Supply-Side Economics is dead ... Long live Supply-Side Economics ...
and the battle still rages, when Americans should be simply demanding better ...
Why Romney Needs Gingrich’s Supply-Side Sizzle
by Lawrence Kudlow, Special to the NY Sun -- Dec 8, 2011
[...]
In my CNBC interview with Mr. Gingrich this week, he slammed President Obama’s tax-the-rich, class-warfare attack on bank’s and businesspeople. He hammered Mr. Obama, calling him a hard-left radical who is opposed to free enterprise, capitalism, and “virtually everything which made America great.”
It was a brutal, frontal, hard-hitting attack on the president. He called Mr. Obama “the candidate of food stamps, the finest food-stamp president in American history.” He said, “I want to get equality by bringing people up. [Obama] wants to get equality by bringing people down.” He said, “I want to be the guy who says, ‘I want to help every American have a better future.’ [Obama] wants to make sure that he levels Americans down so we all have an equally mediocre future.”
OK those are the GOP talking points. They are rooted in the failed policies of Supply-Side Economics. That we all can be wealthy. That only a person's work ethic or lack thereof holds them back. This is GOP Wealth Creation 101: "If you aren't Rich -- Blame yourselves ... you just need to Try Harder!
Today's Exercise in Economics, will try to drill-down into some concepts upon which GOP Supply-Sider rhetoric is based. Upon which it still clings to a voodoo GOP echo-chamber life.
At its core Supply-Side Economics, is based on a little questioned premise, that sounds more like 'magical thinking' than a 'proven principle' to me.
Grab another coffee or tea, and prepare to learn about the unpinnings that have driven so much of Economic growth for the last several decades, and its silent redistribution of wealth upwards, in today's wealth-pandering world ...
If you've never heard of Say's Law, well it is the core premise upon which Supply-Side wishful thinking is based:
It basically says "If you Produce it, the Profits will come" ...
(or, "if those Capital Goods can be leveraged, wealth is created" -- to put it more cleverly.)
Say's Law is the principle that supply constitutes demand. Or, in the words of economist Jean Baptiste Say, "...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." (A TREATISE ON POLITICAL ECONOMY, Chapter 15).
J.B. Say (1767-1832) is the French economist who coined the word entrepreneur to describe an economic agent independent from the landlord, worker or even capitalist (since the entrepreneur may secure financing from others). Say wrote his TREATISE to counter the Mercantilist doctrine that money is the source of wealth. According to Say, goods buy goods, and money mediates the transaction:
"It is not the abundance of money but the abundance of other products in general that facilitates sales."
[...] Say was emphatic that consumption destroys wealth and that only production creates wealth.
Thomas Malthus was the foremost classical economist who promoted the idea that underconsumption causes recession. Malthus blamed the wealthy for saving rather than spending. David Ricardo, in answering Malthus, invoked J.B. Say to write:
"The shoemaker when he exchanges his shoes for bread has an effective demand for bread."
Ricardo attributed post-war depression & unemployment to a mismatch of supply & demand, rather than to underconsumption.
Say's Law and Economic Growth
by Ben Best
Malthus blames recessions (products not being sold) on the hoarding behavior (savings) of the wealthy.
Ricardo blames recessions on the "mismatch of supply & demand."
Funny, according to Say, simply supplying products, creates wealth. Money is incidential to the wealth-creation process, not a critical bottleneck to consumer demand.
The following Supply-Sider author puts the blame for 'over stocked store shelves' -- not on the overly simplistic theory of French economist Say itself -- but rather on the commercial dispensers of Cash and Credit, failing to keep the economic wheels greased, and turning.
Steven Horwitz blames recessions, hypothetically on misapplied Monetary Policy -- instead of Say's Law (supply-side idea) itself:
W. H. Hutt once referred to Say’s Law as the most fundamental ‘economic law’ in all economic theory.[1] In its crude and colloquial form, Say’s Law is frequently understood as supply creates its own demand, as if the simple act of supplying some good or service on the market was sufficient to call forth demand for that product. It is certainly true that producers can undertake expenses, such as advertising, to persuade people to purchase a good they have already chosen to supply, but that is not the same thing as saying that an act of supply necessarily creates demand for the good in question. This understanding of the law is obviously nonsensical as numerous business and product failures can attest to. If Say’s Law were true in this colloquial sense, then we could all get very rich just by producing whatever we wanted.
