Supply-Side Economics Not Working...

...and neither are you?

Here’s the theory: Taxes are a drag on the economy. They suck resources from the private sector that could be put to work helping to grow the economy. So when the economy starts to sag, the proper thing to do is cut taxes — particularly taxes on business and the entrepreneur class. Any shortfalls in government revenue will be temporary because the resulting economic growth will raise government revenues as the economy (and hence the tax base) grows.

Of course Reagan tried this back in the early 1980s, and the results were not good. The federal deficit ballooned out of control and the economic stimulus was minimal. Indeed, the near–instant explosion of federal debt made Reagan raise taxes almost every year for the remainder of his time in office. You might think that the demonstrated failure of the supply–side theory on such a grand scale would be enough to consign it to the dustbin of history. You would be wrong.

Enter the current president and his team. Supply–side theorists one and all, they were ready to succeed where Reagan could not. As we know, Bush and his crew have slashed income taxes at the top and corporate taxes at all levels. Taxes on investment–derived income such as dividends were halved. In all, a near–perfect implementation of supply–side economics - but it hasn’t worked. Or it at least hasn’t worked the way proponents of supply–side theory claim it should. Yes, GPD is up (even though 2003 Q4 GDP slumped to 4%, that’s still a respectable number), but jobs and job growth are nowhere in sight. Bush’s tax cuts have ostensibly pumped billions upon billions of dollars into the economy, and all we’ve got to show for it is more pink slips.

But Bush has made it very clear that, should he win a second term, he’ll be lavishing more and bigger tax breaks in the same two places where they haven’t worked. Clinging to supply-side theory to the bitter end, Bush and his crew may find themselves repeating the words of another American president:

“Died of a theory” was Jefferson Davis’s suggested epitaph for the Confederacy.

:m: Peace.

 

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The economic problems in the US are highlighted by the fact that major corporations are making profits again, and revenue is up. But jobs aren't being made; there are several reasons for this:

i) Productivity is way up, thus more can be done with one employee rather then two, cutting payroll and increasing profit.
ii) Jobs are being created in droves; American jobs are not being made in America rather they are being made in China, India, and other major FDI host states.
iii) Americans are simply too expensive.

The taxes have very little imo to with the job market. All taxes do is generate money for the government, which is necessary. The US now has the largest deficit ever, in 2003 the deficit was $375 billion or 6% of the GDP, in 2004 it is estimated that it will be over $500 billion out of an $11.4 trillion economy. The issue is much more then Bush's tax cuts, and Bush is not totally in control of what is happening in the US today. Sure Bush's $1.2 trillion tax cut for the rich is not very smart, the US would have to grow rather significantly to make up just the lost revenue, and grow even faster to make new revenue. By the looks of it, the US economy will not grow that fast. The deficit should grow, even though Bush says he can cut it in half. It is estimated that if Bush wins another term, the US will add another $5 trillion to her already huge debt load. This "trickle down economics" simply doesn't work apart from those who benefit from the tax cuts. I have never seen it work before. Another thing that the US suffers from is de-industrialization, the US is exporting less and less and importing more and more.

In 1950 the US consisted of 16% of all exports, and 15% of all imports, thus a surplus.
In 1975 (the last year of surplus) the US consisted of 12% of all the worlds exports, and 11% of imports.
In 2002 the US consisted of 10% of all exports, and 18% of all imports.

The US has gone from one extreme to the other within 27 years. The US has to import $100 billion more then exports to China, and that is expected to grow to $300 billion by 2005. The US is facing the triple D, Debt, Deficit (budget) ,and Deficit (trade), the other D happens (deflation) then the US has stepped it’s second foot in the grave. The last one is out of Bush's control, but the former are within his control. The US will slowly implode economy; it has to in order for Globalization to work.

 

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Would supply side economics work better if they targeted middle class suppliers and ignored upper class ones?

Also, would this theory be working better if we weren't exporting our jobs to other countries?

