Supply Side Economics
Many market fundamentalists have incorporated a “supply-side” orientation that defies classical theory and essentially is the opposite of Jean-Baptiste Say’s Law, which states that supply is finite and cannot outrun demand, which is infinite. Jean-Baptiste Say claimed, “Supply creates its own demand.” Production keeps the economy going and generates consumer demand. Put the products on the shelf, and people will buy them. Supply-side economics was based on the work of Arthur Laffer and was publicized since 1974 on the editorial pages of the Wall Street Journal. Laffer had little influence on professional economists, but had a profound impact upon Neo Conservative politicians and writers. The basic idea was simple: government revenues were supposed to increase as taxes were lowered. The supply-siders argue that they can effectively combat stagnation by stimulating demand. They advocate accomplishing this by making funds available to producers to increase output. This will, in turn, stimulate demand. George Gilder’s Wealth and Poverty (1981). According to George Gilder in Wealth and Poverty (1981), supply side economics were the answer to all the nation’s economic problems. “Supply creates its own demand.,” and the entrepreneurs are best at creating jobs. To encourage them to create jobs, the money supply must be increased and taxes reduced. Thus, “To help the poor and middle classes, one must cut the taxes of the rich.” By pumping more money into the economy, new jobs would be created and the goods produced would be snapped up by people with money in their hands due to increased employment.
Government was blamed as the creator of inflation. The supply- siders practiced a form of Social Darwinism, seeing the rich as the best and most productive products of social evolution and showing little interest in those at the bottom of the social heap, those who failed to adapt and thrive. They opposed the minimum wage, claiming it would prevent small employers from adding to the payroll. At base, they thought people should have enough initiative to move beyond minimum wage jobs. Their arguments were successful in for two decades preventing the increase of the minimum wage. By keeping the minimum wage lower, they were able to slow the increase of wages in general.
Followers of John Maynard Keynes believe that it is more important to stimulate demand by seeing that the mass of consumers have the ability to consume more goods. The supply-siders saw the Keynesian approach as inefficient because the poor and ordinary people spend most of their money on basic commodities and do not save significant amounts in banks for large purchases. For these reasons, they insist that tax cuts must be designed to benefit the wealthy, who, they claim will, directly or indirectly, invest it in more productive capacity. Unlike the neo-classical economists, they are not greatly concerned about balanced budgets or deficits. However, they insist that their approach will eventually generate much more tax income and generate surpluses. In the Reagan years, many Republicans who had voted for supply-side tax cuts were greatly alarmed by the resulting deficits and tried to correct them. By the time of the second Bush administration, there was little evidence that any significant number of supply-siders worried about deficits. Much of the prosperity of the later Reagan years was due to massive spending on the military (military Keynesianism). By then, the two political parties appeared to have reversed positions on the subject of deficits. Supply side economics has had few backers in academic ranks, and it may well be that some of the politicians who adopted it, with its naive optimism, simply needed theoretical cover for their plans to shrink government by depriving it of funds. On the other hand, the Neo Conservatives, who became the most dedicated advocates of neoliberal economics, talked about shrinking government but actually were committed to an activist government. The parts of government they would shrink were those that served Democratic constituencies. Indeed, they were perfectly capable of expanding government when they thought it would garner votes, and they did so in 2004 by adding prescription coverage to Medicare. The Republicans of the 1950s were concerned with curbing spending and reducing deficits. By 2004, these concerns were low priorities. When the Republican House passed a 2005 budget that continued unbridled spending and an enormous deficit, only nine Republicans voted against it.
In the Clinton years, the Democrats adopted Treasury Secretary David Rubin’s “Crowding out Theory” and believed that this accounted for the great success of Clinton’s economic policies. At a simple level, it was held that large deficits made it harder for businesses to borrow money at acceptable interest rates. Short-term interest rates may not always be adversely affected by large government borrowing, but the crucial long-term rates are. Republicans, on the other hand, came to see the Clinton era prosperity as a mere “blip” and to maintain that deficits did not injure the economy. A clear advantage of Rubinomics was that it reassured markets that the federal government was attempting to adhere to fiscal discipline.
