We Need Another Dose of Supply-Side Economics Today

In the early 1930s, the economy was in the midst of a very severe recession. At the time, the general belief was that no government corrective action was necessary since the economy would, if left alone, eventually self-correct. As a result, there was no expansionary action taken on either a monetary or fiscal policy basis. The severe recession got more severe and eventually resulted in the Great Depression.

During the mid-1930s, British economist John Keynes said the Depression could be ended by taking action to increase total demand in the economy. That could be accomplished either by cutting taxes for Americans, which would increase disposable income and eventually total demand or by simply having the government spend more money on public projects. Even if the government just hired people to "dig holes and fill them up again," the increase in income for these previously unemployed people would increase demand and get the economy growing.

When World War II arrived, the government did increase spending and the Depression did end. By the early 1960s, most economists subscribed to Keynes' view.

About that time, another group of economists said that using government spending to end the recession creates long-term problems because the deficits that result from this action tend to be long-lasting and would cause problems in the future. Instead, they argued, balance the budget but simply use changes in the money supply to regulate total demand. This policy became more widely accepted in the 1980s. Today, we have used a combination of both to end the recession, as evidenced by the federal government's massive increase in spending during the past two years and the maintenance of an expansionary monetary policy.

Can these policies be used to reduce inflation? They can, but not without very negative side effects. Both government policies (fiscal and monetary) are geared to influence total demand. If action is taken to reduce demand, inflation will fall but the reduction in demand puts downward pressure on output. That means the economy could slow down and may even slide into another recession if the monetary policy is too aggressive.

In the early 1980s, the U.S. economy had a "stagflation" problem. In 1980, the inflation rate was 13.9%. The economy began to slow down which resulted in 10.8% unemployment by 1982.

The government recognized that the traditional actions that were taken to influence total demand could not solve the economic problems. Rather, it decided to take action to increase total supply. That would increase output, grow the economy and reduce unemployment while also putting downward pressure on prices.

It worked marvelously. Inflation eventually fell to about 3 percent and essentially stayed there for the next 40 years, Unemployment fell dramatically as the rate was cut in half before the end of the decade.

The 2018 federal income tax cut tax illustrated more supply-side success. By the end of 2020, the unemployment rate was 3.5% and the inflation rate was 1.8%

Another dose of supply-side economics is needed today. These actions would encourage businesses to produce more. This is generally accomplished by having the government create an environment that encourages new business formation and existing businesses to expand. We do this by reducing the tax burden on business owners, which creates new capital for expansion, and by reducing regulations that generally slow expansion.

Politically, these actions are difficult. Since business owners usually fall into the higher tax brackets, reducing their rates is often viewed as a "tax break for the rich." Creating more capital by reducing the tax rates on capital gains also fuels supply-side growth but is similarly viewed as a tax cut for the rich. Reducing regulations with the current political climate is also difficult.

President Ronald Reagan faced similar difficulties in 1981 and again in 1986. But he did convince people that those policies would solve the economic problems. And they did. We need a dose of supply-side economics today.

Let us accept the author's premise that supply-side tinkering with the economy is an effective strategy to increase production fast enough and great enough to offset the inflation induced by the increased government spending incurred, either by outright spending or by forgiveness of taxes. Let us accept his argument that the supply side approach is far superior to tinkering with demand.

This is essentially the approach taken by Donald Trump in 2017 when he cut regulations, or tried to, when he reduced taxes and attempted to bring manufacturing home. His bet was that the deficits he created would ultimately be compensated for by growth in GDP. He certainly got growth but we also got huge deficits.

Whether Trump's strategy would have ultimately prevailed we cannot know because Covid 19 intervened. He was doing a marvelous job of increasing employment and increasing the gross national product but regulations were both cut and expanded and the treaty wars did not reduce Chinese imports, although some manufacturing might've been stimulated. However, it is clear that Trump's strategy was not a strategy of applying brakes but of hitting the gas pedal. Some of that strategy, such as cutting regulations, could be done without increasing the national debt but other approaches required immediate borrowing.

Before we criticize Trump because the results were not in before Covid 19 changed the game board, let us at least acknowledge that there was no other politically viable strategy that might have worked. A replay of the Volcker years described by the author in 1980-82, that incidentally cost me a business, is simply politically impossible to replay today.

We are in a climate in which we have marinated for some years that leads any uncritical observer to conclude that the government has an infinite capacity to borrow money. Keynesian economics can work by stimulating demand and the price comes later so the untutored observer says, " of course we must stimulate" because he does not understand that when the government intrudes into economic decisions there is a downside in lost economic opportunity as well as in increased debt. We could grow the debt so long as we are the world's reserve currency and superpower and thus have virtually infinite capacity to borrow, there are no observable present-day costs or consequences to borrow and spend, only blue sky present-day benefits for government dependent individuals and crony capitalists beneficiaries.

