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Demand drives supply side

August 4, 2012
Cape Coral Daily Breeze

To the editor:

A widely pandered myth is that by simply supplying capital (ie reducing taxes for the top earners) the alleged job creators, we will produce substantial jobs. That is sometimes called "supply side economics." That methodology is basically the "trickle down theory."

It has been around for a couple decades. President George H.W. Bush called it voo doo economics. Its fallacy is in its failure to recognize demand as the needed preceding factor. Put most simply one does not build a store because he has capital, when there are no customers.

Outsourcing and technology had been progressively reducing employment. For the vast majority of our citizens income had been stagnant for the past decade, especially when adjusted for inflation. The recent financial crisis not only wiped out much of the equity that was in homes but put many under water and some out of work greatly diminishing consumer demand. The governments bail out of Wall Street was basically a supply procedure and did little or nothing for demand. The providing of capital and/or guarantees to start green energy companies was again supply and questionable without a better analysis of demand when China was subsidizing that product area.

Scandinavia got its economy and employment back by focusing on demand. The Swedish Government offered and paid one-half the cost of labor for construction improvements, up to 60,000 krona a person, 120,000 a couple (about $17,000). This prompted many house painting and home improvements, which got that economy back on track.

There is clamor by some that the Bush tax cuts must be maintained for the top 5 percent of income earners. It being alleged, in error, that their additional capital will create jobs. It, however, is not the shortage of capital that is the problem it is the diminished demand by consumers that is the problem. There is a given sum that is distributed among households and the growing inequality is diminishing demand. Prior to the 1981 Reagan tax cuts the top tax rate was 70 percent. The effective tax rate was about 58 percent for the top earner. Notwithstanding the top rate was cut in half the rate of employment during Reagan's tenure was slightly less than the rate, the preceding eight years. President Clinton, raised the tax rate for those on top, balanced the National budget and had a high rate of employment. Moreover our corporations are awash with monies, but requisite demand is absent.

The factors of supply and demand are controlling in economics, but when that phrase is applied to job creation it is better stated as demand and supply because demand is the initial factor.

Supply side economics or trickle down economics as it is sometimes called, as a job creator is voo doo economics as stated by President Bush. As a methodology it reminds me of the old horse and buggy days parable that states, "The best way to feed the sparrows is to feed the horses more oats."

Arnold E. Kempe

Cape Coral

 
 

 

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