The Lies that Will Not Die

By Chris Ricchetti | October 29, 2021

As an eighteen-year-old college freshman, I knew intuitively that much of what I was being taught about how the economy works was flawed, distorted, limited in its explanatory power, entirely uninformed by human psychology, or patently false. It was the Reagan Era—”morning in America”—and most of the conservatively-minded Economics Department faculty were amused by my frequent dissent. Figuratively, they would pat me on the shoulder and tell me, “Nice try, kid.”

In graduate business school, certain Nobel laureates politely dismissed my “socialist” thinking. At the University of Chicago, in the early nineties, faith in the power of the Free Market to usher in the Kingdom of Heaven was delivered with quasi-religious zeal. In every community, no matter how enlightened, there are certain things one simply does not question.

Now, after twenty-five years of working intimately with wealthy families, private business owners, and public company executives, here’s what I know about the Lies the Will Not Die:

➤ Broad-based consumer (i.e. middle-class) spending is the primary driver of economic growth and, therefore, employment (i.e. jobs).

➤ When a recession is deep enough that consumers are unable or unwilling to spend, government spending is the only evidence-based remedy for stimulating economic growth. Apart from the Federal government’s capacity for massive near-term spending, there is no “market-based” solution to this cyclical problem. It is unconscionable that the Congress is unfailingly abusive in deciding how to allocate the necessary spending, but even misguided, corrupt, and wasteful outlays are stimulative. Imagine how much more effective stimulus spending could be, if lawmakers pursued the greater good, rather than their own self-interest.

➤ Wealthy investors and business owners do not constitute a special class of “job creators.” They create jobs only when increasing demand for their products and services (which they largely do not control) dictates that more bodies are needed. Furthermore, firms have a strong tendency to resist hiring new workers, until it is absolutely necessary for them to do so.

➤ Taxing the rich—in fact soaking the rich, and I’m not saying we should do that, but there is abundant evidence from 1932-1981 to support this—has, at best, a modest effect on the amount of capital they invest in new or expanding businesses, and no effect whatsoever on their level of personal consumption.

➤ Increasing tax rates on the earnings of existing medium-sized and large businesses does not reduce the incentive for entrepreneurs to start new businesses (it turns out that entrepreneurs are motivated by several other things besides money—who knew?!). It does not even discourage existing firms from making new capital investments, from entering new markets, or from scaling up profitable business units.

➤ Yes, fairer (i.e. higher) business tax rates will send jobs overseas—but only because current tax policy makes it so ridiculously easy for American companies to reduce their US tax liability by going offshore. There must be non-negotiable responsibilities associated with the right to sell in US markets, including some level of taxation on global sales. Obviously, the answer is to close the loopholes, not to dispense with taxation.

Small businesses and startups should be taxed based upon a completely different set of principles that accounts for their vulnerabilities and the effects that tax policy does have on their business incentives and behavior.

➤ The preferential tax treatment afforded to capital gains, ordinary dividends, carried interest, and inherited capital assets does nothing to promote the general welfare and, in fact, is detrimental because it perpetuates ever-widening wealth inequality.

Undertaxing wealthy individuals and corporations does not incentivize anything that enhances the public good. The macroeconomic relationships postulated by supply-side economics have been shown to be tenuous at best (Arthur Laffer’s formulation of his own namesake curve and his positioning of the US tax system on it were both way off), and the “trickle-down” theory was always a fantasy. Economic growth is, first and foremost, about Aggregate Demand.

There’s not much debate about any of this anymore. Everyone knows these things are true. And yet, under Republicans and Democrats alike, US fiscal and tax policy continues to be heavily influenced by the Lies that Will Not Die.

Venture capitalist Nick Hanauer (2012) says it beautifully…

If lower income tax rates for the wealthy really worked we would be drowning in jobs…

His short, controversial 2012 TED Talk is a must-watch.