Supply Side Economics: Time To Stick The Fork In?

[Plissken]

Harbringer, you make my point: The "boom" of the 90's was just another bubble that burst, followed by another jobless recovery.

I disagree. Unfortunately, many members of our society borrow too heavily against their future. And many members of our society take what is offered to them without putting forth the effort to learn a specialized skill or obtain a specialized education. Even at the collegiate level there are a lot of people who expect a liberal arts degree and a a 2.3 GPA to get them an "out in 20" job. I heard a guy the other day lamenting that he had been unemployed for 6 months. He has a marketing degree. WTF? He of all people should at least be able to sell himself. Is he unwilling to work outside his field?

The fact of the matter is cream rises and shit sinks. It doesn't always sink right away, but sink it will. And the great thing about it is that you have a choice. Do you want to be an eagle or an oyster?

You can disagree, but the Internet Bubble really did burst, and it really did cause alot of economic greif when it burst.

Farsailer, I'm still testing this idea against arguments against it. If it's defensible... Not sure. Probably take a look at how we handled the economy when we weren't pursuing supply-side economics and use what worked.

[Cail]

The problem Pliss is that you're looking at supply-side economics in a vacuum. That's not the way of the world.

You mentioned Fannie and Freddie, not me. It is undeniable fact that Chris Dodd and Barney Frank championed a housing policy that enabled people who had no business owning a home to buy a home. It's undeniable that it was government policy to keep interest rates artificially low in order to encourage consumer spending.

It's also undeniable that the bailouts and stimulus spending of the last 2 years have been abject failures.

Now the question is, what do we do about it? Do we continue to ramp up the national debt and increase entitlement spending, or do we recognize that failure and work to make it easier for companies to do business here in order to increase our job base?

[Farsailer]

There's going to be a double-dip recession because there are far too few new jobs. The government needs to focus on widening the tax base rather than increasing the burden on the existing, shrinking tax base.

We're on that slippery slope where entitlement programs can only go so far before the tax base that pays for them gets squeezed too hard. If you keep biting the hand that feeds you, how much more money can you squeeze out of it?

This is anathema to the usual liberals like Pliss, but the government needs to put tax and deregulation incentives out there to make it easier for the private sector to create jobs. Jobs which are backed up and can be kept going by profitable companies, not an increasingly debt-ridden government which will run out of stimulus because there's too little revenue coming in.

[Brinn]

Plissken,

Bubbles are not a result of supply-side nor Keynesian economics. Both of these macroeconmic theories are aimed at establishing appropriate levels of taxation. Bubbles are more likely influenced by the Fed target rate and lending policies in general.

Additionally, I don't think the wall street bailout is in any way an indictment of supply side economics. You seem to be drawing some very tenuous links here to make your case. Again, Supply side economics is basically a theory geared toward establishing appropriate levels of taxation.

[Avatar]

And now I know even less about it.

--A

[Cybrweez]

Yea, I hear you Av. I'm listening to economics course on CD now, so this discussion is good timing. I'm beginning to be able to understand what's discussed, but not quite have my own conclusions.

The professor did just mention that supply-side tends to work for long term planning, and Keynesian for short term. B/c supply side says eventually, a freer market will shake itself out, but Keynesian says, that's great, but we're alive now and don't want to waste our time waiting.

[Avatar]

Yeah, I can sympathise with that...I think we need a few steps forward until we can trust the free market not to screw us when they can.

--A

[Zarathustra]

I understand your point, but the thing that keeps occuring to me is that the bank bailout pretty much proves, and in the most direct way possible, that when you throw money at the top, it pretty much stays there.

The money we gave them was used for (yes) bonuses to the guys that screwed the pooch in the first place, but it's also been used to buy out competitors, thrown into foreign money markets, just plain sat on, etc...

What hasn't happened is the promised loosening up of credit for small business. What hasn't happened is the creation of jobs. Hell, we haven't even gotten to pick the excess oats out of the leavings, 'cause they're sending those off to India and China.

