Lordy Be But Nick Hanauer Is Ignorant Of Economics, Isn’t He?


Nick Hanauer is, to my mind at least, clearly gearing up for a run at political office. I don’t think merely being a Senator would quite match the ego so I guess we’ll have to see who the Democrats nominate for the White House next time around. The field is open after all. Hanauer’s problem is that as a – largely, he didn’t start from nothing – self-made VC billionaire he’s not exactly going to get the Bernie Bros onside. The solution there being obvious enough, invent a new form of economics and get them that way. That new form being that taxing the rich creates economic growth.

Hmm, well, yes, many thousands of very clever people over the centuries have pondered this point, filled libraries with their musings, this not being the solution any of them have come up with.

But, you know, new economics!

To be clear: There is simply no empirical evidence or plausible economic mechanism to support the claim that cutting top tax rates spurs economic growth. Zero. Zilch. Nada.

He even seems to believe this too. Stalin, at the end of the NEP period, imposed taxes of 120, 130% of private company profits. Soon enough private economic activity disappeared. We’ve at least one instance of high taxes dissuading economic activity at least.

But rather more we’ve got to explain that Nobel to Sir James Mirrlees, largely for optimal tax theory. Which does indeed insist that rates can be too high for growth. Even goes further and points out that capital tax rates should be rather lower than those upon labour income. In order to maximise growth. Or we’ve Diamond (himself a Laureate) and Saez (will be one if he lives long enough) who discuss the peak of the Laffer Curve. The peak being because rates can rise so high that they dissuade economic growth, the higher portion of a smaller economy bringing in less revenue.

But, you know, there are no plausible economic mechanisms by which cutting top tax rates spurs economic growth.

Just none.

The problem seems to be – other than that political ambition – around and about zero, zilch, nada, grounding in the subject of economics. He tells us of this:

US money velocity Credit Fed Reserve via FRED

Of which he says:

During the years preceding the Great Recession, every dollar in circulation typically changed hands about 17 times over the course of a given year. For example, you spend a dollar on coffee, which the coffee shop pays to the barista in wages, who in turn spends it on buying a burger, and so on. But in recent years, each dollar in circulation has been spent an average of only five times during a year—one of the slowest rates on record. This means that each dollar in circulation today is generating 70 percent less economic activity than a dollar did just ten years ago. What explains this dramatic slowdown in the velocity of money? “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it,” explained the St. Louis Fed in a gloomy 2014 blog post.

Trickle-down economics assumes that the velocity of money is relatively stable and predictable (indeed, the standard textbook formula MV=PT represents V as a constant); thus money in the hands of the wealthy should have as much velocity as money in the hands of the middle class. But this clearly isn’t true. And for obvious reasons: For example, I earn about a thousand times more per hour than the average American, but I couldn’t possibly buy a thousand times more stuff. I only own so many pairs of pants. My family and I can only eat three meals a day. We enjoy a luxurious lifestyle, but we already own several houses, a private jet, and one too many yachts (turns out, the optimal number is two). Cutting our taxes will make us richer, but it won’t incentivize me or my venture capital partners to spend or invest more than we already do. What’s holding us back isn’t a shortage of cash, but rather a shortage of demand.

The fall in V is a result of increased inequality. Rather than being the result of a financial crisis. You know, that clearly incorrect assumption of the Federal Reserve and every other monetary authority in the world. Which is why they all went out and made more M (which is what QE is) in order to maintain levels of PQ? And obviously Ben Bernanke is just a non-goy with a beard rather than the country’s great expert on monetary policy in financial crisis induced recessions, which he fortuitously was as well as being Fed Chairman.

Because, you know, Hanauer’s new economics. But it is this which is my favourite:

You can actually see this glut of financial capital accumulating on corporate balance sheets and in private bank accounts in the form of unprecedented reserves of nonproductive cash. According to various estimates, U.S. companies are now hoarding as much as $2.6 trillion in cash and marketable securities through foreign subsidiaries, and another $1.9 trillion here at home. Add to that the $2.7 trillion of investor cash earning next to nothing in money market funds, and another $2.1 trillion of excess reserves banks are hoarding at the Fed, and that’s more than $9 trillion in available cash in those four categories alone. Just sitting there. Doing absolutely nothing.

And yes, that includes the several trillion dollars of foreign earnings the Republican tax plan promised to “repatriate.” The truth is, these “overseas” reserves are largely an accounting trick. According to the Federal Reserve Bank of Atlanta, much of this money is already held in U.S. bank deposits, in U.S. Treasury notes, and in dollar-dominated corporate securities.

Yup, buying US Treasuries, corporate securities, this is doing absolutely nothing with money. That from a man who has made his billions financing companies. Presumably he believes that a company in which he’s a stake gains no benefit from issuing securities then (“Hey, guys, let’s issue some debt paper! Sure, it does no good, waste of effort, but why not?”) . Possibly even that banks lock their deposits up in the vault rather than trawling the country looking for people to lend them to.

I really do assume that Hanauer is preparing himself for a run at political office. For otherwise there’s no excuse for this, only politics makes people this stupid about economics.

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Rhoda Klapp
Rhoda Klapp

I’m surprised that Mr Hanauer doesn’t give away all that useless money. Perhaps a good accountant could show him how to maximize his tax payments?




“There is simply no empirical evidence…that cutting top tax rates spurs economic growth.” In other words, a transaction with low potential payback is just as good as a transaction with high payback; a high-tax regime works just as well as a low-tax regime; bad government is just as good as good government. Hanauer’s political career might be short-lived, as he will have many opponents for either party’s nomination who believe the same thing. Obama (and the latter years of G.W. Bush), despite failure to control government spending, reduced the velocity of money by proliferating prior restraint of transactions. There were… Read more »


Actually there *are* some people trying to hoard money – the Millennials who believe that social security will be broken before they get to 60, but this is thanks to people like Mr Hanaeur


Actually there *are* some people trying to hoard money – the Millennials who believe that social security will be broken before they get to 60, but this is thanks to people like Mr Hanaeur