Supply side vs demand side

Once again I hear the pundits on the Saturday business shows stating that the problem with the economy is not taxes and regulations. It's lack of demand. The implication being that if we just dole out more money, the economy will fix itself. Of course demand is great for business. The question is, where does demand come from.

Some pundits and economists believe that creating demand is a simple matter of putting more money in someone's hands. Wouldn't it be great if that were true? All we'd have to do when recession hits would be to cut everyone a government check. Recessions would last a few days rather than months or years.

The fact is that demand comes from exposure to new things. Once you get past the basic needs; food, clothing, shelter; demand becomes subjective. What came first, the iPhone or demand for the iPhone? You didn't know you had to have it before it existed, or at least not before the commercials for it existed.

The fact that innovation and creativity spur demand is what incentivizes companies and entrepreneurs to innovate and create. If this were not the case, and demand was simply a matter of individuals having more money, companies would only have to maintain inventory and have access to more. There would be no reason to spend anything on research, innovation and creation because they would be irrelevant.

But they're not irrellevant. If you suddenly came into some extra cash and you already have an iPhone 5, your not going to go out and buy another iPhone 5. You might buy a cool new add on or accessory for it, but you're not just going to buy more of what you already have or buy something you've already decided you don't need or don't want.

To create demand you must enable producers to produce, create, innovate. That means making the risk/reward ratio pay off. Most new products don't work out. That means there has to be room for failure. Lower tax rates, less regulation; in short less time spent complying with government demands and more time spent working on consumer demand. Yes, demand is important, but it comes from supply. The two work together, but trying to create demand for products with your boot on the neck of producers is a losing model.

Specifics on the proposal to broaden the tax base would be a really bad idea

Mitt Romney has proposed "broadening the tax base" by eliminating loopholes and tax credits while lowering tax rates across the board. Critics have dogged him for not getting specific about which loopholes and credits he would eliminate. However, getting into specifics at this point would likely kill the whole idea before it even began.

I like the idea of eliminating targeted tax credits and loopholes because I'm generally opposed to the practice of trying to influence individual decision making through the tax code, a.k.a. social engineering. I just don't believe that trying to direct the subjective decision making processes of individuals is a legitimate function of government and it's counter to free market principals.

 I don't believe that all of such tax credits and loopholes can be eliminated in one fell swoop, or that it would even be a good idea to do so. People need time to evaluate how it effects them and make adjustments where they deem necessary. Therefore, there would be a negotiation process. If you go into that process with ultimatums, you may just wind up going in all alone.

For example, I would not mind seeing the home mortgage interest deduction go away, if over a period of years, for a number of reasons. I have very good friends and customers who would vehemently disagree with me on this. I would likely get a lot of support for the notion of eliminating tax credits and loopholes from all of them, but if I prefaced it with a demand that this particular tax credit is going to be eliminated, the negotiation would never take place.

Instead, I could present it as an option, once we're at the table. It would likely be met with fierce resistance and I'd end up backing off from it in favor of some alternatives. The important thing is that the process was started, the overall premise agreed upon and now we can look for opportunities to agree on specifics.

It sounds like politics as usual, but it's really negotiation as usual. You don't make ultimatums unless and until you are ready, willing and able to walk away if you don't get your demand. Opponents of the general concept would seize on any specific provided in advance as justification for dismissing the whole thing before it got started. The firestorm would make for good television, but it would not be an effective strategy for actually accomplishing the goal.

I will say that Governor Romney, nor his supporters have done a very good job of explaining the reasoning behind not getting specific. They should give the American people credit for having enough intelligence to see the logic of it, given the opportunity.