Okay, I begin to rave. But you see my point.

I think you're conflating two different issues here. How is taking tax money from you and me and giving 100s of billions to the banks got anything to do with supply side economics?

From wikipedia: Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices.

There is nothing whatsoever about the bailouts that proves that money "at the top" pretty much just stay there. This is wrong for so many reasons, but mainly the reason it's wrong is because Obama's own policies right now are creating the uncertainty which has led banks to stash that money in the Federal Reserve vault and earn interest, rather than make potentially risky loans during a time when no one is certain what the next major reform of government policy and/or regulation will be. Would you buy a home without knowing how this will affect your tax liability? Would you build a new factory without knowing what the regulations and taxes on that new business will be? The markets aren't going to start throwing money at new risk until there is a measure of stability from the government. It doesn't even matter if you think Obama's policies are good or bad in themselves, the point is that with a constantly changing regulatory environment, no one knows what the rules or penalties will be tomorrow. It is ludicrous to think banks are going to start making loans in this regulatory uncertainty.

Banks have learned their lesson (kind of). They realize that risky loans is exactly what caused them to need a bailout (which then led to the government demonizing them, cutting their bonuses, passing a 90% tax rate on exec compensation, firing CEOs, etc.). And now everyone expects them to take the bailout money and start risking their livelihood again? You've got to be kidding me. Even if it does work and they start making money hand-over-fist, they might get punished by the government for being profitable and rewarding themselves for this risk.

This has nothing to do with money staying at the top. They'd LOVE to take that tax-payer bailout and double, triple their money (which means loaning it out to us so that we can use it to grow our businesses, hire employees, build new factories, etc.). But they've learned their lessons and now they are being very cautious with the money, content to simply let it earn interest after correcting their balance sheets. Investors don't know what the rules are because they keep changing. They don't know if a business-as-usual move will land them in the headlines or have an angry mob outside their door (as happened with AIG execs).

You can't demonize the rich and then stand around wondering why they aren't rushing to your rescue.

Just look at what he's talking about doing next: give the Treasury Secretary unprecedented powers to seize non-bank financial companies (large insurers, investment firms, hedge funds, etc.) based on the premise (again!) that they're too big to fail. These constant expansions of power do nothing to give the markets a sense of stability. They only create uncertainty in what power grab the government will do next.

Furthermore, you are conflating supply-side with "trickle down" (not to mention your more colorful shit metaphor).

Again, from widipedia: Today, supply-side economics is often conflated with the politically rhetorical term "trickle-down economics," but as Jude Wanniski points out in his book The Way The World Works trickle-down economics is conservative Keynesianism associated with the Republican Party.[1]

It's a fact that you can't hav a job without someone putting up the capital to risk a new business venture. You can stick a fork in that idea if you want, but then where are you going to get a job? Are you going to start your own business? Great! But wouldn't it be easier to start that business if the government didn't penalize you the more money you made? It's not about what's fair. It has to be about what works. Fair doesn't create a job. Jobs don't grow on trees. They come from peolpe who have more initiative and work harder than you or I. People like Harbinger, who started his own business, and now employs dozens of people (and has offered anyone here jobs approaching 6 figures). He could decide it's not worth it and stop tomorrow. And all those people would be out a job.

[Farsailer]

To ask Malik's question another way: if you expect the banks to start loaning again in this environment without certainty from the government regarding the possible negative consequences of doing well (like compensation caps or clawbacks) or certainty from the government about the regulation environment (what are the new rules?) or certainty from the government about possible mandates (like health insurance, anyone still remember that debate?), what sort of positive incentive could there be for them to do this?

In this environment, with the Administration still on the warpath, I'm surprised anyone in the private sector wants to stick their neck out.

In a way, I'm with the banks. They're finally being run once again the way they should have been run all along: credit should be hard to get; one should have to jump through hoops to get it; your loan officer should read your financial statements and verify your income. Sheesh! What an idea!

