Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Can Supply-side Economics Save the US Economy from the Boom Bust Cycle?

Economics / US Economy Mar 10, 2008 - 09:02 PM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleCurrent trends in the US economy are worrying a lot of people -- and so they should. Unfortunately worrying never solved any problems, only action can do that. But in order to solve a problem once must first identify it. Remember that economic trends are the product of deeper forces. For instance, a continual rise in productivity year after year is the fruit of capital accumulation increasing faster than the population. On the other hand, the so-called boom-bust cycle is the result of bad economics.

Whenever the economy turns down the usual response is blame it on demand deficiency. This is pretty tough to do if the downturn is accompanied by accelerating inflation. That the two might even be linked rarely, if ever, occurs to the economic commentariat, and the central bankers aren't much better. But there are always supply-siders waiting to prescribe tax cuts -- which I'm all for -- as an economic panacea.

Supply-side economics has been dismissed by critics as "voodoo economics". These critics are invariably of the opinion that tax cuts are either wasteful or inflationary. The first criticism comes from those who in their arrogance believe that the masses are unable to see to their own affairs, particularly when it comes to personal spending. The second objection is based on pure ignorance of the history of economic thought.

Critics are so obsessed with denying the effectiveness of tax cuts that they will attribute any success the US economy enjoys to anything, including tax hikes and surpluses. This brings us to the nature of supply-side economics and the motives of its critics. For an answer we need to turn to Jean-Baptiste Say, the father of Say's Law of Markets. That Say's law has had a raw deal since Keynes' maliciously misrepresented it in his General Theory ought to go with out saying among economists. Unfortunately an overwhelming number of economists have never read Say and have no intention of ever doing so. To a lot of these economists any economic paper more than 20 years old is not worth reading.

It was Keynes who stated that Say's law meant that supply creates its own demand. Now Say never said this and neither did any other classical economists -- none of them would have been that stupid. What he did was to show what every competent economist of the time knew, and that was that demand springs from production. As the late Professor Hutt put it:

When I sell fruit grown in my garden, what I receive and what the purchaser pays me are the same! But what is equally true, and which illustrates Say's law, is that I dispose of an identical value out of the money's worth I receive from that sale whatever I am destined to acquire in return for it .[Italics in the original]. ( A Rehabilitation of Say's Law , Ohio University Press: Athens, 1974, p. 34).

As the classical economists would say: "Supplies constitute demands". Without even mentioning Say's law Benjamin M. Anderson vividly described it thus:

... purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply of wheat gives rise to the demand for automobiles, silks, shoes, cotton goods, and the other things the producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical [italics added], since every commodity may be looked upon as either supply of its own or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium. ( Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946 ,LibertyPress, 1979, p. 383).

It therefore follows that any economic policy that focused on consumption at the expense of investment would eventually lower purchasing power, meaning real wage rates. As for the qualification that goods must be produced in their correct proportions, this was well known to classical economists. This is why they rightly saw that depressions involved disproportionalities. In other words, the pattern of production had been distorted by credit expansion. What gives rise to increased production, therefore, is not increased consumption but increased investment. It is this and not the demand for consumer goods that raises the real demand for labour and hence wage rates. Obviously anything that hinders investment will retard living standards.

By drawing attention to the destructive effects of heavy capital gains taxes, supply-siders are have brought to light another economic fact that is usually overlooked when politicians argue for tax increases: if you want less of a product, raise the cost of producing it. The reverse follows: If you want more of a product, reduce the cost of producing it. By cutting the cost of production the supply curve moves to the right, exerting a downward pressure on prices and an upward pressure on real wages rates.

As capital gains are profits that can be directed to investment, penalizing them produces less investment which in turn has a detrimental effect on real wages. This is something Democrats do not understand, nor do they want to because power and not prosperity is what they are really about. And this is the key to why supply-side economics is hated. It is because, once properly understood, it works.

Unfortunately supply-siders have failed to realise that they only have half of the equation. By refusing to acknowledge that money is not neutral and that a stable price level is a chimerical goal that generates the very boom-bust cycle that supply-siders aim to eliminate they have played into the hands of their critics. If they want to ultimately succeed they must jettison their crude monetary views.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in