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ETpro's avatar

Can supply-side economics resolve a demand-side economic problem?

Asked by ETpro (34217 points ) November 30th, 2012

Here’s a definition of supply-side economics and the problem it is aimed at solving. And here’s what demand-side economics is, and the sort of problem it can fix. Here is a thoughtful discussion of which approach best addresses today’s fiscal challenges.

Which problem does the economy currently face? Why do some people insist on applying the same tool regardless of the nature of the problem they are facing?

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12 Answers

Yetanotheruser's avatar

@ETpro, in researching your links (and doing a little more research on my own), I found it interesting that both demand-side and supply-side supporters reach as far back as James Hamilton (first US Secretary of the Treasury). Hamilton’s 1791 Monetary Reform is an essay by Libertarian Joe Cobb, and this excerpt from Rebooting the American Dream: 11 Ways to Rebuild Our Country by Thom Hartmann both cite Hamilton as the “father” of demand side economics, although many will only trace it back to John Maynard Keynes

Most supply siders will cite Ronald Reagan as the father of their discipline, along with Jude Wanniski, although some also attempt to trace the theory back to Hamilton.

I think the past 30–40 years of bubble economics disproves the supply-side theory as a over-arching model for economics. The lack of regulations, the lowering of taxes on high income earners and the loss of actual production in the US has put us into the biggest economic crunch since the Great Depression.

If we look at the past 80 years, we notice that the most productive years, the 1950’s and 1960’s had the highest taxes on extremely high income earners, sometimes as high as 90%! What this did was incent a high earner (say, an executive of a corporation) to invest the corporations profits rather than take a higher salary. When the corporation had a lot of cash, it would invest the cash. In what? In R&D, which in turn would lead to more products, more jobs producing those products, more jobs to supply and convert the raw materials needed to produce those products.

Add to that a tarriff system that makes it more profitable to manufacture goods in the US than to import them, and you have a society with an economy that is able to afford healthcare for all; a society where a family does not have to declare bankruptcy because of something like a debilitating illness or injury; a society that takes care of its elders; a society that has a strong thriving infrastructure. In short, you have the Great Society of LBJ. Too bad that was derailed by the war in Vietnam…

jerv's avatar

No.

Supply-side (“Horse and sparrow”) was discredited over a century ago, and disproven outright in recent years. A healthy economy is a balanced economy where consumers have enough income to afford things, and the supply side is able to meet demand at a reasonable price while keeping costs low enough to make enough profit to make it worthwhile. When the supply side keeps the consumer poor, that lowers demand; when consumers are too rich, supply has higher costs (consumers generally earn income from working for the supply side), which increases prices enough to reduce demand. Keeping consumers poor also increases reliance on government, which raises taxes for all. There is a fine balance required, but it’s better (especially for those that like smaller government and lower taxes) to err on the side of keeping consumers rich, which means that CEOs take home mere millions instead of tens of millions in order to pay the workers enough to meet basic expenses with enough left over to buy luxuries like eating out (more money for restaurants and wait-staff) and toys (more money for manufacturers).

Our current system which heavily favors the supply side is bad for everyone, even the supply side in the long run. At best, it is not sustainable. As a person who would take $1m/yr for life over $5m/yr for 5 years and then nothing after that because the well ran dry, I see our current system as a disaster, and the problems we have now as a mere warning shot.

Kropotkin's avatar

I don’t find anything persuasive about the supply-side arguments. It appears ideological and only serves the interests of the rich.

But demand-side economics is what historically saved capitalism, and contributed to the neutering of socialism and the radical left (in the US at least.)

With automation and advances in technology, ever fewer people are working in manufacturing and agriculture. This trend of automation and reducing the labour requirement is even beginning to affect the service sector. I think there needs to be a greater acceptance of the fact that we just don’t need everyone working any more, and that it probably isn’t even desirable.

Just looking at some of the trends and indicators since the 70s, when computing and automation really started taking off. Productivity increased massively, yet wages have remained relatively stagnant, working hours have remained about the same and may have even increased recently, and retirement ages are set ever higher—soon we’ll be expected to work till we drop dead.

