What is with this catch cry? It's starting to annoy the crap out of me.

I hear right wing idiots and so-called experts on Fox News use this term everytime the opportunity presents itself to talk about how great Bush's tax cuts have been. I'm pretty sure they have no fucking idea what "supply side economics" is, and more to the point, they obviously don't realize that it's not really a sexy alternative to "tax cut".

Here's Shades' rundown of what "supply side economics" is, for those of you who haven't had the pleasure of studying this crap for 4 years of their lives so that you can happily tell right wing dickweeds where to stick it when they think they sound like they know what they're talking about.

Basically, the idea of supply-side theory is that "supply creates its own demand". That is, the economy should be managed in such way to target, and increase the capacity of suppliers/producers/services, and the demand from customers/consumers will follow.

So this involves 3 basic policy choices: 1. low taxes (especially on those who "supply", 2. less regulation of markets, 3. stable monetary policy (ie. interest rates).

Of course the third one is not really in the governments hands, since the Fed controls monetary policy, but it's a policy that is favored greatly by conservatives, and was popularized by what is sometimes known as "Reaganomics".

The bullshit thing about the theory is that it basically says demand is irrelevant to economic management. People who actually buy this theory will (or at least should) believe that overproduction of goods and services shouldn't affect the economy since prices will adjust themselves (ie. go down) and cure the problem.

Anyone who has had their eyes open since the mid-late 90s should know that this is patently, a bunch of crap. Overproduction from the supply-side is precisely what sent the economy into recession. It took a good 3-5 years for the economy to cure itself from that overproduction, and the consequent cutting of staff, projects, rolling back mergers etc.

Also, true believers would believe in pinning the value of the US dollar to the price of gold (basically, because they don't believe that the Fed has much control over the growth of the economy in the medium term-- another bizarre aspect of the theory) so that the currency, and thus interest rates can be stable and predictable. Apparently, the value of gold is stable.

Anyways... the point of this rant is twofold:

1. "supply side economics" is more than just a tax cut.

2. even so, it doesn't really "work".

I'll just add a few things to this emerging debate.

"Supply side economics" is a bit of a misnomer--"supply side fiscal policy" would be more accurate, since it's an action of a government and not an action of the economy as a whole.

The Laffer Curve is at the heart of the supply side theory:



It's a simple enough bell curve to understand: the taxing agency obviously gets no funds at 0%, but also gets no funds at 100% because no one would want to work at that level if they are going to have all of their money taken by the gov't. The tip of the bell curve (equilibrium point) would be the ideal rate to receive the most funds. The trillion-dollar question is where that point is, and it's never at a fixed point, depending on the will of the public to be taxed. This mankes perfect sense to me.

Where Reagan gets into trouble is that he ironically takes Keynesian policy to a whole new level, He authorized increased spending like a madman, prematurely assuming that he was closing in on that equilibrium point and that the funds would come in to offset his spending. (first cutting taxes to 50%, then to 28% on the highest bracket). Was he there? I'll leave that one wide open to argument.



On the contrary, it's very MUCH in the gov't's hand. I think what you meant it's not in the direct control of the President and Congress.

But anyway, you are right when supply side proponents try to go far and say this policy has a major effect on the economy, when there are numerous other factors that go into it other than just mere fiscal policy. It's just a rally cry to try to get the public to accept their policy. This is why I really tune out when partisans try to take credit for a good economy or blame their opponent for a bad one.

To end this, as many of you know I'm in favor of big tax cuts to a level as low as possible (especially on the federal level), but my reason for that has absolutely nothing with increasing gov't funds--on the contrary, I want funds decreased so that it spends less.

Now, we need kthodos to grace this thread to make sure we are all going down the right track here.

I work in corporate finance currently and I used to prepare corporate taxes full time in public accounting, so let me give you the flip side to this equation:

Companies factor in their tax burden when projecting bottom line dollars. Each dollar that is placed in the "income tax expense" line is pulled from another line. Usually it is pulled from the salary expense, either in the form of decreased raises, new hires, or worse, cuts in staff. It is also pulled from benefits employees receive. In general, each dollar paid in taxes hurts the staff of an organization. Salaries and related costs are almost always by far the largest expense an organization has.

