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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.
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.
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.
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.
"If you build it, they will come".
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.
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.
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.
...as shown by the OP with Fox Network.
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.
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?
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?