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The political genius of supply-side economics

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posted on Jul, 26 2010 @ 03:12 AM
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The political genius of supply-side economics




The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.


blogs.ft.com...

What does all this rhetoric have to do with supply side economics? Martin Wolf, the British "financial journalist" links supply side economics to partisan politics in this way:


To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.


Perhaps Wolf gets his understanding of supply side economics from Wikipedia:


Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers 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.


Of course, this beginning paragraph in the Wikipedia article is the standard view of what supply side economics is, which translates to most as tax cuts. However, when reading further in that Wikipedia article, under the Historical Origins of supply side economics we get a different picture:


Supply-side economics developed during the 1970s in response to the failure of Keynesian economic policy, and in particular the failure of demand management to stabilize Western economies during the stagflation of the 1970s, in the wake of the oil crisis in 1973. It drew on a range of non-Keynesian economic thought, particularly Austrian school thinking on entrepreneurship and new classical macroeconomics. The intellectual roots of supply-side economics have also been traced back to various early economic thinkers such as Ibn Khaldun, Jonathan Swift, David Hume, Adam Smith and Alexander Hamilton.

As in classical economics, supply-side economics proposed that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. Early on this idea had been summarized in Say's Law of economics, which states: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." John Maynard Keynes, the founder of Keynesianism, summarized Say's Law as "supply creates its own demand." He turned Say's Law on its head in the 1930s by declaring that demand creates its own supply. However, Say's Law does not state that production creates a demand for the product itself, but rather a demand for "other products to the full extent of its own value." A better formulation of the law is that the supply of one good constitutes demand for one or more other goods. This requires that the original good has some value to another party and it is through willingness to trade this value that the producer of the new good can express his demand for another good.


Supply creates its own demand

Two examples of supply side economics would be Pet Rocks, a marketing ploy conceived by an advertising executive who found a ready supply of rocks, painted faces on these rocks, and sold them to the public, thereby creating its own demand. Of course, the Pet Rock was just a fad that soon ran its course. It is however a simple and easy to understand example of actual supply side economics that has absolutely nothing to to with tax cuts.

The second example of supply side economics is The FOX Network. When Rupert Murdoch first founded The FOX Network, most people, (really meaning the talking heads of the three networks, outside of PBS, all ready in existence), declared The FOX Network a loser before it even had a chance to lose. In the beginning, FOX did struggle with creating a demand and most viewers did not readily turn to FOX for entertainment, which in some ways seemed to vindicate all the prognosticators who assured the public that just wasn't a demand for a fourth network. Never mind that there was all ready a fourth network in PBS, that network didn't count because it didn't have to worry about profitability. The prognosticators were insisting there was not enough of a profit share for a fourth network.

Murdoch, however, kept supplying his network with programming. At some point, the NFL decided to raise its licensing fees on the games being aired, and at that time, CBS pretty much had the monopoly on NFL games. Larry Tisch, then president of CBS, crunched the numbers and concluded that they were barely paying for the NFL through advertising revenue as it was, and could not afford to pay the increase in licensing fees, so let their contract with the NFL go. Murdoch jumped on this decision, and paid the fee the NFL was asking for. Of course, if CBS couldn't generate enough in advertising, what made Murdoch think he could with his floundering network?

"supply creates its own demand."

Murdoch had two shows all ready airing on Sundays, that he believed were quality shows that deserved a bigger audience than they were getting. He gambled that if he added to that Sunday lineup an afternoon of NFL football games, that he would gain a new audience that just might stick around after the games to watch those shows they weren't watching. Those two shows were The Simpson's and The X-Files. Murdoch's gambit paid off, and the audience of those two shows increased dramatically. This is supply side economics in action. Again, Murdoch's decision had nothing to do with tax cuts, or Republican Party platforms, it was a simple business decision that paid off.

Of course, the main stream media will rarely, if ever, report these successes of supply side economics in the business sector, and continue to link supply side economics with government fiscal policies, and when they do, they will grossly misrepresent what supply side economics truly is, in order to push forth their own agenda, which is a longing to return to a more Keynesian form of fiscal policy.

If financial journalists, or journalists in general were truly interested in demonstrating how supply side economics works in government, they would do more, as the Washington Post has recently done, to show how the creation of Homeland Security, (an increase in government supply), has created a demand for more terrorists. Hence, since the formulation of Homeland Security, we hear much more about "homegrown terrorists", more airport security, and how the internet must be better regulated. That is the supply and demand of government, the bigger the supply of government, the bigger demand there is for taxes, prisons, and overall regulation.

[edit on 26-7-2010 by Jean Paul Zodeaux]




posted on Jul, 26 2010 @ 03:35 AM
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Normally when I hear it described, I heard it called "Trickle down economics", whereby you give tax breaks to the rich, and the large companies, because they are the ones with the ability to effect production or supply, and then you hope it trickles down to everyone else from there.