Now, you may be saying "come on, the fat cats in the corner office will take all the benefits from a tax cut and not spread the wealth." Trust me, this isn't the case. The fat cats are getting theirs every time. They'll lay off 5 people in an 60 person organization but their bonus or stock comp isn't changing one bit. This is true in every single organization I've dealt with, which is in the hundreds.

Much of your argument seems to be with the actual output of an organization (the final product sold), which leads me to believe you're discussing manufacturing of some sort. Today's economy is largely service based, which means people. R&D in technology companies is a large cost, and it is hurt by taxes. Start up companies trying to grow headcount are hurt by taxes. Any business in today's economy is hurt by taxes. Now we're obviously not going to get rid of taxes, but can you honestly argue that allowing a business a reduction in them is bad when you consider what I've said so far?

Take this example:

Business A brings in $10,000,000 annually in revenues. The bottom line pretax is $500,000. The CEO's salary is $400,000 plus a bonus of 5% of the bottom line post tax. Taxes (at the marginal rate of 35%) are $135,000. That leaves $365,000 for growth in the coming year. Well, really it leaves $353,137 ($365k less 5% CEO bonus plus 35% taxes saved on CEO bonus). Now, no business is going to stretch themselves to the point of being at a negative cash flow, and since net income is low already, they aren't going to hire new people this year and salary increases are going to be small. Or maybe they do hire one or two people and they miss their target revenue. Who's getting fired?

I realize that the numbers here are small, but they happen. You could say "Well if they hire people and they miss their number, the CEO could take a pay cut or not get his bonus." Trust me, this isn't going to happen, ever. Well, maybe in a very small shop, but once a company reaches the level of even 20 people, this idea is done. The big wigs are getting paid, end of story.

While I agree with you that in a manufacturing environment creating a larger supply is only going to reduce pricing, in a service environment increasing supply means increasing jobs for everyday people like you and me. These people in turn pay taxes AND reduce the burden on the social system in this and every other country. These people also have more disposable income since they are no longer dependent on the low income social services provides, and they will spend this money, increasing demand for other goods and services, thereby increasing every other sectors bottom line, increasing their tax base.

I understand the frustration of watching giants like Microsoft or Walmart getting tax breaks, but there is merit in the idea for the average company that isn't dominant in their industry.

I'd be more in favor of creating another threshold for business taxes stating that if your company brings in more than $5 billion annually, you are taxed at a higher rate.

Give the smaller businesses a break - they're generally trying to grow, and they need people to do that.

Kelli needs to post more in N&D again.

There's no doubt that even "knowledgeable" economists(and not-so knowledgeable message board posters) use "supply-side economics" as a synonym for tax cuts.

However, disregarding technical discussions of Say's law, it seems rather pie-in-the-face obvious that the tax-cuts have helped the economy, only residents of Krugman-ville would think otherwise.

This is BS. You're taking a part of truth and applying it to your thesis. It's logically flawed at its roots. Is it true that there was an overproduction in the 90's? Yes. But it had nothing to do taxes, and it had everything to do with irresponsible investment practices in the late nineties.

For how many months in 1999 and 2000 did we listen to the bears saying that it wasn't sefl-sustaining due the fundamentals within these companys. You had company's making IPO's that should have never made them in the first place, and many other company's that produced nothing, had no profits, and nothing to support the lofty prices they were at. JDS Uniphase crashed from $400 to a penny stock. VerticalNet went from $180 to two bucks. And it was simply due to incredibly irresponsible investment practices.

The theory behind the over producers, such as the computer makers, the CISCO's, the Nortel Networks, the people that actually MADE the tangible goods, was that the people they were selling their equipment to (the dot coms) were actually selling goods, when quarter after quarter after quarter it proved that they weren't. Hopes were set high, and amazing amounts of money were dumped into the Pets.com's of the world, so invariably people put even more money into the company's that were supplying them with hardware and software. Expectations were for the dotcoms to grow, so inventories of tangible goods grew with it. When the barrel finally fell out, you had all the investment dollars in the dotcoms vanish, and the producers left with enormous inventories to clear, and no need to produce new goods because the people they had put their hopes and dreams on were no longer there.

It was complete carelessness that led to it. Not supply side economics, nor over production in and of itself.

You oversimplified the situation.

To go further, many economists believe it was the initial tax cut that kept us out of a sustained recession. Bush gave back enough to encourage durable goods spending, and his plan worked. People went out and bought TV's, refrigerators, and washers n' dryers. It spurred just a little bit of vital growth to the economy just before 9-11 hit. And many economists think that the overall tax cuts did a lot to support the immediate post 9-11 economy. Generally speaking, I believe the concensus is that we would have been in at least an 24 month sustained recession through that period if not for the tax cuts.