In a somewhat more sophisticated understanding, one which John Maynard Keynes appeared to pin on the Classical economists, Say’s Law is supposed to be saying that the aggregate supply of goods and services and the aggregate demand for goods and services will always be equal. In addition, Say was supposed to have been saying that this equality would occur at a point where all resources are fully employed. Thus, on this view, the Classical economists supposedly believed that markets always reached this full-employment equilibrium. [...] Presumably, however, Keynes thought the Classical economists meant something else, perhaps more along the lines of market economies will never create general gluts or shortages because the income generated by sales will always be sufficient to purchase the quantity of goods available to buy. There is a strong sense in which this is true, but by itself it does not assure that full employment will take place because obvious examples of significant unemployment and unsold goods can easily be pointed to. And, in fact, this is what critics of Say’s Law have done. By pointing to the various recessions and depressions that market economies have experienced, they claim to show that Say’s Law was at the very least naive, and probably downright wrong.
All Markets Are Money Markets
[...] Say’s Law, properly understood, suggests that the explanation for an excess supply of goods is an excess demand for money. Goods are going unsold because buyers cannot get their hands on the money they need to buy them despite being potentially productive suppliers of labor. [...]
Unlike Keynesian critics of Say’s Law of Markets who saw deficient aggregate demand resulting from various forms of market failure as causing economic downturns, we have argued that a more accurate understanding of Say’s Law suggests that there is no inherent flaw in the market that leads to deficient aggregate demand, nor is the existence of real-world recessions a refutation of the Law. Rather, once we understand the role of money in making possible the translation of our productive powers of supply into the ability to demand from other producers, we can see that the root of macroeconomic disorder is most likely monetary, as too much or too little money will undermine that translation process. [...]
Understanding Say’s Law of Markets
Beware measures to boost aggregate demand.
January 1997 - Volume: 47 - Issue: 1 -- by Steven Horwitz
Freeman - Ideas on Liberty
So that Supply-Side advocate of Say's Law, blames too little money, not too much product, for the faltering of markets.
Hmmm? What about the impacts of Unemployment, on overall Demand for those supply-side goods? Yes there is a "too little money" problem here, too. But is not usually directly due of monetary policies -- it's due to "too few wage-earning" opportunities.
But Say's Law proponents also have a curious view on unemployment markets too. Enter the Phillips Curve ...
Ever wonder why the Stock Market goes up when people are laid-off, and goes down when the Unemployment rate falls? This seems very counter intuitive, to common sense thinking, at least.
Lowering Unemployment is good news, right? Well, not if your primary focus is the cost of money, ie the overall Interest rate, as the 1%-ers are prone to follow.
This backwards 'good news' effect is largely due the widely held belief in the Phillips curve, and its ability to predict the future direction of inflation. The Phillips curve was postulated in the 1950's, based on plotting some history stats on a chart.
It treats the Unemployed, as just 'another tool' for regulating inflation and interest rates -- rather than as the direct cause for those Supply-Sider products, gathering so much dust on all those Say's Law shelves.
Phillips curve
wikipedia
In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation. While it has been observed that there is a stable short run tradeoff between unemployment and inflation, this has not been observed in the long run.
The basic Phillips Curve idea – economic trade-offs
scribd.com
In 1958 AW Phillips from whom the Phillips Curve takes its name plotted 95 years of data of UK wage inflation against unemployment. It seemed to suggest a short-run trade-off between unemployment and inflation. The theory behind this was fairly straight forward. Falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise. If the Government wanted to reduce the unemployment rate, it could increase aggregate demand but, although this might temporarily increase employment, it could also have inflationary implications in labor and the product markets.
[...]
The expectations-augmented Phillips Curve
The original Phillips Curve idea was subjected to fierce criticism from the Monetarist school among them the American economist Milton Friedman. Friedman accepted that the short run Phillips Curve existed -- but that in the long run, the Phillips Curve was vertical and that there was no trade-off between unemployment and inflation.
He argued that each short run Phillips Curve was drawn on the assumption of a given expected rate of inflation. So if there were an increase in inflation caused by a large monetary expansion and this had the effect of driving inflationary expectations higher, then this would cause an upward shift in the short run Phillips Curve.
