What follows is a comment made by follower "DLW" regarding my post on "Voodoo Economics." It is not posted as a comment as a result of it being over the 5,000-character limit imposed by the blog site. Please note that it is posted in its entirety and without editing of any kind. DLW comments as follows:
Ah, the myth lives on. Voodoo economics is too polite for the SUPPLY side (build it and they will come) theory of economics, not only because it does not work, but because Capitalism is a demand driven economic system. The failure of your business depends not on the amount of money you have to create the business or even how many businesses you can create, but rather on who is available to buy your product. Without buyers for your product your business will surely fail. Don’t believe it, try building a McDonald’s in the Sahara desert. Hell, you are the entrepreneurial elite who should pay no taxes because you make jobs, build ten (10) Mc Burgers in the desert and watch your sales go wild... but wait, you will have no sales because there are no customers (DEMAND).
Take this silly SUPPLY side theory one step further; is anyone really going to build a business when there is no one willing to purchase the product being sold? When businesses are cutting back, routinely closing, and recording dismal, if any, profits, are we to believe that new businesses will enter the market to lose money also? I think not, they will wait until the market improves and appears to be growing or open only where the market evidences a demand for a product.
Also please remember that DEMAND is based not only on what you want (as in I want a new black Corvette), but also you must have the ability to pay for the item you desire (as in I can only afford a new scooter).
So, when your work force is dramatically under and unemployed (a major symptom of an economic downturn) they (the workforce) have no money to purchase any items in the economy and your economy worsens with every layoff and closed business. This of course is the downward spiral of a recession. The less demand the more businesses cut back by laying off the workforce, which of course results in even less DEMAND for products and services.
Hence, the next problem. How do you create DEMAND. While businesses cut back and attempt to hold their own, who is going to enter the marketplace and hire workers? History has taught us that the private sector will not affect the market until the economy begins to again grow and evidences a DEMAND (and therefore a need) for either more of existing products or the production of new products.
If not the private sector, can government produce jobs which are necessary to create DEMAND for products. Directly no, but it can indirectly through our vibrant use of our nations fiscal policy. Again relying on that pesky thing called history, do you not recall the WPA (works progress administration) the CCC (civilian conservation corp), the TVA (Tennessee Valley Authority) and other government programs that provided funds to private enterprise and governments to fund construction projects and revitalization programs throughout the Great Depression.
Do you really think it is coincidence that so many bridges, damns, and infrastructure projects for our country were created during the Great Depression. Deficit spending in economic downturn periods is essential as the Federal Government is the only entity available to fund the projects. While the opponents of deficit spending are maniacal in their zeal to oppose further federal spending, none of them offer a solution for stirring demand other than claiming the private sector will. The question of course is why in the course of our economic history has the private sector never pulled us out of a depression? This is why the idea of reducing taxes on the rich is ridiculous (unless of course you are rich). The rich already buy what the need and merely retain tax relief for future investment, while the working middle class spends its income on durable goods and services they need which create DEMAND and leads to the expansion of the economy.
Addressing the problem a little more broadly, when we speak of Capitalism we must address the mantra that has developed concerning Government intrusion and regulation into our economic system. The complaint is made as if Government has no role in Capitalism and should take a hands off approach to business, as the market is the only true arbiter of the strength of a business. This is the LASSIEZ FAIRE Capitalists dream. The idea that our economy should be free from government intrusion, taxes, restrictions, regulations, or other dictates is actually quite ridiculous and in fact antithetical to Capitalism. Think not?
If we consider that Capitalism is little more than a Darwinian economic system where the strong survive and multiply and the weak die, we must realize the strength and essence of Capitalism is competition. If you can compete with quality, service, and price then your product or service will succeed, and if not your new Bible will contain only Chapters 7 and 11.
Is it not then indeed strange that the very nature of all businesses is to seek a larger and larger share of the market which naturally diminishes competition. The determined, if unstated, goal of business is actually to eventually create either a monopoly (one supplier) or oligopoly (a few suppliers), both which minimalize competition. Nothing could be more destructive to Capitalism.
Think not, well evaluate the price competitiveness of big oil, big pharma, or big banks. Simply, the fewer providers of a product means that there will be less flexibility in pricing, less responsiveness to consumer concerns, and usually more political power. The trend in the last forty years is to reduce competition by gobbling up the competition in mergers, acquisitions and takeovers. Do a Google search for the number of oil companies of forty years ago and you will find more than ten national oil companies and more than twenty five regional oil companies. Today we have five conglomerates servicing our needs (no pun intended). They are oh so responsive aren’t they? Find much price competition; find much actual rationalization between price and supply?
Noting the self destructive nature of the businesses in a Capitalist economy it becomes an absolute requirement of Government (as the only non market actor) to play the crucial role in maintaining competition. A very conservative U.S. Congress in 1890 enacted anti-trust litigation known as the Sherman Anti Trust Act, followed in 1914 by the Clayton Anti Trust Act. The Governments role in our economy is not only important, it is preeminent as without the maintenance of competition we do not have Capitalism.
The rationale for business mergers and acquisitions is that the dominant company will be stronger, possibly more efficient, and certainly more profitable. However, the question in a Capitalist economy is never whether the individual business will be stronger, better, or more efficient, (as we can conclude it would or there would be no acquisition), but rather will the market be more competitive. This is why the Government has the duty to review and approve major acquisitions that have the potential to affect the competitive nature of the market.
The attacks on the Governments stringent requirement for the maintenance of competition has lead to an impotence of our anti-trust enforcement that has allowed for the consolidation of the oil industry, the banking/stock industry, and far too many others. How do you think that has worked out for us as a nation?
This LASSIEZ FAIRE dream also forgets that Government involvement (a blasphemy per se) includes whenever a Government provides a tax incentive, a loan, a guarantee, a price support, an import restriction, or any other device that assists or protects a business. Every law, whether criminal, civil, affecting rights, liberties or taxes is discriminatory, as laws are designed to allow someone to do something they want to do and to discourage or prohibit someone else from taking other actions. Therefore, if a Government provides a tax incentive, a loan, a guarantee, a price support, an import restriction, or any other device it necessarily discriminates against other businesses which do not get such assistance and resultantly affects the marketplace.
Government involvement is necessary for a strong and vibrant Capitalist economy, system dependant on a monetary and fiscal policy to even out the down turns in economic cycles and to monitor and require competition which is the soul of our Capitalistic system.
In short, when someone tells me that the Government has no role or place in affecting our economy, I smile realizing the selection pool for Mensa just got smaller.
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