “explain” economics to liberals, was posted by a friend of mine on Facebook, and while I know it was intended to be humorous and not a scholarly look at supply-side economics versus so-called “middle class economics,” the dismissive tone on liberal economic theory as naive or not well thought out is shortsighted at best:
That said, I felt compelled to offer a couple points to ponder.
First, the wealthy certainly have a role to play in any capitalistic economy, but the point that seems to be lost by the speaker in the video is that subsidies to bolster the lower and middle class, and the economic theory behind these policies, are intended to serve as a more direct route toward stimulating the economy, whereas supply-side economics hinges on the assumption, by the same strained logic that could have actually contributed to the economic depression of 1896 and other recessions in our nation’s history, not the least of which was the recession in 2008, that the wealthy will always be willing and able to invest in new industries.
While investments into new jobs and startups by the wealthy is definitely admirable, the fruits of that labor are contingent on several variables — demand, owner competency, etc. — before the lion’s share of those resources begin to make it to the lower and middle classes in the long term, aside from the initial pool of jobs, construction work, etc., to open the business.
Supply-side economics, although it may have some merit in some cases, is an indirect, wait and see approach, analogous to treating a patient with an experimental drug. Indeed, we have tried this experiment of limited regulations and tax breaks for the rich for the better part of 30 years now, and the gap between the rich and the poor is higher than it’s ever been.
Second, this report from The Wall Street Journal, which is unapologetically conservative, backs up the statement in the video above that a large number of rich people invest in startups — 35.8 percent of the super rich who make over $20 million — but more than 70 percent of these folks actually prefer to put their money into hedge funds, not startups.
In the middle bracket of rich people ($5-$10 million), only 9.3 percent invest in startups and 38 percent prefer hedge funds. A little more than 4 percent in the $500,000-$1 million income category invested in startups.
I don’t think anyone will argue against the fact that private investments by wealthy people are an important part of the economy, but to imply, as the video seems to do, that benevolent wealthy people spend all their time sawing away at ideas that might create jobs for the country is pure delusion.
Wealthy people will do what is best for wealthy people; sometimes that means investing in startups if they think it’s economically viable, but more often than not it seems, that means putting their oodles of money into hedge funds and private equity accounts, not startups.