Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Increasing inequalities: Recent criticisms to the supply-side theory

Perrotta Cosimo, University of Salento

Since the 1970s the self-defined supply-side economists maintain that development requires transferring most wealth from “unproductive” use (like collective agreement wages, public expenditures) to private investments. They defined Keynesan approach as demand-side economics. Thus supply-side economists call for deregulation, to make spontaneous market forces prevail on subjective impediments (bureaucratic controls, government norms, unions). They also call for tax reduction on high incomes, in order to encourage investments and then increase employment (trickle-down theory). In the last ten years many criticisms have stated that such benefits never happened consistently or steadily. We will examine these criticisms. The critics argue that deregulation actually encourages illegal behaviour, worsens the quality of services or products and allows an unbridled exploitation of work. Besides, the data these authors report show that tax cuts just help the rich get richer but do not increase investments. These critics maintain that the only effect of the supply-side economy has been of impoverishing the state. But this impoverishment renders the number of public workers insufficient and lowers the quality of the great public services, like the health system, education, pensions, housing, transports, physical and digital infrastructures. The supply-side economy has also cut welfare expenditures and has reduced demand so much that domestic investments, far from increasing, diminish more and more. Consequently, unemployment grew up and poverty spread. The level of inequality has increased at an incredible level, never seen in western countries in the last hundred years. Moreover the majority of investments and transactions are by now financial, and this tendency intensifies. Such processes - argue the critics - are driving the economy towards a rent-seeking society, where a privileged tiny minority and a shrinking middle class are protected by tax-havens and tax evasion, financial speculation, short term chase of profits for shareholders and a general restriction of the productive economy. However, these criticisms stress too little one of the worst effects of the supply-side economy: the enormous destruction of human capital potentialities, which compromises future development. The comparison with the welfare state boom (1950s-1970s) is neglected but it would be illuminating. That experience proves that high wages and universal public services not only cause wellbeing but also create an enormous investment in human capital and a consequent increase in productivity. This comparison would also show that the present opposition between supply-side and demand-side economics is meaningless.

Area: Eshet Conference

Keywords: supply-side economics, inequalities, human capital

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