Supply-Side Economics

In my previous blog post, I noted how I believe that a larger number of immigrant workers would not be detrimental to the economy. What I did not clarify extensively was an economic policy that would need to be in place for this to be the case: a demand-side economic system to replace the current supply-side system. However, in order for this to make any sense, first I'm going to have to explain supply-side economics, which should at least be generally informative since, once you know what it is, you'll recognize its effects all around you.

"Supply-side economics" is a term that was coined in the 1970s, but as a concept it seems to have been in effect for as long as I can remember, though not necessarily as an official economic policy.

This gist is this: if you make it easy to produce and manufacture goods, then the existence of those goods will generate demand. In practice, this means creating tax breaks and free market policies that make things easier on the wealthy. The wealthy are the people who create jobs, so giving the wealthy a financial break will incite them to invest in more business ventures, which would then create more jobs. This is referred to as the "trickle down" effect.

So, the success of supply-side economics seems to hinge upon two things: first, when wealthy people are given more money, they will invest that money in order to potentially generate even more money. Second, that the existence of products will cause people to want to buy them. To me, both of these assertions are faulty on their face.

Regarding the first point: economic disparity has existed forever, and when the rich accumulate wealth they almost always focus on ways to retain that wealth. The rich have always found ways to hold onto their money and avoid paying taxes. To once again bring up the History of Rome podcast, in the 800 years of Rome they tried every method of taxation imaginable, and often the rich would simply not pay their taxes at all, instead bribing the collectors to look the other way for a while until, inevitably, Rome would issue a general pardon of debts to the state, wiping their ledgers clean. Meanwhile, the normal people were wrung dry, as the empire's expenses fell on their shoulders alone; a bill they couldn't afford to pay which, of course, hurt Rome as a whole.

In short, providing tax relief to wealthy business owners places an awful lot of trust in people who honestly don't deserve it.

The second aspect of supply-side economics is slightly more complex. If we give the wealthy business owners the benefit of the doubt, then the theory goes that they will invest that money in products and services in the hopes of creating demand. And you know what? There's an argument to be made there.

For instance, there was practically no market for smartphones 10 years ago, but in 2007 Apple introduced the iPhone. I'm not sure how helpful supply-side policies were to getting iPhones into the market, but if we allow that they played a part in this sudden push for a new product then, yes, the sudden, massive supply of iPhones generated a demand, and within years practically everybody in the United States had a smartphone in their pockets, iPhone or otherwise. Though the manufacture of these mobile devices probably never take place in the United States, they still generate tons of jobs as Apple Stores and cellular providers pop up in more and more places and need employees to run the stores. Likewise, countless independent businesses exist that help to buy, sell, and service smartphones in places that aren't big enough to have, say, an Apple Store nearby. Alternately, these independent stores service people who prefer to avoid the big stores, "help local businesses," or pay less for the service. And that's not even getting into the countless software engineers who suddenly had a platform to sell their games and applications directly to the market.

While I won't say that the smartphone revolution wouldn't have occurred without supply-side economic policies, I can't deny that certain aspects such as generous free trade policies (to get the phones affordably from China) helped generate a supply that was able to flood the market and keep up with demand.

That said, success stories like the iPhone are rare, and demand rarely grows to match supply so dramatically. There's an inherent presumption about supply-side economics that the products being supplied will actually be able to generate demand. However, that relies on products being affordable, marketed well, and (best case scenario) intrinsically useful. And even then, it's nearly impossible to really predict how the market will respond. So, just as I'm not inclined to trust the rich to use their wealth to help the economy, neither do I trust the market to eat what they're being fed.

That's not to say that supply-side economics have no value, but I think it generally does more harm than good. It openly perpetuates economic disparity and relies heavily on conjecture. More importantly, the assertion that supply-side economics is backed by decades of data, which many contemporary economists take as proof that the policy has failed: the economy is not booming and the nation is falling further and further into debt.

That said, it actually works pretty well in the case of products with an existing market, such as, say, the milk industry. Increasing the supply results in lower prices as the producers compete with each other for that demand. The result is more, cheaper milk, which could potentially generate more demand as people use more milk now that they can afford to buy it more often. Now replace "milk" with any product (smartphones, haircuts, electric cars) and you can start to see the appeal.

However, I think that supply-side effect will happen naturally as a result of demand-side policies. I'll explain that concept in my next blog, as we continue to explore the fascinating world of macroeconomics.