The Supply-Side Bailout

Reader Julian Dawson (love that name!) asks:

We know that the US Fed and Treasury pledged approximately 23.7 trillion dollars to save the FIRE sector of the US economy. How much of that was actually transferred to FIRE sector corporations in the last two years?

I’m working on posting a more substantial answer to that excellent question.  A post from Paul Krugman today, however, included a graph that speaks volumes about the nature of the Bush/Obama Great Giveaway.

Now, this “bailout” has been premised on the core gospel of capitalism, which is the claim that economic crisis can only be caused by an under-supply of capital, and therefore the answer to each and every crisis is to provide more money to those who are already rich, on the theory that they are the “entrepreneurs” who would always make the investments society needs, if only they could lay hands on enough cash.

This claim, of course, is heart of the doctrine known as “supply-side economics.”  It might also be known as late-imperial overclass dogma #1.  It might also be known as the latest embodiment of what Adam Smith — yes, THAT Adam Smith — saw as “the vile maxim of the masters of mankind — all for ourselves and nothing for other people.”

Supply-side economics is the inverse of Keynesian, demand-side economics and the Baran/Sweezy emphasis on corporate capitalism’s tendency to over-accumulate, not under-accumulate, capital.  In this school of thought, the key problem is that, in the age of corporate capitalism, “entrepreneurs” tend to have too much, not too little, money on their hands.  Because they over-exploit the masses, they wind up somewhat too rich and find themselves having increasing trouble locating new investment opportunities, which always require a population of prospective new buyers.  So, instead of investing in new jobs and production, they start stashing increasing amounts of investable capital in Wall Street gambits, or simply sit on it.

Now, one way to test whether a real world economic crisis stemmed from supply-side or demand side problems would be to give away a mega-shitload of money to “entrepreneurs,” and watch to see what happens to the new money.  If their problem were supply-side, the entrepreneurs would be just itching to lay hands on the new capital and, once they did so, they would instantly start making huge new investments, thereby creating an economic boom.  Conversely, if the main problem were on the demand-side, giving a new mega-shitload of money to the already-rich would lead them to hoard the new money, since they would have nowhere to invest it, thanks to the lack of popular purchasing power out in the wider economy.

Suffice to say, this strikes me as a test that’s about as easy to read as anything could possibly be.  As Business Week reported in its November 5, 2009 issue, “[a]n oversupply of money is what pushed commercial real estate over the edge.”  It’s also what pushed the whole economy over the edge.

To wit, Krugman’s graph, which shows what’s happened to the banks’ share of TARP and TANF:

fredgraph

This trillion dollars in hoarded capital is going absolutely nowhere but in circles, since nobody can think of ways to make a profit investing it in new production.  The masses are maxed out and under water, so the entrepreneurs keep their cash parked.  Getting small interest payments from the Fed — as part of, you guessed it, a Great Giveaway program known as the Emergency Economic Stabilization Act of 2008 — looks far better to our “entrepreneurial” class than just about anything they can find in the real economy.