[High Lord Tolkien]

The boom of the 90's was also fueled (I have no idea how much) by the Y2K issue. Wasn't a trillion+ dollars spent worldwide to update things? Every company was updating like crazy back then, which trickled down all through the economy. Then once Y2K had passed the spending frenzy was over. That's not something government had any control over nor should they have.

(people think that Y2K was an "end of the world" scare that never happened but people don't realize how much was done so nothing did happened)

[sindatur]

The boom of the 90's was also fueled (I have no idea how much) by the Y2K issue. Wasn't a trillion+ dollars spent worldwide to update things? Every company was updating like crazy back then, which trickled down all through the economy. Then once Y2K had passed the spending frenzy was over. That's not something government had any control over nor should they have.

(people think that Y2K was an "end of the world" scare that never happened but people don't realize how much was done so nothing did happened)

True, however, the whole calendar thing was an error in the original design. Hopefully by 9950 they'll realize the calendar needs one more space for the year, instead of leaving it for 9990

[Tjol]

Tjol: Taxes have indeed fluctuated in the last 30 years, but neither the income taxes on the top earners (they who are supposed to trickle down on the rest of us) nor the capital gains taxes have approached even half of what they were before Reagan.

Is it really your belief that the economy under Carter is the ideal state of things? Do you really mean to suggest that government spending has declined rather than inflated since Reagan? Do you really not see that the last twenty eight years have been anything but a supply side economic policy?

Instead, we've got an economy that crashes every time a bubble bursts on Wall Street, and the Main Street jobs that are lost are either replaced by lower paying ones or not replaced at all.

The economy under LBJ and Carter and Hoover (a republican, but a staunch government spending advocate) tells a different story than the one you're telling.

When you compare the almost 50 years of growth that preceded Reagan, hey, it wasn't as dramatic. But it was stable and it was steady growth.

Again, Hoover, Roosevelt, LBJ, Carter.

And if you look at the causes of the one big depression our economy had before those 50 years, well, it looks alot like the end of our modern experiment.

There's a big difference in outlook here between you and I. I feel that this modern experiment of supply side economics from Reagan on never happened. What we've been doing since 1930 is practice greater and greater government involvement through greater and greater quantities of government spending. We haven't participated in supply side (as you describe it) economic policy for at least 20 of the last 28 years.

This current bubble can be attributed directly to a government involvement in housing. Whether you look at the corruption in congress with Countrywide, or the previous administration's insistence on keeping interest rates low, the bubble rests soley in the hands of government attempts to central plan the economy.

(See, back then they didn't call it anything so insulting to the plebes as "Trickle-Down" - they had this theory that, if you fed the Horse of Big Business enough oats, enough of the oats in what would pass back out of that Horse to feed the "Sparrows" that trailed along behind it...)

Your welcome to be insulted I guess. I myself don't see where the insult is involved, and I consider myself a plebe. That people pursuing self- interest will inevitability serve my self-interest by accident is good to know, since I expect that most people act out of self interest, and I have to appreciate being able to benefit a little bit from that reality. Knowing that politicians who profess to care about me pocket more of what they take than I'll ever receive from them only further reinforces my convictions.

My story's close enough to HLT, though it was a divorced father who raised me through many hours of overtime doing physical labor at a warehouse. I haven't made big jumps in income, but I worked through college, took the loans, took advantage of 100% financing to move into a townhouse, and for the last year of my previous job, finally started making enough money to pay off the credit I'd racked up while paying my dues.

I hold that government regulations in California, which constitute an enormous tax in practice if not in letter, are a greater danger to my future economic subsistence, let alone success; than businesses not being taxed enough. If a business doesn't stand to make money by investing in construction, they don't get any less wealthy by not doing any work. I, on the other hand, don't have much work to do if the people with more money don't need my skills to help them make money through construction.

