Macroeconomics: theories underlying political debate

Demand Side Macroeconomics vs. Supply Side Macroeconomics

I decided to take a new tack on the ongoing economic debates currently going on between the political parties (and always has.) You can also look at it as a mini macroeconomics primer.

First, there is a big difference between microeconomics and macroeconomics. We all are used to microeconomics as that is how we run our own lives. We get income, we spend, save, donate etc. that income according to our wishes. Macroeconomics is how countries, governments operate, and the two are definitively not the same, though many would like you to think so.

I’ll start first with the economic theory developed by John Maynard Keynes called Demand Side Economics. I just take it from Wikipedia:

 Keynesianism and Keynesian theory) is a macroeconomic theory based on the ideas of 20th century English economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.^[1] The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936; the interpretations of Keynes are contentious, and several schools of thought claim his legacy.

Keynesian economics advocates a mixed economy—predominantly private sector, but with a large role of government and public sector—and served as the economic model during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the stagflation of the 1970s. The advent of the global financial crisis in 2007 has caused a resurgence in Keynesian thought. The former British Prime Minister Gordon Brown, former President of the United States George W. Bush, President Barack Obama, and other world leaders have used Keynesian economics through government stimulus programs to attempt to assist the economic state of their countries

Next we have Supply Side Economics using the same source.

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to the theory, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation.^[1]

Current supply-side economics is primarily concerned with economic growth in general, and does not hold that decreasing taxes increases government revenue. It is true that many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to compensate completely for the short-term costs of a tax cut, and that tax cuts could, in fact, cause overall revenue to increase.^[2] However, in 2003, the Wall Street Journal declared the debate over the ability of supply-side economics to reduce taxes without cost has ended "with a whimper," after extensive modeling performed by the Congressional Budget Office (CBO) failed to support that possibility.^[3]

The term "supply-side economics" was thought, for some time, to have been coined by journalist Jude Wanniski in 1975, but according to Robert D. Atkinson'sSupply-Side Follies ^[4] [p. 50], the term "supply side" ("supply-side fiscalists") was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell and Arthur Laffer. Today, supply-side economics is viewed by some as a form of "trickle-down economics"

Current history. In the 70’s during Johnson’s administration the economy was a mess; remember the Vietnam war? The Great Society Programs lead to a good deal of inflation and the Mideast found power in their control of oil (the price of which tripled in 1978.) High priced caused production cut backs, high prices less to less spending; it was called stagflation.

The usual inflation solution was for government to raise interest rates, cut spending and slow down demand. To counter unemployment the government cuts interest rates, increasing demand. Problem was both were going on.

Here comes supply side economics. The government should cut taxes on the wealthy to jump start the economy, the wealthy then would take the new money and invest it, thus new factories creating lower priced good. Wow, inflation and unemployment fixed at the same time. Remember the old saying, if it sounds too good to be true it probably isn’t true.

Nevertheless, Ronald Reagan in 1980 promised to cut taxes, raise military spending and the government could spend and the budget would be balanced. George H.W. Bush called it voodoo economics and it was. In 1982, the first full year for this plan the economy shrank 2% and Reagan created the greatest deficit in history. The deficit was 208 billion by ’83 (in contrast to Carter’s $77 billion.) This continued with Bush approached $300 bill a year in deficits. The national debt in 1980 was a bit below $1 trillion and by the end of ’82 it was $4.35 trillion. There is supply side economics for you.

Clinton reversed supply side economics. He raised taxes on the wealthy and lowered them for the middle on lower classes; every Republican voted against this decision. The economy enjoyed the longest sustained expansion in history creating 22 million jobs (lowest unemployment in 30 years. Economic growth averaged 4% per year vs 2.8% during the Reagan/Bush era. That is Demand Side Economics or Keynesian economics.

Then came George W. Bush who of course returned to supply side economics, lowering taxes on the very rich (“his base” as he called them.) This amounted to $1.6 trillion in tax cuts 45% given to the top 1% of the country. GDP (gross domestic product) grew at 2.8% almost a full percentage behind the previous times. Jobs increased 1.3% vs 8.8%  in earlier upswings. It is a terrible weak recovery.

What the Bush administration did do extremely well was increase debt. Clinton had a $136 billion suplus which Bush turned into a $158 billion deficit in his first year. The national debt was at $5.8 trillion and moved to $12 Trillion in 2009.

Had enough? It seems perfectly clear to me that supply side macroeconomics benefits the ultra rich and the ultra rich only, for most of us it has lowered our standard of living. Keynesian macroeconomics, demand side economics is better for the whole country.

The current budget decreases lie mainly at the expense of the poor and the ultra wealthy will hardly feel a hiccup.

There are certainly better economists around than me, but I have a basic understanding of economics from the college days and a bit of teaching. The above material took relative little time to accumulate if you but do a bit of research.

It seems to me that Obama trying to return to Keynesian/Demand side economics and the Republicans wish to have supply side economics. Most of this gets lost in all the rhetoric of modern sound bites debates.

I hope it helps you a bit in understanding current debates on these important issues.