Advertisement

Commentary: The return of supply-side economics

December 13, 2012|By Chriss Street

The Great Recession was primarily caused by the collapse in economic demand as 80 million baby boomers born between 1946 and 1964 moved out of their peak spending years in their mid-30s to mid-50s and into retirement in their late 50s and early 60s.

The U.S. government over the last five years squandered $7.6 trillion on Keynesian demand-side stimulus trying to resuscitate this demographically shrinking demand. With only 23 million born between 1995 and 2012 that comprise Generation Z, this population is just too small for demand-side stimulus to revive the economy. America is now deep in debt, facing 23 million unemployed, and needs to fund the baby-boomers' retirement. Consequently, politicians are being forced to abandon demand-side stimulus and re-embrace supply-side economics.

The Revolutionary War was sparked by Great Britain's demand that the American colonies pay increasingly higher taxes to support England's expanding national debt. Once independent, Congress adopted the 10th Amendment to the Constitution that created a "free-trade-zone" between the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay off any outstanding national debt. These policies created an economic boom that allowed the United States to be debt-free by the 1830s.

Advertisement

This concept of encouraging long-term economic growth by lowering taxes on income and reducing regulatory burdens that serve as barriers for people to produce goods and services is referred to as supply-side economics. The Founding Fathers understood that a greater supply of goods and services produced increases demand by lowering prices for consumers.

But during the Great Depression, Washington politicians abandoned supply-side and imported Keynesian demand-side economics from Great Britain. Demand-side economics argues that in the short run, productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand may not always equal aggregate supply (the total productive capacity of the economy) because private-sector decisions often lead to inefficient market outcomes. Therefore, government should create demand through targeted spending. Armed with this smoke-screen, U.S. short-term spending has risen every year since 1948 as politicians always found some inadequate market demand that needed more spending.

Daily Pilot Articles Daily Pilot Articles
|
|
|