I remember you'd read Guns, Germs, and Steel, which I got the impression covered some of the time period I read about in Through a Distant Mirror. In that time period, as in others, the middle class directly benefitted when the wealthy were chasing more wealth, and the lower class had opportunity for social mobility as well, when the middle class needed more help in satisfying the wealthy's desire for more wealth. The middle class do not exist though, when the wealthy are simply content with being wealthy, or by economic context required to be content with simply being wealthy, and the lower class isn't going to see any improvement in their lot either.

Furthermore, you are conflating supply-side with "trickle down" (not to mention your more colorful shit metaphor).

That's what I was trying to point out in my first post, I may have mixed up terms as well.

Trickle down doesn't happen with government spending, but it does very much happen when you lower the tax burden, and by effect the total expense for doing business.

[Cybrweez]

I'm not sure about govt spending rising over last decades. I think the percent of GDP of govt spending is basically the same. Of course, that means in dollars its gone up, but the percent of GDP hasn't. Apparently, defense spending has gone down, but SS and healthcare have compensated to keep it even.

I was a little confused by pliss' example of money staying at the top, but the idea of supply side vs trickle down help to clear it up.

But anyway, the OP had 2 complaints, stagnant wages and income inequality. Why have wages been stagnant? We had a thread about income inequality before, but I don't think one on stagnant wages.

[sindatur]

But anyway, the OP had 2 complaints, stagnant wages and income inequality. Why have wages been stagnant? We had a thread about income inequality before, but I don't think one on stagnant wages.

The constantly rising costs of Health Insurance, Disability Insurance and Worker's Compensation (Notice, you've paid into 3 buckets, but, you'd think that two buckets should handle, at a premium pace, rather than actual costs incurred). These are a large expense per employee.

So, not only are you paying them $50K+/- a year for salary, you're paying $2000+/- for vacation, $2000 +/- for sick and Holiday pay, plus an additional $5-10K for insurance benefits (The benefits typically equal about 1/3 the cost of an employee, though it was 1/4 and 1/5 not long ago). Now, since we don't have much R&D going on, the same product sells long enough to continue decreasing in price, as volume increases.

This all adds up to smaller profit margins, and having to make cuts, one of those recent cuts in companies I am aware of (Aside from layoffs) is not giving annual raises, and even with bi-annual raises, you're lucky to get a 4% raise (5-10 years ago, 3% twice a year was the minimum), which doesn't really keep up with rising costs of living

(Note: Everything is averages from last I looked, adjust them according to your personal experiences)

[The Dreaming]

Also, we're not talking about your (or anyone's) personal spending power. We're talking about an national average wage that has remained fairly stagnant, when indexed for inflation, or even gone down.

Cail, I can't tell if you are disagreeing with me, or agreeing from the other side of the argument. Governments "tamper" with markets all the time - and when we've got Greenspan finally admitting to us that enlightened self interest (when's the next time a pundit's going to use that phrase with a straight face?) isn't enough to keep the game honest, the only argument is really what form that tampering is going to take.

Harbringer, you make my point: The "boom" of the 90's was just another bubble that burst, followed by another jobless recovery.

The magic of Capitalism is that it transforms human behavior into social good. How does this happen? Through regulation. Not over-regulation, not under-regulation, but *intellegent* regulation. The bubble burst because of a stupid deregulation, and the bailout is only making things worse. We need the government to show some confidence in the long-term economic viability of this country, and it absolutely is not. These "quick fix" solutions may have stopped some of the hemorrhaging in the short term, but are going to have dangerous long term consequences for the American system. Our system doesn't work because we are the most free, or the most productive or anything like that. It works because it tries to look at how people actually behave, and making people work for society when they work for themselves.

Does excessive taxing increase revenue? Yes and no. It takes a feather touch, but YES a tax cut really can increase it and a tax hike really can reduce it, even in the short term. We need the government to act consistently, so it doesn't scare investors away, and we need it to act prudently, so we don't suffer dangerous consequences. The current (and previous) are acting with neither.

When Reagan began his economic reform, he WAS right. Not only did he turn the failing economy around, he also defeated communism without firing a shot.