Also,




posted on Jul, 26 2010 @ 03:48 AM
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reply to post by harpsounds
 


Trickle-Down-Economics is something different than the OP is talking about. It is the idea that others will more likely benefit from my prosperity than from my poverty.

The idea of the OP is expressed in the movie "Field of Dreams" with Kevin Costner:

"If you build it, they will come".

The principle is true and requires a lot of courage to follow through with.

[edit on 26-7-2010 by Skyfloating]



posted on Jul, 26 2010 @ 04:01 AM
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ATS is an example of supply side. Were there thousands of conspiracy theorists out there when ATS began? Probably not, but once information began flowing they came.

Soft drinks.

Bottled water.

Iphone.

When something is created out of thin air before there is an actual need for it, is the basic idea behind supply side, IMO.

I like the mention of homeland security as an example. Excellent.

Other ideas like that are also supply side. Things that are not really necessary or needed, created for consumption. Sometimes created for consumption with nefarious other purposes. BIG GUBMINT comes to mind.

S&F JPZ



posted on Jul, 26 2010 @ 04:03 AM
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A fine prognosis of Supply-Side economics.

A majority of people do confuse 'Trickle-Down' and 'Supply-Side' economics quite often.

While Jean Paul has shown that Supply-Side has little to do with tax-breaks and more to do with allowing those who wish to provide a supply into the market will most likely find a demand.

Since humans are diverse, it is natural to see that the supply side of the market is engine of an economy, while demand is the gasoline. (Did ya see that? Metaphorically placed supply and demand into terms of supply-side economics). People have unique demands that are constantly being unfilled. This is where the beauty of supply-side economics steps in and shines.

Contrasted with 'trickle-down', which is the thought that if we remove barriers such as taxes and regulations on a macro level, eventually the supply side will churn out more to meet a larger demand because of the removal of barriers.

Too many variables to ensure success or that people would drive up demand because of the trickle down effect. Whereas allowing the supply-side to do what they do best, which is supply, within a free-market gives a better predictability rate that there will be a demand of some sort. Thus, promoting possible competition within a certain market. So long as there is minimal government intervention and absolutely no government protection in regards to the initial supplier or supply.



posted on Jul, 26 2010 @ 12:29 PM
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Of course, sometimes it is unfortunate that ANY item will find its buyers...



posted on Jul, 26 2010 @ 10:46 PM
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reply to post by Skyfloating
 





"If you build it, they will come".


I loved Field of Dreams, and what a great film to illustrate the principle of supply side economics. It is a great film to use because that film, on the whole is a goofy Capraesque film that sort of taps into The American Dream in a left leaning way. This is why I think that film is a good analogy for supply side economics, as this economic theory is all to often associated with the right.

Economics should not be either left or right, and should simply be about markets and their proclivities. You are right on the money that supply side thinking takes courage, and that courage is not always enough to make one profitable. I firmly believe that the "labor class" has within them a supply side of services or potential goods that remain tragically untapped.

The market is a sea of opportunity that should be open to all and not restricted, or limited so that only a few players can play. Risk is a part of living, and when we take risks, we certainly take the risk of losing. If sports teaches us anything, it teaches us that victory and defeat are equal. They are equal in that we will not always lose, and we will not always win, but when we do lose, when we get back up and play again, we also risk winning!

As the boxer Floyd Patterson once said:

"They said I was the fighter who got knocked down the most, but I also got up the most."

Floyd Patterson is not remembered for being a loser, but for being a champion who won the World Heavyweight Boxing title twice. Patterson was, at 21 years old, the youngest to ever win that title, at that time, and also the first to ever regain that title. Here's to getting back up again!



posted on Jul, 26 2010 @ 10:58 PM
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reply to post by Jean Paul Zodeaux
 


I liked my macroeconomics professor's ONE saying.

If you have not gone bankrupt, you are not a businessman. He had other sayings that were worthless. Keynesian to the core. Jeez, it has been 20 years since those courses.

I am working on a widget, if I can just come up with a widget where I can make $1 dollar of profit per unit after all expense and sell only to .33% of the country, that will make me $1 million. I could retire on that. Some could not, but I could.

The pet rock mentioned earlier has already been taken. Hmmm, what about a saying that could be sold to the Tea Party crowds on tee shirts.

Light bulb comes on.

Be an information soldier............. no too long.

Or, I could write one that would fire up the other side. Ooooohhh now there is something that would burn therir bottom. Hehehehe. Come up with a saying and sell it at their get togethers, they HATE capitalists, as long as it is not them.



posted on Jul, 26 2010 @ 11:13 PM
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reply to post by endisnighe
 





If you have not gone bankrupt, you are not a businessman. He had other sayings that were worthless. Keynesian to the core. Jeez, it has been 20 years since those courses.


