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ETpro's avatar

When did the USA last face a Supply Side crisis and how did we solve it?

Asked by ETpro (34208 points ) January 29th, 2012

There are two elements necessary to a modern economy in the developed world, a supply side, which means the creation and distribution of goods and services, or supplies; and a demand side, which means consumer demand to buy, use and replace those supplies. When those two elements are in good ballance, the economy hums. There are plenty of jobs making and distriuting goods and services, and the suppliers find plenty of demand for their goods and services because everybody has jobs and is earning plenty of money so that they can buy those goods and services.

If either the supply side or the demand side gets deflated, the whole economy slows down just like a bicycle does if it has one flat tire.

To carry the bicycle analogy further, let’s call our bicycle “The Economy” and name its front wheel Demand and its back wheel Supply. If Supply goes flat—there are not enough goods and services to meet the current Demand—you fix it by patching the leak and pumping up Supply. If Demand goes flat, you fix it by patching and pumping up Demand.

So before trying to fix an Economy that’;s got a flat, it is vital to figure out which tire is flat. Putting a patch on Supply and pumping air into it when Demand is really the flat tire will only make things worse. It will over inflate the one side of the Economy still in working order, and blow it up. Now you have an Economy with not one flat tire, where a simple patch and some air would fix it. It now has a tire needing a patch and another tire completely ruined by overinflation to the point it blew out.

So are we facing a supply side that’s flat now or a demand side that’s flat? When was the last supply side crisis the US faced? How did it get fixed? Shouldn’t the fix for our current economic woes focus on the side of the economy that’s gone flat?

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9 Answers

jaytkay's avatar

“Supply side economics” is a sham. It’s a discredited and disproved idea which says that cutting taxes for the wealthy and removing regulations and reducing government spending is always the best solution.

It brought us the current economic disaster.

Even Reagan boosted the economy by the Keynesian (opposite of supply-side) method of using government spending to counteract a lull in the private sector.

Conservatives have proven again and again that they are wrong about, well, everything. The time to face facts and reject their ideology is several decades past due.

Linda_Owl's avatar

Personally, I think it is the demand side that is flat & it is flat because so many companies have outsourced the manufacturing of their products to various third world countries (so their CEOs can make more money) and the American economy no longer has the jobs that we once did. If people do not have jobs, then they do not have money to spend. No money to spend means a reduction in the demand side of the equation. This situation has come about due to our government seeking to ‘globalize’ our economy & the NAFTA Agreement is also a contributing factor. I think that America’s “golden years” are long gone & I do not see any of the jobs returning. Reagan did a real financial shuffle with our job sources when he came up with his “trickle-down economics” & the dismantling of the various regulations that kept businesses & Wall Street & banks in check. If any of the jobs do come back, they are going to come back to desperate people who are willing to work for very low salaries just so that they have some sort of money coming in. It is happening right now with the Caterpillar Company. They have a large plant in Canada & they have notified their Canadian workers that they will be shutting the plant down & moving the jobs to New Jersey unless the Canadian workers agree to have their salaries cut in half. Caterpillar is NOT a struggling company, they have been posting record earnings & profits – they are doing this just because they can (the plant in Canada is Unionized). They know that the people in New Jersey are desperate for jobs & are willing to work for $22,000.oo per year – $22,000.oo is poverty level wages (barely more than minimum wage). The last time the US had a “supply side” problem was during WWII & the supply side problem ended when the war ended & manufacturing was able to start making products to sell to consumers again.

bea2345's avatar

@Linda_Owl – does not the law prevent this kind of profiteering (They know that the people in New Jersey are desperate for jobs)? I mean, is there a minimum wage in the US?

PhiNotPi's avatar

@bea2345 The minimum wage in the US is $7.25 an hour. If that person works all 260 business days (no holidays or vacation time) for eight hours a day, then the minimum salary is $15,080 per year.

bea2345's avatar

Of course the standard of living is higher in the U.S. than in many countries. $7.25 sounds like a lot to me but as you say, it is only $!5,080 per year. We have a similar problem. The minimum wage has to go up – as it is, in some trades, like plumbing, it is nearly impossible to get anyone to accept the minimum wage. I mean, if the day’s earnings do not cover the cost of transport and food, to name two items, what is the point? My daughter refused a job at Kentucky Fries because it took a whole half day’s pay to earn the cost of a lunch. Well, fortunately she is at university and may she never have to take another job at KFC.

zenvelo's avatar

The original premise in this question is wrong. Supply does not evaporate in the presence of demand. Price increases when items in demand are in short supply. Demand drives the economy, not supply; supply is a way to meet demand. A shortage of supply causes prices to increase; a shortage of demand causes prices to fall.

The diversion of raw materials for the war effort was not a real lack of supply, but required management/rationing of the economy to keep prices in check. People were willing to accept strong price controls for the war effort, but that did not last once the war ended.

ETpro's avatar

@jaytkay How true. I don’t expect that to change any time soon for the folks that get all their news from Fox, or the Drudge Report, or Rush Limbaugh. But it seems time that the voters in the middle, who are not heavily partisan, would figure that out.

@Linda_Owl Great answer. Look at two relatively successful manufacturing economies where things are still made domestically, Japan and Germany. The differential between the CEO’s pay and the average worker’s pay in Japan is 11/1 and in Germany is 12/1. Here in the US CEOs make 475 times ass much as the average worker.

@zenvelo It seems to me that you are setting up a straw man to skewer here. Neither the original question nor its details suggest that the supply side evaporates due to demand. WWII is in fact the last time we had a supply side shortage. Before that, we had one right after the Civil War. In both instances, most manufacturing had been diverted to the war effort. It took some time to retool and aim it back at domestic consumer goods manufacturing. But once that was done, there was an economic boom of historic proportions. The Post War Boom after WWII even outdid the Gilded Age between 1865 and 1900. That is because in the Civil War, there was destructin of what manufacturing there was in the South, but the North, where most manufacturing was done at the time, remained largely intact. It just needed retooling after the war. In WWII, the entire US remained intact while Europe and Asis got decimated. The demand came from all around the world.

zenvelo's avatar

But there wasn’t a supply side crisis after WWII, supply came as quickly as possible. You could get anything you wanted if you were willing to pay for it It was pent up demand that drove the growth though.

ETpro's avatar

@zenvelo I was born during WWII. I know what conditions were like. My parents reminded me of it often.

The thought that you can get anything you want if you are willing to pay enough for it is wrongheaded in two ways. Even Steve Jobs couldn’t buy an extra day on his life. You can’t buy what isn’t there. And more importantly, we are talking about hundreds of millions of people, not the richest 1/10000th of 1%. Demand NEVER comes from the fabulously wealthy because there simply aren’t enough of them. Perhaps they rode out WWII in relative comfort, but that does not mean everyone did.

Silk wasn’t available because it was needed for parachutes. People who couldn’t join the military joined what was called the War Effort. They scoured junkyards and dumps as well as their own possessions to find items with needed metals that could be melted down and converted into the machines of war. Virtually all of the supply side was turned to cranking out a liberty ship a week, rebuilding the Pacific Fleet lost at Pearl Harbor, and building the machines of war and supplies for the troops. When the war ended, the factories couldn’t be converted to peacetime consumer goods production at the flip of a switch. And demand was incredibly heavy. Parts of bombed out Europe and Japan were without food, clothes, medical supplies, hospitals, housing, bridges, communications. It was the largest imbalance in supply vs. demand the US has ever seen to date.

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