In the 1970’s, after America experienced years of “stagflation”, that is a no growth economy coupled with high inflation, Keynesian Economics had reached an impasse. The government’s putting money into the hands of consumers, which stimulates the demand side of the economy, only increased the inflationary pressure, which further drives up prices. It was time for the US to put, Demand Side Economics aside, and give Supply Side Economics a try.
When the Republicans put the plan into motion, by reducing corporate, personal income, and inheritance taxes, it encouraged entrepreneurialism and incentivized business expansion. This ushered in the longest period of economic growth ever seen. After the current “short wave,” (7-11 year) business cycle inevitably concluded, the Democratic Party came to power and started to exacerbate the slow-down by imposing bad economic policies. The resulting worldwide economic collapse, while ingeniously blamed on the Republicans, was a direct result of the Democrats’ unprecedented meddling with the time-honored practices of the banking and mortgage industries. All of the legislation signed into law after Obama came into power, while having convincingly benevolent titles like Economic Recovery Act, was in fact, socialist wish lists for growing a big wasteful government and punishing the economic engine.
Today the country is cautiously optimistic because it instinctively believes that enough time has passed for the economy to turn around on its own. However, many economists have predicted a “double dip” recession, because of the government’s interference and huge deficits, which will eliminate credit, and pull much needed capital out of the private sector, thus further shrinking both job expansion and consumer demand. In essence we have taken a broke country, and in a last gasp effort, plunged ourselves deeper into debt, exhausting every last drop of credit available, in order to do the exact opposite of what was needed to improve the economy.
So where do we go from here? There is no more money or credit for purchasing expensive recovery schemes. Yet, there have always been things a government can do that do not cost a penny (other than legislative cost). And that is, enact Supply Side economic policies. Keep in mind that they need not invest in, or underwrite business, just get out of its way, and stop taxing it so heavily. Remove some of the hindrances that have discouraged businesses and entrepreneurs from investing, expanding, growing, and employing – in other words, doing what they do best: creating wealth.
Now, more than ever before, we live in a new economic climate. Part of what the Republicans created, going as far back as Nixon, was a Laissez-Faire approach to world trade. The economic theory is that each country has its own specialties where it can make certain goods for less than other countries could, and vise-versa; therefore, all countries benefit from lower cost goods. The tropics can produce coffee and bananas for a lot less than Canada. Saudi Arabia can export oil more cheaply, and America can export higher quality grains. Mexico and China can supply labor for a lot less than America can.
I have seen exact opposite at work in Mexico, where until recently, it suffered from Protectionism. Imported goods like electronics had a 300% tariff in order to encourage the domestic electronics industry. Hardly anyone could afford a Sony TV that came with an extra 300% price tag. They were forced to own lower quality, locally made electronics.
Today, trade restrictions and tariffs have been reduced world wide, and China has taken the ball and ran with it, for they had also allowed Free Market Capitalism to flourish experimentally at home. Where previous years of command economy, “Twenty Year Plans” had resulted in starvation, little infrastructure, and hardly any consumer goods; now, their Free Market production’s overflow capacity found a huge tariff-free consumer market eagerly waiting overseas in the United States.
Now, Free Trade works both ways. And, while we have enjoyed tons of cheaper consumer goods like clothing, plastics, and electronics from China, American companies like Coca-Cola, Ford, and McDonald’s finally got access to the world’s most populous country. (Now you know why Ford posted a profit this year.) Whether Free Global Trade actually is as good for everyone in reality, as it is on paper (as with all experiments) only time will tell. Inevitably, with economic change, comes the closing down of the specific industries that are not as efficient as those overseas, and comes the growing of whatever local industries that tend to be more efficient. Unfortunately, for us, and fortunately for poorer countries, cheap labor tends to give most any industry an economic advantage. (Eventually however, a new equilibrium emerges as the third world prospers, and their new middle class can afford American goods.) However, the point is, where do we go from here.
National economic policy is no longer enacted in a vacuum. The policies we make at home will be taken advantage of by the world at large. We are in a World Economy now, like it or not. And thankfully, as of yet, there is no one-world government. So, let’s contrast the two differing economic directions, Demand Side and Supply Side, by illustrating how they operate within the Free Trade, Global Economy.
Demand Side Economic Policies increase demand by giving the American consumer more purchasing power, whether by reduced income taxes, reduced sales taxes, or outright gifts of money such as those stimulus checks in the mail back in 2008. Setting aside the fact that this money must come out of the exact same economy it is being placed back into, the fact is that this money encourages the American Consumer to purchase not only from American Companies, but from overseas companies as well. This was seen recently in the “Cash for Clunkers” Government Program. People bought new Fords as well as new Toyotas. Any such policy today causes the importation of goods from abroad and the exportation of American dollars. In essence, helping to grow overseas companies and increase their competitive stance against us. As a net result, we loose more market share and more jobs.
Supply Side Economic Policies enacted in America, (remember we can’t enact laws in other countries) encourages America to produce more goods and services, which can be purchased by both American and oversea consumers. The idea is, and the result would be, to make American goods more efficient, have higher quality and lower costs, and more competitive on the world market. The jobs created by this new productivity and increased global market share also would translate into American workers having bigger paychecks and increased purchasing power, thus increasing the demand side of the economy naturally. But this time, it is demand for real goods and services that have just been produced. (In other words, this not only raises the chicken, but also allows the consumer put it in his pot.) When this demand meets the increased supply of goods and services, less inflationary forces will be put on the economy than if you only increased demand and not the supply by implementing artificial Demand Side Policies alone.
This approach is what prevents the “Stagflation” from coming back. The net result is the more efficient and competitive domestic product is available to both American and Foreign consumers. When the overseas consumers buy our now more competitive products, we will export goods and services and import dollars. This is how national wealth is created. If I don’t make this point convincingly enough, you could read The Wealth of Nations by Adam Smith. However, the net result of American Supply Side Economic Policy would be the growing of American business and the creation of American jobs.
If only our current political leaders understood this one fact, our economy would start to turn around. You should not hobble American businesses with over-taxation and capricious regulation. That would be, “killing the goose that lays the golden egg.” You should encourage business. Many competing countries go so far as to subsidize the very industries that produce goods that compete against American companies.
Increasing American industrial efficiency and competitiveness on the world stage would increase their profits, so that our government can levy its desired revenues via corporate and income taxes. Then and only then, will the government have the resources and the budget available to spend on its “wish lists.” Tax and hinder business first, and you can count on unemployment, trade imbalances, decreased tax intake, budget deficits, and eventual economic collapse!