The Death of Supply Side Economics

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anonymous_coward
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The Death of Supply Side Economics

https://realinvestmentadvice.com/kass-the-death-of-supply-side-economics/

I think it's probably a smidge early to call for the actual death of supply side thinking.

But worth a read.

Economike
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Well, it was worth a quick

Well, it was worth a quick glance. Not a read.

The authors would help their readers by first defining what they mean by "supply side economics." One suspects that would be a challenge for them.

Let me try to help. "Supply side economics" is not a set of fiscal policy preferences, such "Lower taxes are better." or "Business should be encouraged."

There are two fundamental ways to think about economics: demand-side and suppy-side. Neither implies specific policy aims.

For example, Milton Friedman was a demand-side economist. Karl Marx was a supply-side economist.

anonymous_coward
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Well, to add to the

Well, to add to the discussion, I think it's the difference between fiscal stimulus that is tax cut driven rather than FDR spend-driven:
https://en.wikipedia.org/wiki/Supply-side_economics

The idea being that tax cuts on the wealthy pay for themselves by driving growth, which "trickles down" to us little people.

Toolsmith
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I always look at it the other

I always look at it the other way 'round... tax cuts lessen the burden that depresses economic activity by siphoning off available capital. What is that burden siphoning off capital, you ask? Why, it's government of course! Government wastes much of what it takes in, making the situation even worse. Reducing the burden, by either reducing waste or reducing taxation, does increase economic activity.

The results could reduce government deficits, but in the past government has simply expanded to consume the increased tax revenue produced by increased economic activity. This has happened every time the tax cuts have been tried. It would only produce lasting results if government can be controlled. I don't think it likely.

Economike
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The idea being that tax cuts

The idea being that tax cuts on the wealthy pay for themselves by driving growth, which "trickles down" to us little people.

This is a caricature, not a summary, of supply-side economics. "Trickle down" is a pejorative invented by people who don't like (or don't understand) supply-side economics.

The cited wikipedia article, despite its sincerity, leads off with the mistaken premise that supply-side is a "theory" of economics, as if there are other competing theories encompassed by "macroeconomics." This is not entirely wrong, but it's misleading. Until J. M. Keynes developed demand-side economics in the last century, all economics was supply-side. It is more accurate to say that supply-side and demand-side are two different ways of describing economic phenomena, in distinction to calling them "theories." "Theory" implies a mechanism of causation. I know this is a subtle point, but I think it's important in understanding economics generally.

I always look at it the other way 'round... tax cuts lessen the burden that depresses economic activity by siphoning off available capital.

This observation, which I find agreeable, has a distinct supply-side flavor, but It could be a demand-side expression as well as a supply-side expression. Most demand-siders also recognize that burdens on capital depress economic growth.

anonymous_coward
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"I always look at it the

"I always look at it the other way 'round... tax cuts lessen the burden that depresses economic activity by siphoning off available capital.

This observation, which I find agreeable, has a distinct supply-side flavor, but It could be a demand-side expression as well as a supply-side expression. Most demand-siders also recognize that burdens on capital depress economic growth."

I think the supply sider philosophy is not that the capital is taken away from the economy but rather that it's distributed to less efficient outlets (the core of the idea being that the market is the most efficient way of determining how to distribute and invest capital, and that the government makes poor/politicized choices in that regard.)

However, the question in my mind is, when is it "okay" to increase overall government debt in order to stimulate the economy (either supply or demand side)? Is it only ok in times of recession (when there is slack in the labor market) or can you do it any time?

The Kansas Brownback experiment seems to indicate that it's NOT ok, at least at the state level (could be different at the national level).

Economike
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anon -

anon -

That's an interesting question about the use of government debt, but I don't see it as a supply-side versus demand-side question.

Nor do I think there's a suppy-side "philosophy."

There are two "languages" of economics - supply-side and demand-side. It's like chicken and egg; with which do we begin?

If we're speaking supply-side, we begin with the premise "People make stuff." In demand-side, we start with "People want stuff."

It's true that "supply-side" has acquired a more limited meaning from the Reagan years. Supply-side thinking saw a resurgence when demand-side thinking failed to account for economic events.

While I'm rambling along, I also think it's misleading to imagine capital as being "distributed" as if capital were an undifferentiated sum. (That's macro, or demand-side, thinking.) It's more precise to say that capital can be created or destroyed. A change in the distribution of capital will also change its value.

anonymous_coward
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@Economike: "While I'm

@Economike: "While I'm rambling along, I also think it's misleading to imagine capital as being "distributed" as if capital were an undifferentiated sum. (That's macro, or demand-side, thinking.) It's more precise to say that capital can be created or destroyed. A change in the distribution of capital will also change its value."