Phillips Curve has been largely discounted as anecdotal and very short-term in scope, in the light of several follow-up studies, using more sophisticated and modern-era data.
The prime mover mucking up Say's wealth creation story, these days is largely seen to be imperfect Monetary Policy.
The Supply-Siders will commonly complain, the Fed is not providing enough 'economic grease' (liquidity) to help them (the wealth creators) get their goods to market, at the lowest possible cost -- where ever those markets may be. Be they markets for Labor or markets for Goods, it is low-low-low interest loans, that moves it all, from product creation to $10000's in their bank accounts.
The Supply-Siders will rarely acknowledge, that the Fed has a responsibility to spur the Demand-side of economies too. Because if they did, the follow-up Keynesian arguments, might expect them to actually raise their workers' wages too, in order increase Consumer Demand. And Increasing Wages means fewer $10000's in their bank accounts.
Monetary policy is the subject of a lively controversy between two schools of economics: monetarist and keynesian. Although they agree on goals, they disagree sharply on priorities, strategies, targets, and tactics. As I explain how monetary policy works, I shall discuss these disagreements. At the outset I disclose that I am a Keynesian.
[...]
Monetary policies are demand-side macroeconomic policies. They work by stimulating or discouraging spending on goods and services. Economy-wide recessions and booms reflect fluctuations in aggregate demand rather than in the economy’s productive capacity. Monetary policy tries to damp, perhaps even eliminate, those fluctuations. It is not a supply-side instrument (see supply-side economics). Central banks have no handle on productivity and real economic growth.
[...]
A. W. Phillips’s famous curve (see phillips curve) showed wage inflation varying inversely with unemployment. Keynesians were tempted to interpret it as a policy trade-off: less unemployment at the cost of a finite boost in inflation. Milton Friedman convinced the economics profession in 1968 that if monetary policy persistently attempts to bring unemployment below “the natural rate of unemployment” (the rate corresponding to Keynes’s “full employment”), it will only boost the inflation rate explosively. Friedman’s further conclusion that monetary policy should never concern itself with unemployment, production, or other real variables has been very influential. But in situations of Keynesian slack, as recent American experience again confirms, demand expansion can improve real macroeconomic performance without accelerating prices.
Monetary Policy
by James Tobin
The Concise Encyclopedia of Economics
Library Economics and Liberty
Well, like the weather, everyone complains about the Fed, but few stop ask what goals does the Fed have in mind, whenever he/she decides to crank up those economy-moving 'printing presses' ...
Monetary policy
wikipedia
Theory
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.[1] [...]
Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. [...]
History of monetary policy
[...]
Monetarist economists long contended that the money-supply growth could affect the macroeconomy. These included Milton Friedman who early in his career advocated that government budget deficits during recessions be financed in equal amount by money creation to help to stimulate aggregate demand for output.[9] Later he advocated simply increasing the monetary supply at a low, constant rate, as the best way of maintaining low inflation and stable output growth.[10] However, when U.S. Federal Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it was found to be impractical, because of the highly unstable relationship between monetary aggregates and other macroeconomic variables.[11] Even Milton Friedman acknowledged that money supply targeting was less successful than he had hoped, in an interview with the Financial Times on June 7, 2003.[12][13][14] Therefore, monetary decisions today take into account a wider range of factors, such as:
* short term interest rates;
* long term interest rates;
* velocity of money through the economy;
* exchange rates;
* credit quality;
* bonds and equities (corporate ownership and debt);
* government versus private sector spending/savings;
* international capital flows of money on large scales;
* financial derivatives such as options, swaps, futures contracts, etc.
"Other macroeconomic variables" is that what the kids are calling the Fed's "wider considerations" these days?
SO, regulating the Money Supply to match our natural rate of Economic Growth and match our Population Growth too, has become too blase, too basic, in today's Over-levered, Under-regulated economic world; Apparently. I wonder how that focus on "wider considerations", turned out for the supply siders last decade, anyways?
Given the chaos that a wild-west free market could leave you,
What is a lone Federal Reserve Chairman to do to fix it ... And what would the original Supply-Sider say, if he did?
What Would Milton Friedman Say about Fed Policy Under Bernanke?
by David Beckworth and William Ruger, Cato Institute
This article appeared in Investor's Business Daily on October 20, 2010.
