Every so often it’s useful to remember for readers the dismissive line from John Maynard Keynes about his numerous disciples in the economics profession. Asked admiringly about his flock by Friedrich Hayek, Keynes referred to them as “fools.”
Arthur Laffer is far too gracious to say the same about self-proclaimed supply siders, but the wager here is that he not infrequently sighs about some who claim kinship. Probably more bothersome are the critics who don’t know what they’re criticizing.
Indeed, the bet here is that if you asked critics what “Supply-Side Economics” is, most would say it’s a theory about tax revenues that says a lower rate of taxation often yields a higher tax-revenue haul. It's a foolish try.
More realistically, supply-side economics is a simple statement of reality: in order to consume we must produce first. Since consumption is what happens after production, the goal of economic policy should be to remove the barriers to production. Taxes are a penalty, or price placed on work and investment, so always and everywhere strive to reduce them. Regulations are wholly superfluous in markets looked over by the ultimate regulator (competition), so erase government control that empowers those who could not get jobs in certain industries to oversee those who could. Money is the agreement about value that makes it possible for producers to exchange with each other, and by extension specialize on the way to enormous productivity, so maintain a currency the value of which is as unchanging as the foot, minute, and teaspoon are. Trade is the purpose of all of our production, so remove any tariff barriers that act as a tax on our production.
Supply-side economics is merely a cheerful acknowledgement that free people are best positioned to produce. Leave them alone so that they can pursue their bliss. Put another way, supply-side economics is a statement of reality about human action; albeit one butchered by proponents and critics alike.
Add Treasury secretary Janet Yellen to the list of supply-side critics who is wholly confused about what it is she’s criticizing. In a recent speech before the World Economic Forum, Yellen pointed to the Biden administration’s infrastructure proposals, child care, paid leave, and global warming initiatives as “Modern supply-side economics.” She said what?
Yellen’s statement implied that erecting barriers to production is the path to economic progress, and that doing so rates a “modern supply-side economics” descriptor. Except that there’s no connection to be made between the two. Yellen would have been much more reasonable had she said the Biden administration’s proposed policies are a rejection of supply-side. Because they are.
That is so because President Biden has been more than clear about a desire to increase the spending footprint of government. The problem there is that government spending is by its very name a huge tax on production. In order for individuals to enhance their output, and for businesses to improve their processes for production, they need access to forward-looking capital. Government spending logically limits the amount of funds in search of progress. So do other forms of forced compassion.
The Biden administration would like government to provide child care and paid leave benefits, but both come at a cost. Which is no insight. Government can only provide benefits insofar as actual producers have less. Put another way, government can’t vainly attempt to lift some of us up without pushing some of us down. Again, it’s something about costs. Please keep this in mind with government spending top of mind. It’s a tax. So are benefits a tax. This is true even if they’re mandates.
For government to force businesses to provide child care and paid leave benefits is for government to raise the cost of producing. Get it? Businesses add workers on the assumption that their output will exceed the costs of adding them. Extra mandated benefits raise the cost of hiring workers in the first place, not to mention that higher costs for merely employing workers limits the flow of capital to corporate initiatives that actually enhance production.
What about “climate change initiatives”? These imply that how we the people live and work is having a negative impact on the environment. Government will intervene in what we do in pursuit of a better environmental outcome. Oh well, if we ignore the absurdly arrogant assumption by politicians that they know better than we do how to maintain the world around us, the reality is that any policy changes meant to bring life to the policy yearnings of the political class will limit what we would otherwise naturally do. In short, initiatives taken with the theory of global warming in mind will be freedom limiting. They’ll be a barrier.
It’s all a long way of describing in relatively short fashion that what Yellen imagines is “modern” supply-side economics quite simply isn’t. Yellen is cheerleading policy proposals that will limit human progress, not enhance it.
Except that it gets worse, or more foolish. Yellen claims that the “old supply-side economics” was “a failed strategy for increasing growth.” About this, if it can be agreed that “supply side” reached its influence peak in the early 1980s and beyond, it would be hard for any reasonable person to dismiss it given market indices that are up something along the lines of 40X since 1980. Except that Yellen isn’t terribly reasonable. We know this because her husband George Akerlof says he and his wife have “always been in all but perfect agreement about macroeconomics.” Yet Akerlof co-wrote arguably the most ridiculous book on economics in the annals of economics writing (review: here).
Yellen’s reason aside, it’s really not the point. You see, reasonable people should be for reducing barriers to human action even if it does result in slower growth. Freedom is the primary goal, not growth. Which means Yellen has bigger problems than a misunderstanding of supply-side economics. Dismiss her because she’s controlling.
