The school of economic public policy known as "supply side" is out of favor, but it is not as dead as it looks. The theory works. The production of goods and services does indeed create its own demand. Otherwise, low productivity countries would be wealthy. Jamaica would be as rich as Singapore. As Josh Lerner points out here: "In 1965 the two nations were equal in wealth. Four decades later, their standing was dramatically different. What accounts for the difference?"
Lerner answers his own question:
Soon after independence, Singapore aggressively invested in infrastructure such as its port, subsidized its system of education, maintained an open and corruption-free economy, and established sovereign wealth funds that made a wide variety of investments. It has also benefited from a strategic position on the key sea lanes heading to and from East Asia. Jamaica, meanwhile, spent many years mired in political instability, particularly the disastrous administration of Michael Manley during the 1970s. Dramatic shifts from a market economy to a socialist orientation and back again, with the attendant inflation, economic instability, crippling public debt, and violence, made the development and implementation of a consistent long-run economic policy difficult.
But in explaining Singapore's economic growth, it is hard not to give considerable credit to its policies toward entrepreneurship. The government has experimented with a wide variety of efforts to develop an entrepreneurial sector:
--Providing public funds for venture investors seeking to locate in the city-state; --Subsidies for firms in targeted technologies; --Encouraging potential entrepreneurs and mentoring fledgling ventures; --Subsidies for leading biotechnology researchers to move their laboratories to Singapore; --Awards for failed entrepreneurs (with a hope of encouraging risk-taking).
In other words, Singapore invested in supply. It built infrastructure with government funds. It kept taxes low, regulations light, trade open and laws simple but rigorously enforced so as to encourage private investment.
President Obama is a thorough-going demand-sider. The $787 billion stimulus package, tax "cuts" for people who aren't paying taxes, Cash for Clunkers--could it be any clearer? Demand side has a fatal flaw. It takes the production of goods and services for granted. Demand side takes you to Jamaica, not Singapore.
The critics of supply side argue that it, too, has a fatal flaw: deficits. Does it? Sure, when government spends more than it takes in.
Supply side, in fact, is the only way out of the deficit nightmare. Consider these facts: The privately held net worth of the U.S. is somewhere around $50 trillion--about $165,000 per capita. That's stocks, bonds, cash, real estate net of mortgages, the whole shebang. Two years ago the privately held net worth of the U.S. was about $65 trillion, so we're down, no surprise.
Now try this thought experiment. What would happen to the privately held net worth of the U.S. if just two policy levers were pulled: (1) capital gains taxes were permanently lowered to 15%; (2) the Fed and U.S. Treasury announced a strong dollar policy?
My guess is that commodity speculation would slow, stocks would rise, real estate would stabilize and begin to climb, and small businesses would start investing in their future once more. Opportunity would abound and investment capital would flow into the U.S. The privately held net worth of the U.S. would go from $50 trillion to $80 trillion in three years.
Moreover, because of low taxes, that privately held net worth would turn over more frequently. If it turned over just once on its three-year trip from $50 trillion to $80 trillion, the capital gains taxes would be $4.5 trillion (15% of $30 trillion). That would be $1.5 trillion of capital gains taxes generated per year.
In 2009 the U.S. ran a fiscal deficit of $1.4 trillion. Since the federal government is known to play accounting games that would get you, me and Bernie Madoff tossed in jail, let's round it up to $1.5 trillion.
Question for President Obama: Would you rather close the $1.5 trillion annual deficit by unleashing the assets and creativity of the American people? Or will you try to close it by taxing the American people into a long plague of malaise and stagflation?
Do you really want to bet your presidency on the demand side, Mr. President?
Post your comments below.
I hate the premise of the entry that the only way out of our mess is to adopt supply side economics. I hate it when anyone becomes narrow minded into thinking that the solutions they offer are the only ones which would work.
Different economic models work for a wide variety of reasons. For example, Sweden is a very socialized country with a relatively high standard of living.
Bush was a supply sider â?? didnâ??t his economic policies contribute to the economic meltdown that we are currently experiencing?
Rich, The example of Singapore is well and good, but lacking in context. The M1 money multiplier is under 1 i.e., money supply is contracting. http://research.stlouisfed.org/fred2/series/MULT If you discuss supply-side without engaging the issue of private sector debt, you will be seen as a one-trick pony with no real understanding of the underlying issues.
Rich writes â??What â?¦ if â?¦ (1) capital gains taxes were permanently lowered to 15%; (2) the Fed and U.S. Treasury announced a strong dollar policy?â?
Rich, youâ??re sliding into the Twilight Zone. Your musings have no relationship with reality.
If you think your GOP friends would embrace either of these ideas, youâ??re flat out wrong. They are just as complicit in the mess weâ??re in right now as is Obama. Do you really think we would be in much better shape if it was President McCain? I think not.
Rich, as Iâ??ve shown before, â??supply sideâ?? has been PROVEN to fail. It was an utter failure under GW Bush and a majority of Republicans in BOTH houses, yet you really expect President Obama â?? or anyone â?? to consider it as a actual policy? Come on.
So, if itâ??s so wonderful, why didnâ??t the â??conservativesâ?? actually enact said policies? Because they know they do not work. Period. They just say it cause it makes people happy â?? to think they can CUT taxes and still live as theyâ??ve grown accustomed to. Itâ??s a political dodge, a con. Why are you promoting it, I have to ask?
And as I wrote a few days ago (here: http://brianshall.com/content/your-consolation-prize-living-hand-mouth-time-great-reset) this graphic from the Fed shows fully how the moment we went all â??supply sideâ??, consumers had no other choice but to choke down massive unprecedented amounts of personal debt. Itâ??s not only a government failure, but a personal one as well.
Time to put that brain and all those connections to work coming up with a solution that does work. It aint supply side!
Also, and I really do hate to pile on, but simply re-read the very first statement of your quote. What did Singapore do?
GOVERNMENT â??INVESTMENTâ? GOVERNMENT SUBSIDIES TIGHT REGULATIONS
Is this what you are proposing? Is this what ANY Republican would propose? What, really, is the purpose of that quote then? Youâ??re all over the map.
And for crying out loud, donâ??t even get me started on that â??strong dollar policyâ?? charade. The Republicans under GW enacted a new entitlement giveaway (as your magazine recently noted) that cost more than the current â??Obamacareâ?? plan. You cannot have a strong dollar policy AND massive unfunded entitlements.
You are way off your game, today, sir. I expect itâ??s because you are (irrationally) clinging to a set of policies and principals that are rapidly becoming extinct. They are now around in name only. But are not serious.
Brianshall,
Supply side â??provenâ? to fail? Not likely. But then again, one can always appeal to the failure to allow free markets. Human nature is such whatever economic policy is enacted, demand side or supply side, that people will take advantage where they are able, and seek as much security as possible. The conflict between differing economic ideas is as much responsible for the dynamic as any intrinsic part of a particular theory.
What can be proven is that when you spend money that you donâ??t have, eventually your creditors will stop footing the bills, and you will go into bankruptcy.
The US is bankrupt as we speak, but there is no possibility of repudiating debts without major tribulation reverberating throughout the world economy. Chinese financiers are laughing at Tim Geitner when he says that US securities are guaranteed.
We are headed for a 2012 level catastrophe in the world economy unless we can reign in profligate government corruption and spending.
- Paul H
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