Saturday, October 4, 2008

Demand Side Economics

What went wrong with the U.S. economy? Was it corrupt politicians? Greedy speculator? Irresponsible consumers? I don't think so. All of those factors are with us all the time, in good times and in bad. I believe this was a major policy mistake. We did an about face from Supply Side policy and turned to Demand Side.

After 9/11 what did the administration appeal to people to do? Go shopping. Later, to increase home ownership, policies were implemented by Congress and the administration, not to decrease the cost of the home, but to make it easier and cheaper to get the money to buy one. When the economy continued to slow, we were all sent checks from the government and told once again, "go shopping". Now, the government has decided to give banks a massive injection of cash so they can more readily loan it to us so we can guessed it, go shopping. All of these things were aimed at increasing consumer spending without any real market stimulus for doing so.

Ronald Reagan was an advocate of Supply Side economics. The idea is to reduce taxes and regulations on producers. Increased profit margins increased competition and spurred innovation. Consumers bought more because new and better products came on the market at lower prices. Demand went up naturally as the supply of things people actually wanted increased, as did value.

Today, the government will decide which businesses are worthy of a bail out and which aren't. The government will decide through subsidy and tax credits, which products it wants you to buy. The government will decide through regulation and mandate what those products will look like and how they will perform. This does not encourage innovation, it encourages compliance. Demand Side policy will only increase debt and decrease the value of the dollar. The federal government will never go broke. They'll just print more money. Interest rates will soar as lenders attempt to stay ahead of inflation. Prices will soar as retailers attempt to stay ahead of interest rates. We should have learned these lessons in the 70's, but obviously we didn't. Policy makers have gone back to the age old, tried and failed method of fixing problems by throwing cash at them.

1 comment:

datadave said...

eh, googled your blog. Now, Demand-side economics isn't what you're describing. The Bush Administration has been a slavish follower of Reagan's supply-side econom-ism. "Keynesian" is another description of 'demand-side' which means govt. spending to help lower incomes be able to buy ..thus increase 'demand'. We now see a failure of supply-side economics which has a belief in increaseing money supply for 'investors' (the 'rich'). Sec. Paulson's given about 300 billion to the 'rich' banks...and little to show for it. Demand-side would encourage more prosperity from the bottom up rather than increasing wealth inequality. Increasing Demand from the majority of people is what is needed. Giving the 'investors' more money to "loan" to people unable to pay their current debts is 'supply-side' economics and like what went on during the Roaring 20s is a big failure leading to a Depression. And now here we are again.