So we’ve all inherited this technological civilisation, built on the accumulated labour and knowledge of countless millions over many generations, and we’re seemingly blessed with previously undreamed of crop yields and incredible productivity and efficiency in manufacturing—and strangely relatively few of us are reaping the full reward of all this gain.

We’re still expected to work tirelessly, the longer the better (instead of sharing work and working fewer hours). The engine of health in this economic system is measured by how much we’re shopping, with conspicuous consumption and aspiration of material gain becoming the greatest goals in life—while millions continually bemoan their dissatisfaction with their work and how their managers and bosses annoy them.

And this is the status quo of demand-side economics.

Perhaps when enough people start shopping more, it will allay all our concerns about unsustainable resource exploitation, global warming, ecological disruption, environmental pollution, species extinction, poverty, income disparity, job dissatisfaction, pollution, political corruption….

ETpro's avatar

@Yetanotheruser Well said.

@jerv Agreed.

@Kropotkin I think @jerv has it right. The supply siders may be out to serve the rich, but their ideology doesn’t work, and ultimately that hurts the rich and poor alike.

Kropotkin's avatar

@ETpro I’d argue that supply-side policies have been an astounding success for the very rich. I will try to explain what I think its rationale actually is, which I believe is motivated more by malice, spite and class interest, rather than delusion and incompetence (not to say that many of its proponents are not deluded and incompetent.)

Demand-side economics saved capitalism. It helped stave off the influence and growth of the radical left and appease the discontent of millions. It did this by putting people to work, but most importantly by giving people a disposable income and promoting consumerism. Increasingly, workers could buy and enjoy more of things once affordable only by the rich.

Historically, the rich have distinguished themselves by their conspicuous consumption. In the post-war boom, this outward class distinction was being eroded. Even ordinary blue-collar workers could buy cars similar to that of their bosses, wear fashionable clothes, buy bigger homes, afford various luxuries and foreign vacations.

The problem is that the interests of the rich are not the same as that of workers, and that their concessions and elevation of the working class to the affluent, self-styled middle class they came to be, was done begrudgingly and only in the interests of preserving their own long-term privilege and power. They immediately went to work in undermining this new middle-class, intellectually and politically, and they have done so relentlessly.

This is where supply-side arguments play their role. It’s also, I think, where the political and philosophical wings of the supply-siders come in: Libertarianism and Objectivism. Right in the middle of the most prosperous period of capitalism, arguments were being made that the rich deserve more, that people should be concerned only with their own affairs, that true liberty is expressed only in a free market, and individualism and selfish greed are the greatest human values. If we just cut taxes on the rich, if we just cut social spending, we’ll all be freer and even more prosperous.

And guess what? That rhetoric won. Those arguments swayed people. The propaganda was relentless. There are dozens of major think-tanks advocating supply-side economics (they even argue that their policies ended the Great Depression) supported by corporations and individual billionaires. The turning point appeared to be in the 70s, because this is when consumerism and the affluent life-style of the middle class stopped being largely fueled by their disposable incomes, but by ever larger debt. The oil crisis also gave the supply-siders the pretext to impose their new economic order and gain a political foothold; they haven’t looked back since. (Globalisation played its part, too, but I won’t get into that else I’ll be writing forever.)

Since the late 70s we’ve witnessed a social and economic regression to the sort of class distinctions and income disparity that existed prior to the ‘Golden Age of Capitalism’.
We’re now replaying similar economic conditions to that of the 1930s, but with some key differences: There is no radical left. The peasants aren’t at the gates with pitchforks. The finance sector now largely controls governments. The rich have no incentive to repeat the concessions of The New Deal and the Great Society, since it was the existence of a radical left that allowed for that at all. And we’ve massive environmental and ecological risks to manage and problems to solve—with civilisational implications.

I agree that fiscal policy designed at increasing aggregate demand would (except there’s far less political will to even do so now) pull the US and the EU out of recesssion—It’s just that we’re on an unsustainable path anyway.

jerv's avatar

To paraphrase, ”... concessions and elevation of the working class…. was done… only in the interests of preserving their own long-term privilege and power.”

But try telling a Supply-sider that they are cutting their own throat in the long run and they won’t believe you. That tells me that there are elements of Solipsism and Nihilism in their philosophy as well. Is it any wonder that the most successful CEOs show strong signs of sociopathy?