There are many famous business people who failed numerous times before finally finding success. Henry Ford found success through supply side economics. Prior to Fords mass marketing of the automobile, that product was largely seen as a luxury for the rich. Ford respectfully disagreed, and forever changed the method of travel, across the world. Even so Ford had failed several times before finding success with his Ford Motor Company. That famous Col. Sanders of Kentucky Fried Chicken fame, faced rejection over a thousand times before finally finding a restaurant that would give his secret recipe a try. Bill Gates failed at first, as did Walt Disney, just to name a few.

Keep plugging along End, endeavor to persevere, and all will work out just fine.



posted on Jul, 28 2010 @ 12:08 AM
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reply to post by Jean Paul Zodeaux
 


The Devil's Advocate in me wishes to play


Can we conclude, from what you have written and thus researched that the following is true:

In examining economic effects upon a market, it is apparent that allowing the free flow of a given supply within its market will inherently find a demand to fill; if it does not, the demand will be created by the supply now introduced into the market.

Would you say this is true?

On that note, one must define and encapsulate the term "free flow" as to better understand why the above statement is true or false. Also, does a supply always finding or creating a demand good for society?

Is there ever a moment when there must be an intervention not by the players within the market, but outside of the market to artificially drive down, or up, market supply and/or demand? The "War on Drugs" comes to mind specifically on this one



posted on Jul, 28 2010 @ 01:10 AM
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It seems to me that the Supply Side of economics is much riskier than another alternative that even fewer people mention...Yes, Supply Side economics can work, as shown by the OP with Fox Network. But there's much less risk involved if someone decides to do some research into what people really need, as opposed to what someone thinks people would want. I speak of the Supply & Demand side of economics.

No matter what, people are human beings & all have certain basic needs in common. Those markets that supply those needs are the most stable of markets, prospering in relative porportion to population growth (but you must also consider the other factors in play, such as professional competion, cost/expenses, etc). The most stable businesses deal with human commonality in life...Food, clothing, shelter, costs of medical and/or death arrangements & a few other factors. Businesses that stay (or diversify within) such categories rarely, if ever, go bankrupt.

However, the more government interferes with the normal Free Market, the greater the risk gets, in any venture. Government can only increase business expenses with every new regulation (& regulation/enforcement agencies) they put into effect. There is no government job that actually aids the economy, because the government cannot actually produce anything that can be put to the open market. No, the government can only operate by feeding on the economic vitality that already exists...It cannot supply, it can only demand. Therefore, the bigger the government gets, the worse the nation's economy suffers.

Government pundits would have us believe that "businesses are inherently unethical" & would rip off everyone at every opportunity. Yet, they don't mention that every new business starting must be able to account for the risks of getting started...And the banks & insurance companies will calculate the risks, as well as impose certain conditions on the new business before they will help cover for it.

After a business has been running for a while, it's in the business' best self interests to provide high-quality goods & services & treat customers as best they can...Public opinion is quick to pick up & spread around if a business starts acting unethically & people will simply stop patronizing it; In short, mistreated customers will simply shop somewhere else. Thus, businsesses that deserves to succeed will & businesses that deserve to fail will. There is no such thing as a good monopoly in any market...Without competition & without any regard to their customers, any monopoly will go bad.

Now consider that the US government is horning in & taking over private enterprises & regulating competition out of "their" markets...Why do you think so many companies have fled America, taking their jobs with them? Government regulates so much extra expense into doing business that businesses can't profit here. It's only good sense to go somewhere else. It seems that the government itself is a prime example of what happens when any "business" goes for the monopoly, or even goes too heavy on Supply Side economics, hmmm?

[edit on 28-7-2010 by MidnightDStroyer]



posted on Jul, 28 2010 @ 02:39 AM
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Welcome!


Originally posted by MidnightDStroyer
It seems to me that the Supply Side of economics is much riskier than another alternative that even fewer people mention...Yes, Supply Side economics can work, as shown by the OP with Fox Network. But there's much less risk involved if someone decides to do some research into what people really need, as opposed to what someone thinks people would want. I speak of the Supply & Demand side of economics.


Supply Side can be seen as having a slight more risk because you are placing economic capital into a good that has yet to have a demand. This only rings true though to a percentage of Supply Side economics; producing a good in hopes of a demand is only a small aspect of the macroeconomics of Supply Side.

EDIT: Fixing the argument as I misread.

...as shown by the OP with Fox Network.
This type of debate tactic is used when one believes their position is weak and must interject a known protagonist in attempts to discredit another's point without actually refuting the points.

The OP did use Fox Network to support their facts, but also used other sources along with it. You chose to single out the one factor that would garner support from people that may not even know what Supply-Side economics but have deep distrust or misgivings about the Fox Network thus possibly siding with a lesser argument against the OP's assertions based on that alone and not facts or logic.