 

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You make some good points about supply-side and the potential consequences, the main one being budget deficits. Debt is not an inherently bad thing for a government to have, but I think there exists some sort of happy-medium level of debt relative to the GDP. Obviously the U.S. is way over that level, whatever it is. This may not be the best system to stimulate the economy, but I haven't heard any better alternatives from the Demo candidates. Raising taxes certainly isn't going to help.

I lived through the disastrous economic policies of the Carter admin and I will never forget the hardship that the interest rates of that time put on people in my life. Whatever happens, and whoever gets elected, the most important thing is to manage the rates and keep them low. Not necessarily as low as they have been of late(not that I'm complaining. Just re-fied the house last spring)

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, but certainly never let them creep into double digits again.

 

So why hasn’t supply-side worked?

The biggest cuts (and the overall bulk of the cuts) in personal income taxes went to the top 1% of earners. Those people pocketed the extra cash: the money went into savings and non-productive investment (non-productive meaning investments that have no effect on economic output — treasury bills, for example). So only a tiny fraction of that part of the supply-side pump made it back into the economy. The remainder of the personal income tax cuts got doled out in small packages to middle- and lower-income wage earners. Already strapped by the sagging economy, those people did what the supply-siders hoped they’d do: they spent the dough. The 8% GDP growth of Q4 in 2003 is testimony to the tax checks arriving in the hands of those people. The GDP slump in Q4 is testimony to the short-lived effect of that.

What about the corporate tax cuts? Businesses did what the top 1% did: They pocketed the savings. And why not? Industrial capacity utilization is still stuck at around 75%, so there’s no point in investing in new plants and equipment (which would create jobs). And with the economy not doing real well, the tax cuts sure make it easier to bolster the bottom line (thus helping those all-important stock prices).

Meanwhile, Bush has spent the last year pushing the dollar down in an effort to bolster sagging U.S. exports and bring the trade deficit under some control. But that’s not working out, either. U.S. exporters have taken advantage of the dollar’s fall to raise prices. Instead of boosting the volume of exports (which would begin to take up some of that excess industrial capacity and thus create jobs), exporters are cashing in on windfall profits while leaving American-made goods no more competitive overseas than they were before.

The end results are what we have today: GDP growth without job growth. Barring some serious policy changes, the outlook is not good - especially with Bush pushing to make the tax cuts permanent.

At this point, there really is only one way out of this mess and that is to bolster demand. To a large extent, the American consumer carries the world economy on his back. If American consumer demand can be increased, it cannot help but drive all other sectors of the economy upward. The monstrous GDP spurt of 2003’s third quarter demonstrates that quite well.

It also demonstrates that the supply-side remedy, at least as applied by Bush, was applied in the wrong place.

:m: Peace

 

In theory it works well enough, within a closed system, ie a country with minimal imports/exports. I need to go read some keynes. Why is htis called supply side economics? All I can see is demand that is lacking money, and suppliers withe xcess capacity, but unable to fulfill the demand. some basic keynesianism woudl work here, thats one reason why the gvt has spent so much money, and how spending on the military helps, but ultimately, unless the gvt money is spent on things that will feed back into a virtuous circle involving increaased production and consumption, then its no use in the long term. Time to rethink your money supply, folks.

 

Demand? how? Everyone is in debt, and interest rates cannot get any lower. In tehory, the recession is supposed to be tempered by consumers spending on credit until produciton etc can be brought back up to speed and efficiency, and then power out of the recession no the back of a renewed wave of optimism. or something like that. But in the real world, what prevents that from happening is as undecided says, the attractions of abroad for the manufacturers. Those who live by the sword, die by the sword.

 

Exactly right fraggle rocker. But strictly speaking there hasnt been a free market since the days before or during mercantilism. It is impossible for there to be such a thing IMO.
I am getting part of the wealth of nations for my christmas present, but its not here yet.

 

A careful analysis of supply-side economics sees the trees but not the forest. I submit that everyone who matters knows that supply-side is a joke. A joke at the expense of the average American, to the benefit of the rich. Republicans have to promise to enact supply-side to get the campaign contributions they need. That’s really the only meat there is to the subject.

