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.
Learning about a subject from actual textbooks and becoming experts on the subject is always a little disconcerting. You become hyper aware of everything. Freaky.
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