All of this is changing. Inflation is upon us and threatening to grow exponentially. We are being existentially challenged by China as the headlines tell us that in every important respect, from satellites to hypersonic missiles, the Chinese are beating us. Again, we must spend to defend. Our supply chain is broken, our rule of law is breaking down within society and being perverted further by our very own government. In short, everything that makes our wonderful capitalist economy flourish is disintegrating beneath our feet.

That means our government's seemingly infinite capacity to borrow vast sums of money for schemes to stimulate the economy is threatened, our employment structure is surely threatened, our tax base is threatened, the Fed's capacity to keep interest rates low is threatened. The whole game is threatened and the music is liable to stop.

Events are very likely to override us and simply snatch away our capacity to replay Trump's plan of 2017. In fact, events are liable to take charge of affairs just as the Republicans acquire control of Congress and catch all the blame for the pain we have stored up over the decades.

Worse, there is no consensus among Republicans that any sort of austerity is politically acceptable and no inclination on the part of the McConnell branch of the Republican Party to cut the ties to their cronies, adhere to the needs of the middle class, or cut popular giveaway entitlements. The budget deficits are so massive so the remedy must be commensurately draconian.

There is not even any credible inclination on the part of the establishment Republicans to symbolically cut so that markets might be deceived into believing that there is light at the end of our debt tunnel so that time can be bought before the reckoning. If Trump or his like is restored to office and a replay of the 2017 plan is attempted it will not sell unless the perception of success is also sold. Personnel is policy and the indispensable policy cannot be sold without a change of personnel.

That means a revolution within the Republican Party.

Interesting when even someone at Town Hall doesn’t understand what inflation is. It is no more and no less than increase of the money supply. QE or excess money “printing” by any name cannot fight inflation because it IS inflation. Stable inflation would be the printing of additional money at a rate that equals the rate of increase in production so that the price level does not change. If the stock of money remains unchanged then in an expanding economy prices will decrease. In a contracting economy prices will increase as a direct result of the changes in the amount of stock i.e. things to buy related to the amount of money in circulation.
The perceived “proper” rate of price increase, lately that is 2 or 3 per cent is a comfortable additional tax as the value lost at the consumer/production end accrues to the government. That price increase rate actually represents a real rate of expansion somewhat higher than that 2 or 3 per cent in an expanding economy and thus represents even more of that largely invisible tax to the government.

I doubt seriously that Spanish translated anything will help educate the migrating masses. What my California family are seeing in these groups are totally illiterate people who don’t speak Spanish rather some tribal dialect. These folks are lost.

My brother-in-law was walking his dogs on his property several weeks ago when he ran across 4 dirty youngsters cutting through his land. He tried talking to them in Spanish to find out what was going on with them, no reply. He said they were talking to each other in a language he didn’t understand.

Then all of a sudden a girl who was a bit older maybe 14 came out of the scrub and she could speak enough Spanish my brother-in-law found out they had been taken to a big illegal marijuana grow over the hill next to an aquifer ran by the Mexican cartel.

Since it’s harvest season the 5 youngsters were the lucky ones, they were just let go to find for themselves. The older girl had been a sex slave and marijuana grower. That’s why they were hiding her, they thought the cartel might be looking for her.

Many of these captives are taken out into Death Valley or other desert areas, shot buried never to be heard of again. Then the cartels either grab the replacements out of the groups of migrants or the most insidious form of kidnapping they started during the Obama regime.

The cartels know where the FEMA camps are. They find someone who can go in and out and recruit them to find young pretty girls and healthy young boys. The cartel’s Judas Goat goes in and tells the unsuspecting victims he can get them jobs, boys for construction and the girls are going to be maids.

Then when the victims agree, the cartel sends an adult over to the FEMA camp masquerading as a family member. Immediately the officials release the victims into the cartel’s care. And the girls go to motels up the I-5 corridor all the way to Canada not as maids but as prostitutes and the boys are used as criminal tools until their value has been used.

Add that to the fact it’s known worldwide fly to Mexico City and you can walk into America unscathed. Even one of my friends from Singapore who’s been doing everything right to immigrate to here for 5 years asked me what I thought about doing that. As much as I yearn for that entire family to be here, I will even support them when they come, I cannot recommend doing that, it’s dangerous and wrong. They would not want the stress of knowing one day there could be a knock on the door…

We have big problems on the Southern Border and Mexico makes it worse.

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