You can also examine our fiscal and economic policies to Europe if you want. We've taken a far more conservative approach to taxes since 2000, and we've really been the only non-developing economy to cut unemployment and continue grow since 9-11. Look at Europe. Just look at it compared to us. Don't think for a moment that our taxes have a lot to do with our sub 5% unemployment rate and double digit unemployment across a lot of Europe.

Supply side economics makes sense. Especially when it is applied responsibly.

Oh, and I heart PJDoll.

Everything you just said about the tech bubble proves my point. Everything.

I'm all in favor of tax cuts, Kelli, when they are needed. I'm basically in favor of free markets and minimal constraints on production. But to equate "tax cuts" with "supply side" to the effect that Keynesianism wouldn't ever allow for tax cuts is baloney. Keynes' theories are past their use-by date at the moment (they might become useful again if we go through a massive depression + deflation) but growing the economy by a looser fiscal policy, be that more government spending or less taxes, is completely consistent with what he said. In fact, it is aguable that Bush' tax cuts was a classic Keynesian economic policy.

Either way, there's little doubt that both supply and demand management is possible, and at times desirable. Monetary policy if used effectively can cool an economy down to positive results (ie. avert an unnecessarily prolonged recession) or stimulate a slowing economy by making the cost of borroing lower. It's all pretty technical stuff because of the lag, and that's why we have the Fed doing it, not popular vote. But it does play a very important role in economic management, that's for sure, and it's something true supply-siders would contest. I guess there aren't many true supply-siders around anymore. Maybe we'll call them neo-supply-siders.

Where did I ever say that the tax cuts were or were not influential to where the economy's GDP is today? I was completely silent on this point.

Criticizing "supply side economics" and the inaccurate usage of that term has no connection to whether or not the expansive fiscal stance created by Bush's tax cuts have helped the economy grow.

In case you are interested, I absolutely agree that it has helped, as it should always help production and thus, output, to have more money to burn. But to what extent the economy would have revived naturally without the tax cut I am not so sure. It's possible that the low interest rates would have achieved this anyway, but of course, there's no harm in monetary and fiscal policies working together. In the long term however, you will need the budget to balance, and with defense spending out of control, I hope that tax increases aren't necessary in the future.

I wouldn't disagree with any of this. I was bringing the tax discussion in because whether or not the textbook definition of supply side economics isn't a tax cut, the way the government has used the term has generally changed the meaning for many.

Supply side economics was basically taught to me as Reaganomics. Continue to create and demand will follow because more buyers will have cash flow. It is a means of flooding the market with falsely generated income, so to speak. Tax cuts are one means of achieving this goal. Another is to produce unwanted goods. The workers work and spend income on products that would not otherwise have been purchased. Suppliers of those products need to produce more for the new demand so they hire new workers who in turn spend the cash.

Keep in mind, this is a VERY dumbed down version of my economics professor's rant. I had to take ecomonics, but I didn't want to. Finance and taxes, however, that's another story

Which is exactly the point of this thread.

Oh and I was essentially a finance major too, but you can't get away from some micro and macro subjects before learning how to DCF.

Just look at it as a changing of meaning over time because of popular use. It happens.



No, you can get away. Trust me, I ran. Economics, blech!

neither liberals nor conservatives have a monopoly on demagoguery. taking credit and pointing fingers are both par for the political course.



this is THE central debate in all of economics. does supply create demand? or does demand dictate supply? i happen to believe that both statements are gross oversimplifications. dogmatic adherence to one or the other usually leads to misguided policy.



i don't quite understand what your contention is here. are you saying that economies are inherently unable to regulate themselves, and tend towards overproduction (or underconsumption)? are you implying that the government (ie...the Fed and her technocrats) is better able to judge what the optimal production/consumption ratio (or savings/spending ratio) should be?



i absolutely disagree. it is not that ALL the firms misjudged the anticipated demand for their products. it is that these firms and their products should have never come into existence in the first place. loose monetary policy and profligate credit expansion encouraged riskier ventures, sent the wrong signals to investors, and generally created an unsustainable bubble.

for my money, it is the fed that creates the instabilities, the booms, and the busts of the economy.



i'm a proponent of commodity-based money (read: the gold standard). fiat money is much less stable and subject to manipulation by politicos.



what, then, does?

what is your economic philosophy?

