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Could supply-side economics help the economy?

Yes: Meeting consumers' needs worked wonders for ReaganNo: A round of federal spending can create millions of jobs

Published: Tuesday, Aug. 4 2015 8:39 a.m. MDT

A jobs posting board hangs on a wall at Central City Concern Tuesday, June 19, 2012, in Portland, Ore. Employers in April posted the fewest job openings in five months, suggesting hiring will remain sluggish in the months ahead. The Labor Department on Tuesday said that job openings fell to a seasonally adjusted 3.4 million in April, down from 3.7 million in March. (AP Photo/Rick Bowmer) (Rick Bowmer, Associated Press) A jobs posting board hangs on a wall at Central City Concern Tuesday, June 19, 2012, in Portland, Ore. Employers in April posted the fewest job openings in five months, suggesting hiring will remain sluggish in the months ahead. The Labor Department on Tuesday said that job openings fell to a seasonally adjusted 3.4 million in April, down from 3.7 million in March. (AP Photo/Rick Bowmer) (Rick Bowmer, Associated Press)

By Arthur Herman

WASHINGTON — Supply-side economics is summed up in the phrase from "The Field of Dreams": "Build it and they will come."

The "build" in this case is entrepreneurs and businesses producing more goods and services at lower cost, which consumers will then buy. Encouraging the production process fosters economic growth by satisfying the wants and needs of more people at decreasing cost, from sewing machines and automobiles — the first industries to use mass production to lower costs and increase output — to computers and cell phones and athletic shoes and cartons of yogurt.

Increase the range and supply of goods, the supply-sider says, and demand — the other critical part of the economic equation — will take care of itself.

Others, like the followers of British economist John Maynard Keynes, disagree. They say it's the demand for products and services that fosters innovation and growth — demand created by individuals or the government it doesn't matter. In fact, since government has lots of money, it can stimulate growth faster by spending it quicker. Indeed, the more, the better.

In this Aug. 4, 2011 photo, job seeker Manfred A. Lynch, left, speaks with a recruiter at a job fair in Arlington, Va. The Labor Department announced Friday, Aug. 5, 2011 that hiring picked up slightly in July and the unemployment rate dipped to 9.1 percent as employers added 117,000 jobs. (AP Photo/Jose Luis Magana) (Associated Press) In this Aug. 4, 2011 photo, job seeker Manfred A. Lynch, left, speaks with a recruiter at a job fair in Arlington, Va. The Labor Department announced Friday, Aug. 5, 2011 that hiring picked up slightly in July and the unemployment rate dipped to 9.1 percent as employers added 117,000 jobs. (AP Photo/Jose Luis Magana) (Associated Press)

The supply-sider sees this formula as wrong-headed. The marketplace, as opposed to government, knows best where economic effort should go to satisfy demand based on consumer tastes. Producers who get their goods and services out there at the lowest cost, will get the biggest rewards — as will consumers.

So the top economic priority is making sure producers are free to expand capacity to produce more, and install new technologies that will produce those goods faster and cheaper or even create entirely new products and services.

That's why supply-siders favor various kinds of economic deregulation — so that investment is free to go where it can do the most good — and like tax cuts, especially cuts in capital gains and in marginal tax rates on higher income brackets.

Job seekers scramble for jobs and talk to recruiters at career fair in Overland Park, Kan.  (Associated Press) Job seekers scramble for jobs and talk to recruiters at career fair in Overland Park, Kan. (Associated Press)

That's not because they think rich people should have more money. It's because people with higher incomes are more likely to capitalize their savings as investments aimed at bringing a lucrative return, whether it's expanding their own business (as when a dry cleaner opens a new store and hires new workers to run it) or someone else's.

Some call this "trickle down" economics. It's really "let the capital flow economics, and it's what stimulates new businesses, new technologies, new jobs and bigger paychecks for everyone.

The real test of any economic theory is, does it work? President Obama and his advisers tried the Keynesian "stimulus" formula to get the country back on track after the 2007-8 recession. The result has been the slowest economic recovery in modern history.

In 1980, by contrast, President Ronald Reagan self-consciously tried the supply-side formula for the first time by rolling back regulations; imposing capital gains and personal income tax cuts; and making it clear America was back in business again.

The result was 12 years of sustained economic growth in a row — the longest unbroken expansion in American history — with an average GNP growth rate of 3.2 percent. Twenty-one million jobs were created; even government revenues rose — a paradox created by the fact that the increased economic activity generated more taxable income.

Will a new round of tax-cuts revive this economy? The evidence seems clear, but the Keynesians will still be unhappy. They admit economic growth happened in the Reagan years, but insist it was the "wrong" kind of growth because it was aimed at satisfying fleeting consumer tastes, instead of creating new infrastructure or green jobs or something.

Right now, Americans are ready for some growth that's on the money.

Arthur Herman is a visiting scholar at conservative the American Enterprise Institute.

By Mark Weisbrot

WASHINGTON — Three years after our worst recession since the Great Depression officially ended, the U.S. economy is still very weak.

The people most hurt by this weakness are the unemployed and the poor, and of course the two problems are related. We have 23 million people who are unemployed, involuntarily working part-time, or given up looking for work — nearly 15 percent of the labor force. And poverty has reached 15.1 percent of the population; amazingly, a level that it was at in the mid-1960s.

The first priority of the U.S. government should therefore be restoring full employment. This is a relatively easy thing to do. As Nobel laureate economist Paul Krugman aptly put it: "It's like having a dead battery in a car, and while there may be a lot wrong with the car, you can get the car going remarkably easily, if you're willing to accept that's what the problem really is."

Most economists are well aware of what the problem really is, since it is so simple and basic. The economy lost about $1.3 trillion in private annual spending when the real estate bubble burst in 2007, and much of that has not recovered. State and local governments continue to tighten their budgets and lay off workers.

If the federal government had simply funded these governments' shortfalls, we would have an additional 2 million jobs today.

The right says we can't borrow and spend our way to full employment, but there is no economic basis for their arguments. In fact, the federal government can borrow at 1.6 percent interest today for 10-year bonds. This is basically free money; and for those who want it to be absolutely free, the Federal Reserve has created $2.3 trillion since 2008 and can create more if the federal government is willing to spend it.

The inflation-paranoids haven't noticed, but the Fed hasn't created any inflation problem in the United States: the Consumer Price Index is currently running at just 1.7 percent annually.

We don't have a federal public debt problem either, at least not any time soon. The easiest way to see this is to look at the net interest payments on our federal public debt: these are less than 1.4 percent of the Gross Domestic Product, which is as low as it has been in the post-World War II period.

This is the real burden of the debt; all those big numbers you hear about trillions of dollars are mainly thrown around to frighten people.

In the long run, there is a budget problem — but this is entirely due to health-care spending. If you pick any country with as high a life expectancy as ours, and plug their health care costs per person into our budget, our long-term budget deficit will disappear. So we just need to have normal health care costs — not budget cuts.

If this sounds different from what you have been hearing from the media, that is a problem of public education. The airwaves and cyberspace are filled with junk promoted by people who would like to cut spending on Social Security, for people receiving an average of just $1,100 a month. Most of these senior citizens are relying on this modest payment for most of their income.

There are plenty of things that the federal government can spend money on that will make this a better country, like funding for state and local governments so they don't have to lay off teachers; or public transportation and renewable energy.

The government can also save millions of jobs, as Germany has successfully done, by subsidizing employers to keep workers on the job at shorter hours, rather than laying them off. The problem is not a lack of solutions, but a lack of political will.

Mark Weisbrot is the co-director of the progressive Center for Economic and Policy Research.

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