I do however will inform you I am not saying that was your intent, just that it has the perception thereof.

I have shortened your statement for brevity.


Those markets [of certain basic needs] that supply those needs are the most stable of markets...The most stable businesses deal with human commonality in life...Food, clothing, shelter, costs of medical and/or death arrangements & a few other factors. Businesses that stay (or diversify within) such categories rarely, if ever, go bankrupt.


While those markets are stable, the demand is nearly constant, thus the stability yet markets still stall out! Granted that outside influence is minimal it will remain as such a market and its fluctuation will follow a steady pattern until a change occurs within the market, either supply or demand. While we all need the basics of life, our choices and wants vary so widely and diverse, no market is forever stable.

Since every form of production and/or service has an inherent risk associated with it, that risk does not directly correlate to a higher bankruptcy factor.

Poor business practices, planning, marketing, etc will lead to bankruptcy along with those that take a risk in producing a product that has yet to have a demand. Via Supply-Side economics, we see innovation flourish, else producers would just stick with the tried and true.



However, the more government interferes with the normal Free Market, the greater the risk gets, in any venture. Government can only increase business expenses with every new regulation (& regulation/enforcement agencies) they put into effect. There is no government job that actually aids the economy, because the government cannot actually produce anything that can be put to the open market. No, the government can only operate by feeding on the economic vitality that already exists...It cannot supply, it can only demand. Therefore, the bigger the government gets, the worse the nation's economy suffers.


Absolutely true! Government intervention into a free-market leads to controlled-markets that have favorites. Competition is usually stifled either by political sway or by regulatory actions. Without competition, innovation is lowered, market fluctuations become more erratic and false of the indication of the actual market. Rent controls and price ceilings/floors come to mind.



Government pundits would have us believe that "businesses are inherently unethical" & would rip off everyone at every opportunity. Yet, they don't mention that every new business starting must be able to account for the risks of getting started...And the banks & insurance companies will calculate the risks, as well as impose certain conditions on the new business before they will help cover for it.


Again, great points! Businesses operating within a free-market are subjected to the will of the market.

Funny thing is that a free-market is self-regulating in this aspect. If a company or person tries to sell their goods/services for grossly higher prices, they will sell just a few, as in a free-market, competition thrives and they would be unable to compete against those that are selling their goods at a near market rate. Vice-versa, if they try to undercut the competition severely their initial boost in selling that good may go up, but eventually the market will have too much supply and this time, the demand will go way down to correct the imbalance.



After a business has been running for a while, it's in the business' best self interests to provide high-quality goods & services & treat customers as best they can...Public opinion is quick to pick up & spread around if a business starts acting unethically & people will simply stop patronizing it; In short, mistreated customers will simply shop somewhere else. Thus, businsesses that deserves to succeed will & businesses that deserve to fail will. There is no such thing as a good monopoly in any market...Without competition & without any regard to their customers, any monopoly will go bad.

Now consider that the US government is horning in & taking over private enterprises & regulating competition out of "their" markets...Why do you think so many companies have fled America, taking their jobs with them? Government regulates so much extra expense into doing business that businesses can't profit here. It's only good sense to go somewhere else. It seems that the government itself is a prime example of what happens when any "business" goes for the monopoly, or even goes too heavy on Supply Side economics, hmmm?


Bingo again!

Good points you have made, but you never really refuted Supply-Side economics. Do you not agree that it is a major driver for innovation? That said innovation may not have a demand yet, but because there is a supply now, demand will eventually be created?

[edit on 28-7-2010 by ownbestenemy]



posted on Jul, 28 2010 @ 02:56 AM
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Originally posted by ownbestenemy
Good points you have made, but you never really refuted Supply-Side economics. Do you not agree that it is a major driver for innovation? That said innovation may not have a demand yet, but because there is a supply now, demand will eventually be created?

You're right that I never really refuted Supply Side economics...It is possible that someone can research current trends & develop a product that they think will be a demand. The only refutation I had for Supply Side economics is because it's riskier to anticipate a new market than it is to supply a current & reasonably consistent demand.

Even so, Supply & Demand economics can use innovation too, usually for improvements & upgrades for current products already in the market. As long as the free market is relatively free of government intervention, a steady business can keep more money to invest in Research & Development, expand & diversify & research trends to try to anticipate future demands that may pop up.

This is where the government is interfering in the creation of new jobs in the private sector: After the "bailouts" & other subsidies were given to companies, it was in the news that they were holding those extra funds (banks & financial institutions were loaning less & keeping interest rates low artificially, for example)...Mainly because, as the government regulates more, they're uncertain about how to use those funds. These are funds that companies could use to expand operations (create jobs), expand market territories, improve current products/services & even invest in R&D. Except that they're not sure what the government is going to slap on them next.

[edit on 28-7-2010 by MidnightDStroyer]



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