[Friedman, who won the Nobel Prize in 1976, helped interpret and popularize so-called supply-side economics, which came to dominate much of U.S. public policy in the second half of the 20th century.]
[...]
So what would Milton Friedman say about our current monetary policy?
First, low interest rates do not necessarily mean monetary policy is loose.
Friedman criticized the policies of the Fed in the 1930s and the Bank of Japan in the 1990s on this very point. Both central banks claimed to be highly accommodative at these times, pointing to low interest rates as evidence of easy monetary policy. Friedman countered, however, that low interest rates may reflect a weak economy rather than easy monetary policy.
[...]
Fourth, the Fed is not out of ammunition.
Friedman believed central banks are never constrained in their ability to shape nominal values. The only requirement is a desire to do so. Thus, Friedman argued that the Bank of Japan could have removed deflation and stabilized nominal income in the 1990s had it persistently stuck to a higher money growth rate.
For Friedman, worries about "pushing on a string" (because the Bank of Japan had almost reached the zero bound on its policy interest rate during this time) were a red herring. Only a commitment to a higher money growth rate was necessary.
Similarly, were Friedman alive today, he would balk at the notion that the Fed is out of ammunition. He would remind us that in the early-to-mid-1930s, when the economic environment was far worse and short-term interest rates were near the zero bound, monetary policy easily generated a recovery. Therefore, the Fed could do likewise today.
Maybe, just maybe, truckloads of cash at almost 0% interest, don't move the right economic mountains afterall ???
-- especially when all that cheap-money doesn't make into the hands of those who matter most in a Keynesian world: those 'aggregate consumers' -- ie. the people and the small businesses and the govt agencies, with enough cash (or cheap-credit) in hand, so that they can become the buyers -- and wealth creators -- of last resort.
Afterall the Monetary experience garnered in Japan's Lost Decade, might just prove the theoretical bankruptcy of Say's Law, if anyone would bother to research it.
Simply producing an ever more expensive Supply of Real-Estate -- did wonders to their Economy, once those prices inevitably fell back to earth, didn't it? That "over supply" may have "created wealth" for some -- those fleet enough to Take the Money and Run -- but only at the overwhelming "dearth of wealth" to Japan's other economic participants, at large.
In other words: The everyday Bag Holders. The reverse wealth-effect citizens, left in a cloud of supply-side dust.
Perhaps Americans, should try to learn from Japan's supply-side pain? Perhaps some already have?
Monetary Policy and Japan’s Liquidity Trap
Lars E.O. Svensson (Princeton University, CEPR, and NBER)
www.princeton.edu
Abstract
During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level. Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates. [...] Expectations of a higher future price level would lead to current depreciation of the currency. Quantitative easing would induce expectations of a higher price level if it were expected to be permanent. The absence of a depreciation of the yen and other evidence indicates that the quantitative easing is not expected to be permanent.
The U.S. Fed has taken a serious Quantitative Easing monetary path the last year or so -- although he has recently signaled that pump-priming era is now closing, too. Apparently, his Liquidity-bridging efforts worked -- somewhat anyways.
What the heck is Quantitative Easing? Short answer: The U.S. Treasury becomes a "Consumer of last resort" .. the thing they are consuming (ie. creating confidence-building credible in) -- is Bonds.
Even including Mortgage Bonds ... the ones still suffering from a systemic Toxic Supply-side hangover ...
Quantitative Easing 101 (part 4): Consumer Q&A, Timeline, Rate Chart
by TheBasisPoint, November 2nd, 2010
Quantitative Easing is one of the most used financial phrases of 2010 so homeowners and buyers need to know what it means. The core definition is simple: it’s when the Fed buys bonds to lower rates. [...]
What Is Quantitative Easing (QE)?
QE is when the Fed buys bonds to lower rates. It was introduced in the U.S. during the heat of the financial crisis in late-2008 as a way to stimulate a severely ailing economy.
[...]
How does QE help mortgage rates?
The Fed engages in two kinds of QE: Treasury bond buying to lower overall rates in the economy, and mortgage bond buying to lower home mortgage rates. The Fed spent $1.25 trillion buying mortgage bonds from January 2009 through March 2010 which helped 30yr fixed rates to drop 1% during this period: 30yr fixed rates dropped from 6% to 5%.
Well, did the Fed's QE market shelf-clearing effort work?