Moderates and many conservative Republicans ridiculed Ronald Reagan’s supply side economics, but this approach to economics became fixed Republican doctrine by the time the second Bush assumed the presidency. . Supply-siders believe that supply creates its own market; it is the opposite of the demand side. Democrats and even many Republicans had believed that the lesson of the Great Depression was that workers needed enough money to keep the economy humming through consumption. George H.W. Bush called it “Voodoo economics,” and John Anderson saw it as “economics with mirrors,” and Senator Howard Baker likened it to a “river boat gamble.” Nevertheless, it became the Republican cannon under Reagan and the cornerstone of George W. Bush’s domestic programs. Belief in supply-side economics has more than a bit of a religious quality to it, and supply-siders are known to direct their anger at fellow Republicans who do not endorse the new form of Republican economic orthodoxy. Peter G. Peterson, an old-style Republican who long served the party, complained that his colleagues had come to see deficits as “a sort of fiscal wonder drug” and reminded his readers that the tax cuts of the 1980s boosted the debt “from 26% to 42% of G.D.P.” By the second Bush administration, Republicans crafted tax cuts with “sunset provisions” so that revenue losses would appear to be minimized. Of course, the plan was to repeal the sunset clauses later. In late 2002, George W. Bush appointed John Snow Secretary of the Treasury and Stephen Friedman as chief economic advisor. Both were denounced for “deficit phobia” and not being “one of us” by supply side true believers. The appointment was a shrewd political move as the new appointees were placed in the position of having to sell a supply-side tax reduction program to some who doubted its wisdom. The ridicule of “deficit phobias” signaled a new position on deficits. In his first inaugural address, Ronald Reagan said that nations and individuals can Alive beyond our means, but only for a limited period of time.” When his policies created enormous deficits, Republicans found various ways of blaming them on Democrats or minimizing their size. As late as the speakership of Newt Gingrich, Republicans were pressing for a balanced budget amendment.
Related to supply-side economics is the concept of the wealth effect developed by Michael Palumbo. This Federal Reserve Board economist claimed that the great stock market boom of the 1990s created a boom fueled by consumer spending. He pointed out that the increased spending and the wealthiest households, which were benefitting by great increases in stock values, saved at a high rate.. Polumbo argues that increasing spending by low income people is far less effective. His bottom line is that by stimulating the rise in stock market prices the economy will also be substantially boosted. This theory underpinned George W. Bush’s call to end taxes on dividends.
Market fundamentalism’s advocates preferred the term free market economics, but the word “free” is often not warranted. Most versions of market liberalism did not oppose various forms of corporate welfare and the continuation of some important tariff barriers. Nor did they address the problems of monopolistic and oligopolistic power, which made markets unfree. Some Republicans addressed these matters in the 1970s and a few, such as Kevin Phillips and Pat Buchanan, have raised these concerns in recent years. Some market fundamentalists oppose agricultural subsidies that largely benefit huge agribusiness corporations. However, there also is concern about the many ways government assists business. For example, the Department of Defense funds a great deal of industrial research and development, playing in some ways the same role as Japan’s Ministry of International Trade and Industry. Similarly, the Star Wars programs were largely about subsidizing the development of high technology for the use of American industries. Advocates of the so-called free market seldom complain about airline subsidies, corporate bailouts, export subsidies, or the use of the CIA for industrial espionage.
Conditions in the late Twentieth Century were right for a revival of laissez-faire economics and its related political doctrines. Changes in the global economy generated conditions conducive to the resurgence of conservatism in the late 20th century. Corporate profits began to lag after 1965, and America began to experience intense foreign competition. The squeeze on American corporate profits was resulting in attacks on employee wages and benefits as more foreign goods entered the American market. The loss of good-paying industrialized jobs had begun well before the 1970s, as had increased foreign competition, witnessed by the City of Chicago’s loss of 59% of its industrial jobs between 1947 and 1984.
After 1973, the substantial rates of growth would be rare, leaving nothing for redistributionist policies and less for sustaining welfare state policies. The high inflation and weak economy during the Carter years also led many to conclude that liberal economics had failed and that the time had come to try Republican remedies. Given these circumstances, many accepted conservative arguments that American industries could not prosper unless workers benefits were reduced and corporate taxes were reduced. To make America a lean, tough competitor, many accepted arguments that the nation had to reduce the size of government and the safety net it provided. Environmental legislation and governmental regulations of business were seen as potential threats to maintaining jobs.
Sherman has written African American Baseball: A brief History, which can be acquired from LuLu Publishing on line.http://www.lulu.com/browse/search.php?search_forum
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- Sherm spent seven years writing an analytical chronicle of what the Republicans have been up to since the 1970s. It discusses elements in the Republican coalition, their ideologies, strategies, informational and financial resources, and election shenanigans. Abuses of power by the Reagan and G. W. Bush administration and the Republican Congresses are detailed. The New Republican Coalition : Its Rise and Impact, The Seventies to Present (Publish America) can be acquired by calling 301-695-1707. On line, go to http://www.publishamerica.com/shopping. It can also be obtained through the on-line operations of Amazon and Barnes and Noble. Do not consider purchasing it if you are looking for something that mirrors the mainstream media!