I'm not sure what you mean. Could you elaborate?

Economike
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Could you elaborate?

Could you elaborate?

Here's an illustration. Consolidated Gear and Acme Widget are both publicly-traded corporations. Consolidated sells a subsidiary plant to Acme. What is the effect on the value of each company?

If your answer is "We don't know." then you can grasp the difficulty of the expression "capital is distributed." After the deployment of capital changes, it's not the same capital as before. When we talk of capital as "distributed" we're implying that changes in the deployment of capital are value-neutral, and this is almost never the case. If we think that capital can be distributed and we'll end up with the same value of capital, we're probably wrong. This is how thinking in macroeconomic terms (that is, imagining capital as an aggregate) can mislead us into conceptual economic error.

In practice, capital is (intended to be) deployed toward higher-value uses. This is a microeconomic proposition, and without this micro basis for imagining the transaction, our macro thinking about capital as an aggregation leads us into the fallacy of imagining that capital can be (actively) distributed as a matter of policy.

Toolsmith
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the fallacy of imagining that

the fallacy of imagining that capital can be (actively) distributed as a matter of policy

So the whole premise of socialism/communism is a mirage...? Redistribute, and it changes. Or vanishes.

Economike
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Toolsmith -

Toolsmith -

Good point. Marx was a supply-side economist, but the fatal flaw in Marx's communist vision is his failure to understand the relationship of capital and risk. Marx saw ownership of capital merely as a safe opportunity to collect rent. For Marx, capital would be of equal value whether owned by Daddy Warbucks or the proletariat.

As you know, capital is not an undifferentiated lump of productive resources. Whether it is at risk - and whose risk - is of critical importance to productivity. Although J. M. Keynes, the originator of demand-side economics, understood this, his system of aggregation makes his demand-side descendants susceptible to the notion that capital can be rearranged without altering its value.

Toolsmith
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Ownership of the means of

Ownership of the means of production by a group of workers with zero incentive to work hard can't help reducing the value of that means of production...

anonymous_coward
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@Economike: "Here's an

@Economike: "Here's an illustration. Consolidated Gear and Acme Widget are both publicly-traded corporations. Consolidated sells a subsidiary plant to Acme. What is the effect on the value of each company?

If your answer is "We don't know."

My answer was actually, "the sum of the differential in cash flows over the lifespan of the plant, discounted to the present day", but sure.

then you can grasp the difficulty of the expression "capital is distributed." After the deployment of capital changes, it's not the same capital as before. When we talk of capital as "distributed" we're implying that changes in the deployment of capital are value-neutral, and this is almost never the case. If we think that capital can be distributed and we'll end up with the same value of capital, we're probably wrong. This is how thinking in macroeconomic terms (that is, imagining capital as an aggregate) can mislead us into conceptual economic error.

I don't see how this description is any different than calling it, "distribution of capital". In both cases, it's non-linear, since invested capital leads to more invested capital, but the decision of where it goes is still a decision. Maybe we're just quibbling over semantics (or maybe I still don't get it).

anonymous_coward
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@Economike: "As you know,

@Economike: "As you know, capital is not an undifferentiated lump of productive resources. Whether it is at risk - and whose risk - is of critical importance to productivity. Although J. M. Keynes, the originator of demand-side economics, understood this, his system of aggregation makes his demand-side descendants susceptible to the notion that capital can be rearranged without altering its value."

Just want to point out that economic systems are not black and white, there is a lot of grey in there.

We currently have an enormously popular system of redistribution where we take money from young people and give it to old people - Social Security. Would our economy be more efficient if we didn't have this and let microeconomic decisions flow au natural?

Economike
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I think, by discussing the

I think, by discussing the connotations of "distribute," I've wandered off the track of the simple point I wish to make. At least, I hope it's simple.

Which is - In macro, capital is conceived of as an aggregate, the variable K. This is a useful conception so long as we remain aware of the theoretical limitations of macro.

In practical (i.e. micro) terms, capital consists of any and all resources used for production of goods and services. Capital is a varied and multitudinous array of particular uses that can't be rearranged without changing their value. Some of these uses (bricks, mortar, machines) are quantifiable and some (skills, habits, culture) are not.

A problem arises when macro thinkers forget macro's theoretical limits: they begin to think of the variable "capital" as a sum which not only *is* distributed, but *can be* distributed.

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