Supply-side economics
might be considered an active offshoot of the
passive laissez faire policy of
conservative government toward
business. It is touted as a stimulus
for a sluggish economy, and is immensely
popular because it contains that favorite
catch-phrase, "tax-cut."
Supply-side, also known as
"trickle-down," proposes that
cutting taxes on corporate dividends and
capital gains invigorates business by
stimulating investment. The theory goes
that increased investment enables capital
improvements and boosts production, thereby
generating a need for a larger work force and
increased hiring, thereby enhancing public
purchasing power and fueling general
prosperity, which eventually pays back the
initial cost of the stimulus through a
growing economy and tax base.
On its surface,
the theory gives the appearance of being
straightforward and targeted for
effectiveness. It includes all the
essential components and their appropriate
interconnections. However, as repeated
disappointments in practice have
demonstrated, there is a crucial and very
basic flaw. Consider:
-
Investors
invest, not just to have something to
do with their spare cash and to save
a few bucks on taxes, but to have it
generate more money—dividends
and capital gains—than can be
produced by mere savings-account
interest.
-
Business
makes money, not by soaking up
investors' cash,* but by producing
and selling goods and services for
more than it costs to produce them.
-
As profit
is the motive for producing goods and
services for sale, demand is what
makes profit possible; some demand
comes from government and from other
businesses, but mostly it comes from
the consuming public.
-
Consumer
demand arises from the ability of
customers to pay for goods and
services which they find useful and
appealing.
-
People can
pay for goods and services when they
have adequate income. The more people
with adequate income, the broader the
consumer base.
-
There are
many forms of income, but that which
stimulates the broadest and strongest
consumer demand is the wages,
salaries, and commissions paid to
working people.
As we see, some
of these elements combine to form
loops. For example, workers use their
pay to purchase goods and services, thereby
encouraging businesses to increase production
and hire more workers, thereby both meeting
existing demand and generating additional
demand, while also boosting profits and
investment returns. In addition, to
meet rising demand, businesses buy new
equipment from other manufacturers, which in
turn need to hire more workers, and
prosperity thus ripples throughout the
economy in response to consumer demand.
All economies
experience fluctuations, however. In a
sluggish economy, the question is at what
point(s) in the system to apply a stimulus
most effectively. Supply-side theory
supposes that investment tax breaks cause
cash to be pumped into businesses, boosting
their resources and ability to produce.
True, such a move triggers an inflation of
stock prices; however, the boost is
transient, for it ignores the underlying
problem: In recessionary times,
business's difficulty is not an inability to
produce, but an inability to sell, and
increasing capital does nothing to remedy
that. No surfeit of cash or
resources can induce business to produce what
it cannot sell in the face of insufficient
consumer demand. Without demand
for its products, business is powerless to
put investment to good use. So without
prospects for profits, investors instead put
their cash into low-risk instruments such as
bonds, which in turn represent a debt burden
upon the issuing entity. With more
money going into debt instruments for
safekeeping, interest rates drop. Now
ordinarily, lower interest rates should
encourage consumer spending and capital
investment, but when much of the work force
is laid off and can't afford to incur
non-essential debt, this is a hollow
promise. Even if lending rates should
drop to zero, without demand there is no
production, no profit, no
incentive—period. Trying
to motivate an economy, by shoveling money
into businesses that have no market for their
products, makes as much sense (and does as
much good) as using leeches to cure the flu!
Just as there are effective remedies for the
flu, there are ways to address weak market
demand. Supply-side doesn't happen to
be one of them, for reasons which become
obvious when the problem is considered
honestly.
This is why,
every time it has been tried, supply-side
strategy has failed to generate the hoped-for
self-sustaining prosperity. Workers all
too often find themselves paying for their
tax cuts with their jobs, and investors find
their returns drying up. Any gains
obtained can be sustained only by continued
infusions of government cash and mounting
public debt, which is never paid off due to
diminishing general income and a consequently
shriveling tax base.
A successful
stimulus, in contrast, identifies and
addresses the weak point in the money
cycle. In a capitalistic system such as
ours, this is usually consumer purchasing
power (not investment
capital). If the problem is minor, a
tax cut on earned and interest income may
suffice. If it is major, due perhaps to
rising unemployment, then training programs
can help displaced workers attain skills in
new technologies, and public works programs
can effectively bolster general income and
consumer demand, until business recovers and
it once again becomes self-sustaining.
A tax cut can be
a valuable tool for stimulating a sluggish
economy, provided it is appropriately timed
and effectively targeted. Plainly, it
stimulates demand and production far more, to
give a million average workers a little extra
to buy clothes and appliances, than to give a
millionaire enough to buy a new yacht.
Far from solving the problem, misdirected tax
cuts can actually worsen and perpetuate
it. This is what happens when
short-sighted greed masquerades as
strategy. Clearly, it is in our own
best interest to choose leaders who
understand the difference.
=SAJ=
*Some
businesses have tried to make money this way,
with deplorable results. Notable
examples include Enron and Worldcom.