I do agree that the answer isn't to look to Reagan, the answer is to look to what our problems are now, and enact regulation to discourage the behavior that got us into this mess, and encourage behavior that will get us out of it. The federal government doesn't need to raise taxes to increase it's revenue and it's not going to take a dime more than the price of a pen and some ink to fix this.

What's depressing about Obama and the Pelosi led congress is that they don't have to balls to make the right choice, they just want to make

A) Reps and the previous admin look bad
B) Themselves look good.

Enacting intelligent legislation is going to make Obama unpopular with a lot of the people who elected him. That's what scares me. He might even have the courage to make a few right choices and stop passing the buck, but Pelosi sure as hell doesn't.

(Oh, and to the xenophobes - immigration and outsourcing may have some impact on YOU, but it's not bad for the economy. In fact, overall it makes a whole lot of people's lives better, they are just brown and don't speak the same language as you. Globalization is happening, it's the future, and trade is the path to a peaceful and harmonious world. When our economies are tied together, so are our interests, and that's a beautiful thing.)

[Cail]

(Oh, and to the xenophobes - immigration and outsourcing may have some impact on YOU, but it's not bad for the economy. In fact, overall it makes a whole lot of people's lives better, they are just brown and don't speak the same language as you. Globalization is happening, it's the future, and trade is the path to a peaceful and harmonious world. When our economies are tied together, so are our interests, and that's a beautiful thing.)

Immigration and outsourcing can both be good things, but unregulated illegal immigration is almost always a bad thing, and not just economically.

[The Dreaming]

(Oh, and to the xenophobes - immigration and outsourcing may have some impact on YOU, but it's not bad for the economy. In fact, overall it makes a whole lot of people's lives better, they are just brown and don't speak the same language as you. Globalization is happening, it's the future, and trade is the path to a peaceful and harmonious world. When our economies are tied together, so are our interests, and that's a beautiful thing.)

Immigration and outsourcing can both be good things, but unregulated illegal immigration is almost always a bad thing, and not just economically.

I'm too much of an internationalist to care about illegal immigration. I think the very idea of "international borders" is something that's maybe a century from being obsolete. When you think about what we are building *to*, fear of immigration seems silly. What do you want this world to look like in 100 years? I see a world united by the communication age and globalized trade. I really think our isolationism is going to do more damage to our future than immigration possibly could. We are at a crossroads, either we can become the leader of the world again and shape a future to our liking, or get left behind and have someone else decide how it's going to happen. (Which makes me afraid, I don't think we would go down gracefully).

In the short term, if an illegally working foreign national who doesn't speak my language is able to compete with me on the job market, I don't think immigration is the issue. I'm honestly more sympathetic to the easily exploited illegals than I am afraid of any consequence of their presence.

But that's kind of a side note. My overarching point is that it's easy to only think of what's right in front of you, but sometimes I think I'm the only person who takes into account what it's all for. What, exactly are we moving towards? What can we do that's going to matter in 10 years? 100 years?

Remember the Moon? Smallpox? Will we ever achieve anything so grand again?

[ParanoiA]

Does excessive taxing increase revenue? Yes and no. It takes a feather touch, but YES a tax cut really can increase it and a tax hike really can reduce it, even in the short term. We need the government to act consistently, so it doesn't scare investors away, and we need it to act prudently, so we don't suffer dangerous consequences. The current (and previous) are acting with neither.

Very good point. With the perceived increase in political contention of late we seemed to have swept in a new front of judgmental taxation - where we're not as concerned about economy and bustling capitalism as much as we're focused on who deserves to be taxed and who doesn't.

Strange. Because so many of us complain about outsourcing, while we seem to ignore all the business running out of the country out the back door. If we thought more in terms of the capitalist country that we are, we would be a tax haven, not a tax burden, for business so we could secure more manufacturing and such. Businesses should fight to come here. We would all do better.