 

In today's globalized world cutting taxes for the rich, and TNC's give them more incentive to leave the country, and set up shop in Shanghai, rather then in Ohio. The economic disaster that this economic theory has on America is disasterous, this is basically like corporate welfare, letting the working class in the US pay up the tab 20 yeras down the line. I don't think the US wants to end up like Argentina but it sure does look like it really wants to...

 

Bush et al do want the US to end up like Argentina, where the rich are proportionately richer. That’s always been the Republican nirvana.

 

If true, then Malthus would have loved Bush. I think Americans should really seriously look at the economic debacle in Argentina for a guide for a very likely American future. Unemployment was over 20% in Argentina, half the countries population was almost instantaneously plunged straight into poverty. Bank accounts frozen, in neighboring Uruguay a almost total banking collapse (saved only through loans). The saddest thing about that economic meltdown is this, it was primarily caused because of currency jitters, and investor confidence after the Asian currency collapse in 1997-98 and the Russian collapse, the Argentines began to have troubles with those pesky debt payments. Argentina owes so much debt that she loaned money to pay off the interest on older loans! Argentina sold huge amounts of nationalized companies (like the UK) and now suffers from a whole multitude of problems. Now Argentina needs further loans to get back up from the collapse, thankfully the country is growing again, but it is merely making up what was lost. About 15% of the GDP vaporized, in about a span of 2 years. This is coming to you America very soon if this cycle of spend and borrow doesn't stop, soon enough America will not be immune to such things. Although I am wondering what exactly makes you think that Bush wants that aforementioned disaster?

 

Simple. By choosing it, he gets 8 years as world’s most powerful person, exclusive use of a plush 747, $millions after he leaves office, plus half the population (the ignorant & the rich) declare him demigod. Many people would trash a country for that.

 

Pinochet syndrome, oh my. The US has a serious problem on it's hands, and I the questions lies on how long it will take for the US to get out of it's budget deficit, and if the US can hope to cut's import deficit.

 

I wouldn't bite down on that Cyanide pill just yet. There are abundant signs of growth in the local economy around here, and not just the furious rate of new call centers being expanded, but rather real jobs, manufacturing jobs. Please don't be offended by my statements if you work at a call center, it's simply a reality that call centers, while a nice addition in that they provide abundant opportunities for entry level workers and a promise of guaranteed hours, they don't really provide much in tax revenue for the local economy, and generally max out wages at the $12-14 range. Conversely manufacturing jobs in this area often start at $19 per hour and go up from there. PBR is a great example of an overseas(Au) company that has come in and built a new plant, hired locals and provided very nice wages for those willing to work in a state of the art mfg. facility. Denso is another great example of this type of investment in an American community. What's the answer? No labor unions, low taxes, agressive Economic Development agencies and a populace known for a strong work ethic. Don't give up so easily goofyfish. Thinks are starting to get hoppin around here. Maybe the same will happen in your neck of the woods.

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Oh, almost forgot. Hit it.
http://www.ecommercetimes.com/perl/story/32626.html

 

The American consumer is upto his neck with personal credit at 30% interest rate or more if you add all the fees the banks collect. If the interest rate can be lowered, that itself can free up disposable income to buy more stuff

That is true, last time I checked the American consumer debt was at about $2 trillion, add that the $7 trillion of the US government you have about 78% of the US GDP. The US economy is dependant on debt. This will only bit the US in the long term where debt becomes such a large burden the consumerist society could collapse, alas the Great Depression all over again. If you were to add mortgages you have another $7 trillion worth of debt, so altogether debt consists of 140% of the US GDP. The same problem precipitated the Great Depression a mere 75 years ago.

http://www.washingtonpost.com/wp-dyn/articles/A10011-2004Jan12.html

Only saving grace so far has been cheap imports from China!

The odd thing that is the same thing that will eventually do you in.

All heavy industry products would still be cheaper manufactured in US.

Can you support that? I mean steel is significantly cheaper in China for instance, the only thing I can see making foreign heavy industrial goods more expensive to the US market is tariffs.

 

The Brits make some decent stuff too, but they've lost a ton of business in the last few years to American companies that have had to start fabbing it here to save money.