There are some signs that it did. The economic forecasts for the U.S. in 2012 are looking up, assuming the Europe's easy-money supply-side fallout, doesn't swamp out the fledgling-confidence fire, starting to catch hold this side of the supply & demand pond.
Bernanke Money Policy Seen Achieving Goal as Savers Become Consumers Again
by Rich Miller, Bloomberg News - Dec 21, 2011
Federal Reserve Chairman Ben S. Bernanke finally may be catching a break: His easy-money policies are showing signs of speeding up the economic rebound three years after he cut interest rates to zero.
Housing may be nearing a bottom as record-low mortgage rates tempt more buyers into the market and confidence among homebuilders climbs to the highest since May 2010. Autos, another part of the economy sensitive to interest rates, are reviving, with carmakers reporting in November their highest sales pace in more than two years.
Banks also are starting to put more of their money to work, expanding commercial and industrial loans last quarter by the most since Lehman Brothers Holdings Inc. went bankrupt in September 2008.
[...]
More Bad Luck
More bad luck may be in store if Congress fails to extend a payroll-tax cut and special unemployment benefits beyond the end of the year. That could knock a percentage point off growth in 2012, reviving fears of a double dip, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.
[...]
“We see the unemployment rate at 8 percent at the end of 2012,” Maki said Dec. 14 in a radio interview on “Bloomberg Surveillance” with Tom Keene, compared with 8.6 percent last month. It will fall faster than many forecasters expect, in part because “more and more of the baby boomers are retiring every month,” he added.
Well thanks for making it this far, if you have.
What about my conclusions, on this academic "Supply-Side Economics is dead ... Long live Supply-Side Economics" debate?
Well, I'm a Keynesian. I think gainfully employed workers move markets, create demand, help an economy grow. One only has to look at the consumer-led booms of the past, to see our key role. When most people can afford to go to college, afford to buy a house, or start a business, our economy grows.
When the opposite happens, when the average person is afraid, for their future, afraid to spend, well Economic tides go out, and are very slow to come back.
The best economic recovery plan is a good job.
Americans need to learn to put more faith in our people, and less in tired old theories ... of dead economists, from the Mercantile Age.
If unregulated free markets were truly self-correcting ... if shelves were truly self-clearing and wealth creating ...
as Supply-Sider have contended, ever since Friedman convinced Reagan to focus on the needs of the 1%, to the exclusion of the economic impact of the 99% ...
If all that were true, would the last Fed Chairman had to have sheepishly admit before Congress -- that he was wrong about his faith in such purely functioning markets?
Greenspan Makes Friedman Eat His Words
http://youtu.be/...
Greenspan: I made a mistake in presuming that the Self-Interest of organizations, specifically banks and others, was such as they were best capable of protecting their own shareholders and their equity in the firms.
Indeed he admits to being "shocked" by the "break down of a critical pillar of market competition and free markets" ...
And what was that shocking "critical pillar" that crumbled, as Greenspan put it?
Greenspan: "the loan officers of those institutions [banks and others], knew far more about the risks involved in, to the people to whom they lent money, than I saw even the best regulators at the Fed were capable of doing."
Perhaps Greenspan was shocked even further by the pointed questioning he received from this champion of the 99% real Americans?
Senator Sanders: "I would urge you, come with me to Vermont. Meet real people. The Country Clubs and the cocktail parties are not real America. The Millionaires and the Billionaires are the exception to the rule."
Greenspan Grilling brought to you by Bernie
http://www.youtube.com/...
Someday, something better, needs to replace Supply-Side Theory. And those of us, living in the 99% zones of Real America, need to be able to articulate such people-based economic alternatives.
Because as President Obama put it quite simply in his recent watermark speech, with respect to Supply Side theory:
Obama: It doesn’t work. It has never worked.
Here's the longer version:
Obama: “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes -- especially for the wealthy -- our economy will grow stronger. Sure, they say, there will be winners and losers. But if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And, they argue, even if prosperity doesn’t trickle down, well, that’s the price of liberty.
Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. (Laughter.) But here’s the problem: It doesn’t work. It has never worked. (Applause.)
here's the link to the longer version yet
It may be time for another refill ... thank you for your time.
Here's to hoping 2012 will truly be a year of recovery ... goodness know the people need it ... the 99% of us, that is.