In the Michigan paper The Oakland Press, former union local president Gil Lapoint has an article called “History shows ‘supply-side’ not good,” where he writes about the evils of supply-side economics.  I am always amused when non-economists write articles about economics, especially Liberals, because of the numerous mistaken economic rationales. 

 

Mr. LaPoint writes:

 

Capitalism has its flaws — there is no natural stop-valve to control its appetite.  The natural penchant of capital is to always seek maximum return from its wealth.  There is nothing to prevent investors from demanding too much and to convince them that their collective thirst for net gain is undermining the system itself.

 

Capitalism does have natural stop-value to control its appetite—it is called a recession.  Recessions are the way the economy wrings out the inefficiencies and puts in place the seeds for the next economic expansion.  Free-market economist never state capitalism will eliminate all downturns because the economy is made up of imperfect human beings.

 

Of course capital seeks to maximize its return, it is human nature.  Just as Mr. LaPoint and all other consumers shop at stores that offer the lowest price, in order to maximize their purchasing power.

 

As well, there is a mechanism to prevent investors from demanding too much—it is the market.  Look what happened in the stock market at the end of 2000 and the beginning of 2001.  Investors were running up the price of tech stocks and finally the market said enough, and hundreds of inefficient Internet firms went bankrupt.

 

He goes on to write:

 

Historically, there have been three distinct eras when supply-side (sometimes referred to as “trickle-down economics”) theory has been employed.  The failure or success of these examples can provide us with the empirical evidence of history — a record of whether the application of supply-side efforts in the past was successful or whether they were a total bust?

 

After all, the old axiom that “hindsight is 20-20″ is construed as self-evident.  These eras are in chronological order are (nice grammar):  First, the administration of Republican Herbert Hoover, just prior to the stock market crash of 1929 and the ensuing tragedy of the “Great Depression;” Second, the fiscal irresponsibility of the Reagan 1980s; and third, the current debacle of the George W. Bush administrations and the havoc they have wrought.

 

Actually there was a fourth time supply-side economics was employed—in 1964 when Congress enacted the late President Kennedy’s tax cut legislation, which lowered the top marginal tax rate from 90% to 70%.  After the Kennedy supply-side tax cuts, the economy experienced 93 months of continuous growth.  When President Reagan’s tax cuts were introduced, the economy expanded for 136 straight months. 

 

He continues:

 

This dichotomy was put to a test during the Depression.  Roosevelt, and Marriner Eccles, the Federal Reserve Board Chairman, knew that only the government had the resources that could deal with the enormity of the problems facing the country.

 

The Fed chairman had come to the realization that the economy was being steadily weakened by what Eccles called the “giant suction pump of mal-distribution” — economic policies that pulled more and more income away from those who would spend it, pushing millions of families to the point where they could no longer consume.

 

It is not a sound defense of your argument to use a quote from the Federal Reserve chairman, describing the cause of the Great Depression before it is even over.  Economists have given a number of theories as to the cause of the Great Depression—of which mal-distribution is not one of them.  One is the passage of the Smoot-Hawley Act in 1930, which raised tariffs, and greatly reduced trade as other nations soon raised tariffs on American exports.  A second theory put forth by Milton Friedman was the Fed’s reduction in the money supply in the wake of deflationary conditions.  In other words, the actions of Chairman Eccles were a major cause of the Great Depression.  Both of these actions were the exact opposite of what a supply-side economist would recommend in the wake of the stock market crash in 1929.

 

If generating jobs is the heart of an economy, reducing poverty is its soul.  When President Clinton took office, 10 million Americans were unemployed and poverty levels were astronomical.  The Clinton administrations created 22.88 million jobs and lifted 8.2 million people out of poverty, including 4.2 million children.

 

Now that’s a lot of heart and soul.  All this was accomplished without tax giveaways to the supply-side rich.  Every Republican president since Abraham Lincoln has had a recession in his first term in office.  Is it any wonder?

 

Again, equating every Republican president with supply-side economics is disingenuous.  President Reagan was the first Republican president to think of economic policies in terms of supply-side.  Presidents Eisenhower, Nixon, Ford and Bush Sr. were anything but supply-side presidents.

 

As for Republican recessions, let’s look at the facts.  President Eisenhower experienced an economic downturn in the second half of 1953 and the first quarter of 1954.  The reason:  the end of the Korean War reduced government spending on military projects, causing a downturn until the economy could readjust to domestic output.  In the first term of President Nixon, the U.S. experienced an economic downturn in the last quarter of 1969 and the first quarter 1970 due to a 69-day nationwide strike by General Motors.  President Ford’s term in office saw a recession due to the first OPEC oil embargo.  President Reagan came into office in the mist of an economic downturn.  The negative growth in GDP in the early part of 1982 was not due to the supply-side economic policies but to the Federal Reserve reducing the money supply to wring inflation out of the economy, the effect of fifteen years of expansionary monetary policy.

 

George Bush Sr. faced two quarters of negative growth in GDP in the last quarter of 1991 and the first quarter of 1992, due to the Iraq invasion of Kuwait and the run-up in oil prices.  Remember, President Bush raised taxes in 1990 to help reduce the deficit, much to the dismay of every supply-side economist.

 

Actually the so-called George W. Bush recession began in the last year of President Clinton’s administration.  Like Reagan, Mr. Bush inherited the makings of a recession from a Democratic incumbent.  It was President Bush who faced the brunt of the turmoil by the collapse of the .com stocks.  In a way it is disingenuous to say President Clinton created 22.9 millions jobs because many of them came about at the height of the Internet bubble; jobs that should not have been created in the first place.  When the bubble burst, it was President Bush who had to pick up the pieces.  At the same time the U.S. experienced the terrorist attacks on 9/11.  In addition, President Clinton signed into law supply-side tax cuts on dividends and capital gains, which helped fuel the economic expansion in his second term.

 

The basic idea behind supply-side economics is to reward saving, investment, and innovation.  For any economy to expand, it must increase its productivity.  Either each worker must produce more goods; or fewer workers are needed to produce a good.  Increases in productivity are achieved through investments in new and improved capital and technology, not through increases in consumption. 

 

Demand-side economics can’t raise productivity.  In order to increase consumption for the poor and middle-class, the government must do one of three things:  1) increase taxes on the rich, which reduces their consumption and savings and in turn reduces investment by an equal amount; 2) increase the money supply, which will in the long-term create higher inflation and interest rates; or 3) borrow the money, which means the government will have to lower spending or raise taxes in the future.  These actions only redistribute the pieces of the pie; they do nothing to increase the size of the pie.

 

If one wants to debate the merits of Republican economic policies I would not recommend using Mr. LaPoint’s article as a basis for an argument against them.