We are seeing the rise of an old and ugly economic term; “Supply-Side Economics”. It is ugly because it has a much better image than any economic substance to it. Ronald Reagan, “The Great Communicator”, managed to sell it to the public back in the late 70’s and 80’s. “Voodoo Economics”, “Reaganomics”, “Supply-Side Economics”; call it what you will, it is pretty much all the same thing and it just doesn’t work. While it does have sort of a nice, logical, warm fuzzy feel because it provides corporations and the rich with tax breaks that will allegedly give us all jobs and fix our broken economy, that does not make it any more effective. It will never work. Allow me to explain.
The theory goes like this in very simple terms; if the government gives tax breaks to the corporations that make stuff, let’s call them widgets, they will have more money and will hire more people to make more widgets to sell to people. They will sell more widgets and will make even more money, thus, the economy miraculously turns around. If this worked, it would be a warm, fuzzy answer, but it doesn’t work. Let us look at why.
Let us make a few assumptions that most of us can relate to in our current economic situation. Consumers, the people that buy widgets, have seen the economy go down the toilet over the last three or four years. Many people do not have jobs and therefore, no income. Other people are scared they may be laid off and are saving for the anticipated rainy day. Many people owe more money on their homes than they are worth; some are going into foreclosure due to the fact that they do not have jobs or the fact that they are just not going to make payments on a house they can never get their money out of, ever. Many have no idea what is going to become of them in the near and long-term future.
Credit has tightened up and, in a very short period of time, people in our society went from spending 6% more than they made, using credit cards and home refinancing, to spending 6% less than they make. This is a 12% shift in spending, a huge change and shrinking of the economy. Consumers had been slapped in the face by the rainy day for which they had not saved, they learned their lesson and are now hoarding cash because they think it is going to rain harder in the future. This is a lack of consumer confidence.
If you boil all the above down to basics, people do not have any money and they can’t get any with which to buy widgets. If they are unemployed and cannot find a job, they certainly can’t buy widgets they don’t absolutely need. If they are working, they are not increasing their wages because companies are not making any money. They cannot borrow on their homes because they are underwater on them and they can’t use credit cards because they can’t get them and won’t use them anyway. Simply put, no one has any money and can’t get any.
Corporations are rational and make decisions based on simple considerations. They want to make money, plain and simple. Corporations are not going to make widgets for which there is no demand. You can give them all the tax breaks and deregulate them all you want, if there is no one to buy widgets, they are not going to make more widgets, period. The neo-supply-siders somehow think that if you build it, they will buy. This made a really nice plot line of sorts in “Field of Dreams” but that was a movie and old, dead baseball players are not going to come out of the corn field and thousands of consumers are not going drive in to buy widgets when they have no money. If they build them, all there will be is an inventory of widgets the corporation/manufacturer cannot sell.
People mistakenly credit Supply-Side Economics with the economic recovery during the Reagan years. It was coincidence and there are other, better reasons for the recovery. The credit can still go to Reagan, but for completely different reasons. In what statisticians refer to as a “correlation” we became convinced that Supply-Side Economics succeeded in getting us out of a recession, when the two events were not “cause and effect”. In a correlation, two events may just coincidentally happen at the same time, one may not make [cause] the other to happen. A causal relationship will produce correlations; but many correlations do not indicate cause and effect. Let us look at an example of the falsity of the correlation logic.
“The more firemen fighting a fire, the bigger the fire is observed to be. Therefore firemen cause fire.” In this example, the correlation between the number of firemen at a scene and the size of the fire does not imply that the firemen cause the fire. Firemen are sent according to the severity of the fire and if there is a large fire, a greater number of firemen are sent; therefore it is rather that fire causes firemen to arrive at the scene. So the above previous conclusion is false.
During the Reagan years there were a lot of things that were going on at the time that contributed to the economic recovery. The Reagan Administration and Congress, engaged in massive deficit spending. This was, in part to out-spend the Soviet Union on The Strategic Defense Initiative; SDI or “Star Wars” as it became known. What Ronald Reagan did was put this country on an economic war-time footing, spending money in order to break the economic back of the Soviet Union. It worked, but it also had a side effect. It poured money into the economy and into people’s pockets. They had money and they could buy stuff. This created demand and manufacturing boomed because people buy the products being produced.
If you recall from your history, it was really the onset of World War II that ended “The Great Depression”. The United States had to enter the war after the attack on Pearl Harbor and, pardon the pun, did so with a vengeance. We opened up the National Treasury, sold War Bonds (government borrowing) and generally said to hell with future debt problems, we have a war to win. Every able-bodied man, woman and child was put to work making stuff for the war. It got sent off to the war, got shot down, blown up or otherwise destroyed and had to be replaced. Demand, on an immense scale, ended the Great Depression. World War II was the largest government public works project this country has ever known.
Another thing happened as well in the 1980’s. The personal computer and other new technologies began to come of age and people found reasons to buy the new technology. This, in combination with the fact that people had money, created jobs in the technology industry and thus matured “Silicon Valley”, a brand new area where people could get jobs. So it helped the upward spiral. People wanted the new, different and exciting technologies, and they had the money to be able to afford them; again, a demand-driven recovery.
The long and the short of all this is that you can give as many tax breaks and cut as many regulations as you want and the fact is that if consumers don’t have any money with which to buy the products that are being made, the economy just stagnates. Corporations increase their profits garnered from the tax breaks and lessened costs of regulation, make their books look really good, but don’t engage in any activity that helps the economy as a whole.
Voodoo Economics; it didn’t work then, it won’t work now and it will never work. We live in a demand-based economy and no matter how much you make, if consumers cannot afford to buy it, there is not reason to make it. I invite your comments.
Soon, a blog on what just might work, but it will hurt….a lot.
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