(Oh, and to the xenophobes - immigration and outsourcing may have some impact on YOU, but it's not bad for the economy. In fact, overall it makes a whole lot of people's lives better, they are just brown and don't speak the same language as you. Globalization is happening, it's the future, and trade is the path to a peaceful and harmonious world. When our economies are tied together, so are our interests, and that's a beautiful thing.)

The principle is quite beautiful. One thing I learned from my previous open-border position was that there is a limit to the inflow of immigration that's beneficial. When there are more immigrants than the market can 'adjust' to, then it's extremely detrimental. In California there are jobs that pay HALF as much as they did just a few years ago due to the influx of mexican immigrants flooding that particular labor market. When that's your job and your income, your career that just got yanked, and your family that's suddenly at risk, you start to think more selfishly.

You have to consider, how much is too much? You invoke "xenophobia" in your post, but have you actually considered your own position if everyone in the world wanted to come here tomorrow? All 6 billion of them? Suddenly, you'd start prioritizing and rethinking the damage of such immigration and xenophobia won't have squat to do with it.

There is a reason why we want to control the flow of people coming into the country and it isn't xenophobia. It's far more pragmatic than such a prejudice. The flow has to be such that the economy and society can adjust, and that takes time. You can literally destroy a local economy by ignoring it.


Supply side economics is the compliment to creating opportunity - not outcome. I think that's why I like the concept better.

[Zarathustra]

The magic of Capitalism is that it transforms human behavior into social good. How does this happen? Through regulation. Not over-regulation, not under-regulation, but *intellegent* regulation. The bubble burst because of a stupid deregulation, and the bailout is only making things worse. We need the government to show some confidence in the long-term economic viability of this country, and it absolutely is not. These "quick fix" solutions may have stopped some of the hemorrhaging in the short term, but are going to have dangerous long term consequences for the American system. Our system doesn't work because we are the most free, or the most productive or anything like that. It works because it tries to look at how people actually behave, and making people work for society when they work for themselves.

You're on the right track (excellent post, btw), but I want to make sure that an important point isn't obscured by this. Yes, it most certainly takes intelligent regulation (which usually means minimal regulation), but the magic of capitalism doesn't *come* through regulation. It is built into the system, Adam Smith's invisible hand. The magic of capitalism is freedom, division of labor, and bottom-up self organization. People seeing their self-interest best fulfilled in mutual self-interest. Capitalism all by itself (without regulation--working ideally), directs self-interest along paths that maximize when we pool our resources, pool our capital, pool our labor, and trade these things in ways that increase our efficiency. And most importantly, they happen by millions of individual free decisions of people maximizing their own personal self-interest. These free choices trim the fat from the system and direct this monster of a global economy in a way that no government could ever regulate.

(Oh, and to the xenophobes - immigration and outsourcing may have some impact on YOU, but it's not bad for the economy. In fact, overall it makes a whole lot of people's lives better, they are just brown and don't speak the same language as you. Globalization is happening, it's the future, and trade is the path to a peaceful and harmonious world. When our economies are tied together, so are our interests, and that's a beautiful thing.)

I agree with your point about out-sourcing. That's not the cause of our unemployment. It does nothing but increase both our standard of living and the standard of living for those people in other countries.

However, I agree with Cail that we've got to get a handle on illegal immigration. I have no problem working with Mexicans (I've done it many times, I have the highest respect for their skill, intelligence, and work ethic), but I do have a problem with them abusing our system (entitlements, etc.) and presenting a national security threat.

Did you all know that Al Qeada is training its people to speak Spanish and pass themselves off as Mexican?

[Brinn]

Enacting intelligent legislation is going to make Obama unpopular with a lot of the people who elected him. That's what scares me. He might even have the courage to make a few right choices and stop passing the buck, but Pelosi sure as hell doesn't.

Excellent observation and one I agree with. Reid and Pelosi need to be reigned in. Last time I checked the White House wanted to end the $8,000 first-time homebuyer credit while Pelosi recently said that Congress would be renewing it and possibly expanding it to all homebuyers!

If you want to inflate a bubble this is precisely how it's done!