Paradox25's avatar

Supply-side economics would only benefit average people if people can afford the products that corporations sell, which is difficult when consumers don’t have much income, and are mired in debt because of high interest rates. Supply-side advocates tell us that if you tax me, I can’t hire, but yet history (and stats) clearly show that lowering taxes on corporations does not create more decent jobs. This is rather ironic, because I used to be a libertarian that wanted free-market capitalism to become a reality. It was while I was trying to debunk keynesian economics that I became convinced that I was wrong.

jerv's avatar

@Paradox25 That seems to happen to a lot of people; shedding ignorance by finding out how things really work make them abandon the views that the current breed of Republicans hold dear.

ETpro's avatar

@Kropotkin Thanks for a thoughtful and thorough contribution to this discussion. And I should have said if before—welcome to Fluther. There is only one thing I take exception to, and that’s the idea that the future inescapably holds doom and gloom. It’s true our current way of doing things is unsustainable, and that poses enormous threat to the rich. Even with all the security they can buy, there are too many pitchforks held by the unwashed masses. The 99.99% can drown them in their blood and thus win. So the elite of the elite have good reason to question their current actions.

The reason I am unconcerned with sustainability is this. In 1860, politicians and social thinkers were concerned about the future sustainability of New York City with its population growth curve. In 1700, the population was just 200. By 1860 it had risen to an unimaginable 805,658 people. So city leaders convened a conference of the top scientific, engineering, political and social science minds of the day to decide how to deal with growth. They concluded that bu 1960, the city would be abandoned. It was unsustainable. The 1860 population required 100,000 horses, and they reasoned that with continued growth, by 1960, the manure would be neck deep.

What they didn’t foresee was the entrepreneurial power that the great manure crisis would launch. By the early 1900s, there were 100,000 automobile manufacturers in America. Some were tiny concerns building specialized horseless carriages, and others like one in Dearborn, Michigan; launched by Henry Ford, grew quite large. What did not happen is the tsunami of manure the “experts” predicted, even though today’s population in New York is 8,244,910.

I am as sure of the future of sustainable technology as I can get lacking a working crystal ball. Entrepreneurs all over the world are already hard at work solving the sustainability problem. We will figure out how to sustain 7 billion humans on earth without wrecking the environment doing it. Just you wait and see,

jerv's avatar

@ETpro There are some problems that physical logistics cannot solve though, and the econommy is one. Imagine if only 1% of New Yorkers could afford the new “horseless carriages” while the other 99% were stuck with the old shit-factories? Part of the reason that did not happen was Henry Ford’s insistence on building an alternative that the average worker could afford, and paying his workers better than slaves.

There is easily enough wealth to support far more than the 7 billion humans we have now; the trick is distributing it well enough to actually do so. Just the gold plating in the galley of some potentate’s third yacht could feed a remote African village for decades. Charlie Sheen probably spent enough on coke to build at least one desalination plant and have enough left over for a few million immunizations.

Don’t get me wrong, some people deserve to be wealthy, but I don’t think that anybody should ever be wealthy at the expense of others, especially since that wealth often comes to them as the result of the intellectual capital and sweat equity of those they screw over. And I know Conservatives often accuse others of fallaciously thinking that wealth is a zero-sum game; I say to them, “You’re right, it isn’t, so why don’t you stop treating it as such!”. We can feed the poor while still having enough left over for billionaires exist, and to buy Bugattis!

Warren Buffet and Bill Gates each donated half their fortunes to helping others. They are still ridiculously wealthy, and did not suffer from doing so, yet look how many lives have been enriched as a result of them realizing that there is such a thing as “too much money”. Besides, I think the future of humanity is the best investment one can make.

Paradox25's avatar

@jerv This is why I agree with the workers behind the fast food movement. It’s not about higher wages = higher prices, but about executives wanting to make $40 million instead of $20 million a year.

ETpro's avatar

@jerv & @Paradox25 I totally agree. It’s a balancing act to get it right, where entrepreneurs are still motivated to innovate and solve the looming problems of the 21st century, but everyone willing to work can earn a decent living wage. We can do it, though. We have done it. We just let the libertarian Objectivists sloganeer and sell crap as caviar. It’s time to set the game back on an even keel. It’s currently rigged.

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