Thursday, September 22, 2011
supply or demand?
I recently read a magazine article that said the leading economists here in America are still scratching their heads wondering what caused the 2008 financial melt down. That came as a surprise to me because both political parties depend on these economists to give direction to their monetary policies. The ideologies of each political party hang on the economic theories that give expression to their world view. That leaves me scratching my head and wondering if these people have no clue as to what happened then who does?
I’m not an economist but like every other voter and tax payer I have my own opinion and it is based on what I have observed in the political arena and the books and articles I have read. So here’s my take:
Throughout history there have been many schools of economic thought. Here in America those theories seem to have been narrowed down to two: Supply side economics and demand side or Keynesian economics. Supply side economics proposes that economic growth can be achieved by tax cuts and deregulation of business. It also maintains that lower taxes will raise revenue by improving the economy making it possible to collect taxes from a broader base of working people and businesses who were able to make more money in a lower tax environment. It is also called trickle down economics because its proponents claim that as the rich get richer the poor are eventually helped as the benefits of a growing economy trickle down to them. John Kenneth Galbraith says that it would be more aptly called the horse and sparrow theory: “If you feed the horse enough oats, some will pass through to the road for the sparrows." Supply side economists claim that the tax cuts of the Reagan administration lifted the country out of the 1981-82 recession, and increased tax revenue. Those who disagree claim that if you factor in the effects of inflation there were no actual increases to tax revenue. One thing is true: record setting deficits were left behind by the Reagan presidency. The Congressional Budget office has recently informed us that if the Bush tax cuts were allowed to extend past the 2010 expiration date it would add 1.8 trillion dollars to the deficit over the following decade. And yet, President Obama signed a bill to extend those cuts for two more years.
Demand side economics asserts that the combined demand of consumers, government, and businesses are the power behind a healthy economy, and that it is necessary for the government to take measures (such as deficit spending) to stimulate demand and insure full or near full employment. One historical example of Keynesian economics was during the Great Depression. Herbert Hoover, a laissez faire Republican had decided to take Adam Smith’s advice and let the “invisible hand” of the market place bring the economy back to health. That didn’t work and led to the election of Franklin Roosevelt. Roosevelt put into place public jobs programs and regulations to oversee the banking industry and Wall St. The Glass-Steagall act was signed into law and ended some of the financial practices by banks and Wall St. that led to the collapse of 1929. The economy began to grow again from 1933 until 1937 when we slipped back into a recession. WWII provided the impetus for the massive government spending that ended the depression and brought about a thriving economy that lasted until 2008. (There have been recessions in the intervening years but the trend has always been toward growth.) Some say that what is needed is a massive spending program of the scale of WWII to increase demand, put people to work and revive commerce. But, we’ve been fighting two wars at the same time for the better part of a decade and the eventual cost is projected to be 3.7 trillion dollars. The military-industrial complex President Eisenhower warned us about has been billing the government for the cost of war for decades and we now spend more than all the other countries on earth on defense. With the debt we are carrying there is not much room for additional extreme spending of the scale needed to jump start an economy as large as ours.
So, supply side, demand side. Which one is best? The supply siders say that lower taxes increases government revenue, but there is no historical evidence of a sustained increase that strengthened the economy. I don’t like paying taxes but I see the necessity of revenue sufficient to operate the government services and social safety nets that make our nation a civilized place to live. Another claim the supply siders make is that government regulation of business is a job killer and a drag on the economy. Let’s look at how federal oversight has benefited us. Remember the Glass-Steagall act mentioned above? It kept banks and Wall St. investment firms from participating in the practices that led to the Stock Market crash of 1929. For years the banks had been lobbying for changes in federal regulation and in 1999 a Republican congress passed and President Clinton signed into law the Gramm-Leach-Bliley Act which effectively repealed Glass-Steagall and allowed banks the freedom to merge, buy and sell mortgage backed securities, credit default swaps and derivatives; actions which were prohibited by Glass-Steagall. We all know the outcome. Other government regulations that protect the quality of our food, the safety of our transportation and work places are, in my mind, absolutely necessary to the welfare of our citizens.
And now the Democrats and the Republican/Teaparty are so polarized that responsible government is impossible. The Teapartiers were even willing to allow our nation to default on its debt before it would agree to a new debt ceiling, an event that would have triggered a global financial crisis. What do we do? The politicians are not able to govern responsibly. It’s not that they aren’t capable to performing the job. It’s that they lack a heart for public service, more willing to lend an ear to the corporate lobbyists than to their constituents back home. They lack integrity, it’s hard to find an elected official that hasn’t been involved is some kind of scandal. The American public bears a large share of the blame because we keep returning these miscreants to office.
America has seen the last of its glory days. In order to be healed it will take a lot more than our politicians are willing to do. And probably a lot more than American citizens are willing to do.