This thread isn't an exercise is how liberals are better than conservatives. I know that all discussions that somehow touch politics in America has to fall into this category, but believe it or not, this isn't one of them.



Both are gorss oversimplifications, and both have more than an ounce of truth in them. So the sensible position really does lie somewhere in between. In this thread, I was attacking the former dogmatic proposition: that supply creates demand. Period.




The whole contention of this thread is twofold, and I'll restate it one last time:

1. supply side economics is not a fancy term for tax cuts
2. supply side economics as a theory is incapable of guiding all economic policy choices.

I believe that above quote goes to the second point, because the reality of our market doesn't support a vertical supply curve-- which is the contention of supply side theory.



You're falling into the same trap as LittleWing here. If firms came into existence that shouldn't have due to economic policies that encouraged their coming into existence, that means that these policies targetted supply side. If it was only monetary policy that encouraged ridiculous spending, shouldn't a non-supply side policy actively try to curb it?

Neither the Clinton administration nor Congress had the slightest interest in doing so (NB. I'm not saying they should have-- I'm merely pointing out that their position on the economy at that point was classic supply side) largely because inflation was at historically low levels, and the finance community thought gains in productivity from the tech sector had killed the business cycle.




How is the current valuation mechanism of the USD being subjected to manipulation by politicos, though?



At this time in history, the most sensible economic policies seem to be those that emphasise structural reform at the micro level, a neutral fiscal stance, and monetary policy that targets inflation at 2-3% on average over the business cycle. This formula won;'t work forever, but it does seem to work at the moment. I think the real challenge we face at the moment is figuring out how to rein in the current account deficit, and start to question whether or not the price of housing ought to figure how we calculate inflation, and whether or not monetary policy has a role to play in that.

*is a fine arts major*

*leaves*

I sometimes wish I was a philosophy major, but I hope my trying future Enron cases will vindicate my undergrad choices.

Philosophy major = waiter

You made the right choice.

But philosophy major + JD = wise lawyer.

Or at least one would hope.

Your undergrad years are too precious to waste on stuff you have to learn later anyway. If I could go back, I'd have done more study of Nietzsche, Habermas and TS Eliot. Maybe even some film and other odds and ends. I'd have probably stayed away from politics, believe it or not.

If your heart's desire (you as in the notional you, not you as in Mr Orpheus) is to become an investment banker, or management consultant, that's what an MBA is for. You'll probably increase your chances of getting into a good school by having an interesting academic and vocational background anyway. You might however be too much of a pinko by that point to want to go down that path.

okey dokey. in general, though, what are your thoughts? do you tend to sympathize with tailoring policy so as to facilitate production? or do you tend to sympathize with tailoring policy so as to facilitate consumption?

FWIW, i tend to harbor a very hands-off approach. that is, i don't think any per se policy can be crafted that necessarily improves the outcomes of the unencumbered market.



ok, got it now. you were more interested in sanitizing for yourself (and the red mosquito community) the particulars of "supply side" economics than in indicting free markets, capitalism, or conservatism. yours was an attack on the trees, not the forest, no?



i certainly don't disagree there.



i guess i never really made it clear that i am not, in fact, a supply-sider. the fatal flaw with supply-side economics, at least to my mind, is its monetary and fiscal tenets. too much spending, too much control for the fed, etc.

so, yes, i eschew the supply side school because of their easy money policies and fiscal prodigality. prodigality which eventually manifests itself in labor market friction, economic overheating (booms and busts), and an attitude too lax regarding capital accumulation.



forgive my ignorance...USD?

Looks like we're more or less on the same page. All your characterizations of my arguments were accurate. This is a rare commodity on this forum.

To answer that first question, I'm more or less with you. I don't believe in either demand or supply management per se, but I do think when the times call for it, some element of either can and should be done. For instance, I do believe, perhaps naively, that Keynesian fiscal deficits greatly helped kickstart ther global economy after the depression and World Wars. But in general, I think markets tend to follow their own cycle, and there isn't much governments can do, save for drastic situations. I mean, say the dollar collapses in value, or Citigroup goes down, can the government just sit back and watch? Obviously not.

USD? As opposed to AUD, NZD? Greenback? Benjamins? Whatever suits your style.