The financial world we live in is just as wild, if not more, than the mountains and woods we walk through. We are told that the fundamentals of our economy are strong, but we can feel that something is wrong. My unique financial background and survival passion make Financial Survivalist and excellent place to learn and share.

Thursday, December 5, 2013

Supply-Side Economics

The majority of the discussion about supply-side economics can be summed up by “trickle down.” However, many “supply-siders,” as Karl Brunner called them, would argue that there is much more to supply-side economics than that. The basic doctrine can be described as “a lower tax schedule and , especially, a lower slope of the tax schedule is a necessary and sufficient condition for economic recovery.” Such as tax policy will “increase real economic growth, eliminate inflation, and eventually lower government expenditures.” The reasoning is behind incentives to work, invest and save.
Robert Freeman goes on to specify that that tax cuts should be for those who are wealthy enough that they don’t need to spend the “windfall.” Rather that they will invest their tax savings in factories, office buildings, research and development, etc. To me, it sounds like supply side economics is the exact opposite of “redistribution” of wealth.
Robert Freeman goes on to point out that the theory is that the investment will lead to economic growth, higher employment and higher incomes, and therefore higher tax revenue for the federal government despite the cut in taxes. Anne Krueger elaborates the definition of supply-side economics to consider the measurement of success. If one refers to determinants of aggregate supply, then production or supply is the key to economic prosperity. I should point out that over production leads to a dead weight loss, and so my initial though is that supply is only half of the equation.
Karl Brunner was a tough critic of supply-side economics and the Reagan administration.  He said that supply-side economics “lacks the consistent analytical framework necessary to provide effective solutions for our socio-economic problems.” That it, it won’t fix our problems that we have inherited from past generations.
So what are the problems that we inherited? Karl Brunner attributed the majority of the growth during the 50’s and early 60’s to Keynesian policies. He did not praise Keynesian policies, only eluded to their at least partial success at the time. He said that in the mid 60’s and through the 70’s we drifted into a period of permanent inflation with erratic and high levels of interest rates. He admitted that employment was growing, but the average level of “real growth” (I am assuming GPD) fell below the precedent set by preceding years.
He blamed the waning economic environment partially on shifting policies, but mostly on monetary, fiscal and regulatory policies occurring during the postwar period. As a solution to the woes in the 80’s supply-side economics reared it’s head and provided only a partial solution.
I find it interesting that while Karl Brunner spends his time criticizing the failures of policy makers during these years, Anne Krueger points out that during these years the world experienced that fastest increase in quality of life ever! 50 years ago the world was a very different. I wouldn’t know because I wasn’t alive, but it is easy to deduce a similar conclusion by reading about the time.
The majority of time reading Karl Brunner’s article, I felt as though he was a progressive criticizing conservative parties. Even if he wasn’t a progressive, he at least leaned left. As the article progressed, I realized that Karl Brunner was a staunch conservative, and that his critique of supply-side economics was that it was not extreme enough. It surprised me that he criticized supply side economics, but argued that the key to prosperity was limited government, decreased regulation and decrease in taxes. He made a point that cuts in government spending were more important than tax cuts, and one of the failures of President Reagan is that they didn’t cut government sufficient. He criticized supply-side economics because it didn’t really focus on cutting government spending. Instead it justifies deficits because tax cuts would lead to more revenue and offset it.
Robert Freeman makes an observation that essentially supply-side economics is a modern version of Say’s law. Say’s law has long since been discredited and it is easy to see the similarity between the two. Just because supply is there does not me demand will meet it. Without considering the demand side of the equation, supply-side economics is bound to fail or not succeed fully.
It seems to me that cutting taxes on the 1% wealthiest individuals won’t do anything. The majority of their income is from capital gains. So any affect of a tax cut will have to encompass a significant number of citizens in order to have any effect. As it includes more and more tax payers, the chances that they will spend the “windfall” will also increase. The balance between the two will likely not lead to more investment in factories, machinery, research and development etc., because for the most part it is companies that make these investments, not individuals. So policy would have to be centered on corporations and small businesses, not around individuals. However, these entities often make their decisions based on expected demand for their products. If taxes are cut, then they might expect and increased demand due to increase disposable income of customers. Therefore tax cuts do have the potential to increase investment, but such tax cuts should not be focused on the rich as they cause a relatively small portion of consumption.  
It is always easy to look backward and criticize decisions made in the past. After all hind-sight is 20-20. I seem to grow ever more tired of these extreme unbalanced criticism. Not that someone doesn’t have the right to criticize, but at least when doing so they should not apply their criticism to the extreme niche of the view. What I mean is that there are wackos in every bunch. I’m sure there are “purist” supply-siders, but I could easily argue that the majority of “supply-siders” are not purist. They understand that it is not a complete one size fits all solution.
Anne Krueger points out that the nature of our economic environment dictates that the problems and solutions are not static. As our economy evolves we will continue to encounter new problems that need new solutions. It has been in the past and will be in the future, an extreme error to attempt to apply a single static solution to economic problem. It is the every changing nature of economics that draws me to it. I want to be able to have the proper knowledge and skill set to observe, orient, decide and act to solve the new problems as they come our way.
Because the economy is not static and I believe contains at least some level of chaos, neither is the answer to our economy static. I have more to learn about current application and attempts to apply non-linear analysis to the economic challenges. I look forward to this study as I continue in my educational pursuit.



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