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Tuesday
Oct232012

Supply-Side Economics Is Coming Back

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. Chriss lives in Newport Beach, CA.

Consumption over Lifetime 150x150 SUPPLY SIDE ECONOMICS IS COMING BACK

The Great Recession was primarily caused by the collapse in economic demand as 80 million “baby-boomers” born between 1946 and 1964 moved out of their peak spending years in their mid-30s to mid-50s and into retirement in their late 50s and early 60s. The U.S. government over the last five years squandered $7.6 trillion on Keynesian demand-side stimulus trying to resuscitate this demographically shrinking demand.

With only 23 million born between 1995 and 2012 that comprise “Generation Z”, this population is just too small for demand-side stimulus to revive the economy. America is now deep in debt, facing 23 million unemployed, and needs to fund the baby-boomer’s retirement. Consequently, politicians are being forced to abandon demand-side stimulus and re-embrace supply-side economics.

The Revolutionary War was sparked by Great Britain’s demand that the American Colonies pay increasingly higher taxes to support England’s expanding national debt. Once independent, Congress adopted the Tenth Amendment to the Constitution that created a “free-trade-zone” between the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay-off any outstanding national debt. These policies created an economic boom that allowed the United States to be debt-free by the 1830s.

This concept of encouraging long-term economic growth by lowering taxes on income and reducing regulatory burdens that serve as barriers for people to produce goods and services is referred to as “supply-side economics.” The Founding Fathers understood that a greater supply of goods and services produced increases demand by lowering prices for consumers.

But during the Great Depression, Washington politicians abandoned supply-side and imported Keynesian “demand-side” economics from Great Britain. Demand-side economics argues that in the “short-run” productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand may not always equal aggregate supply (the total productive capacity of the economy), because private-sector decisions often lead to “inefficient market outcomes”. Therefore, government should create demand through targeted spending. Armed with this smoke-screen, U.S. short-term spending has risen every year since 1948 as politicians always found some inadequate market demand that needed more spending.

President Ronald Reagan revived supply-side economics in the 1980s with Reaganomics. The policy ended the oil windfall profits tax to stimulate oil production, passed the Tax Reform Act of 1986 to cut taxes and eliminate deductions, and instituted a payroll tax to begin a “sinking fund” to reduce the accumulated liability of Social Security and Medicare. Although Reagan was never able to reduce total spending, he did start a huge economic boom that lasted until 2001 and led to huge United States treasury surpluses in the late 1990s.

Most Americans do not realize that Reagan’s biggest ally for his supply-side encouragement of economic growth was the demographics of the baby-boomers. Studies demonstrate that 50% of all durable (cars and houses) and non-durable (food and clothing) expenditures are directly related to household demographics. Spending tends to peak as families grow and people reach their mid-30s to mid-50s. Then spending declines rapidly after the mid-50s.

When Reagan began Reaganomics in August 1981, the first baby-boomers born in 1946 were just turning 35 years old. By the time those first baby-boomers hit 55 in 2001, the NASDAQ over-the-counter index of growth stocks had risen 2600%, from 190 to over 5000.  As the boomers hit 55 and begin to retire through 2019, only 30% as many Generation Z members will replace them in the work force.

Politicians love demand-side economics, because they get to look busy spending lots of money creating “demand” for their crony capitalism friends. On the other hand, a part-time Congress could manage a supply-side economics, because the policy is set once to encourage long-term economic growth. But as we have been observing, the United States government will go bankrupt long before politicians can “create” enough demand to replace the shrinking consumption spending as the baby-boomers continue to rapidly retire. Having tripled the national debt since 2001 and recently suffered a credit downgrade, Congress has no other viable option than supporting a return to supply-side economics to encourage growth.

I expect Congress to soon update President Reagan’s play-book for supply-side growth. The United States has the world’s largest oil and gas reserves and last year those proven reserves rose by the highest amounts ever recorded. Much of the un-tapped oil is on federal land and Congress will begin deregulating the energy market to capture huge royalty payments on higher energy production. Congress will also deregulate the utility industry. This will encourage up to $6 trillion in private-sector capital spending for new pipelines and refineries across the nation to connect and distribute new production. Corporate taxes and crony tax deductions will be slashed and individual taxes and deductions will be reduced. America is on the verge of a huge economic expansion. Enjoy the ride!

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Reader Comments (5)

Really? Supply side is going to revive the economy? We have abundant oil? Natural Gas? Hahaha!

The Us is NOT exceptional! And that is coming from a 14th generation American. My family came to the part of North America that would be called Pennsylvania, in 1734. But Americans have to get over the idea that they are special and the world should revolve around them. It is obvious that that is NOT so and they are going to learn it more personally in the next few decades as they rejoin the rest of the world at a much lower level of living.

I hope it happen fast so the pain will be over and they can pick up the pieces and move forward. 'For Profit' Capitalism is dying. It does not work without regulation. Greed has taken over common sense and will destroy a good thing. Wait and see.
October 23, 2012 | Unregistered CommenterMakati1
Good article. At least someone is thinking out of the box and offering a solution.

It's always been about demographics. At every stage of their lives, the boomer generation because of it's size has always been the driving force behind the dominant trends at each stage of their lives. If done thoughtfully supply side could work today to renew tomorrow.
Yes the current debt is enormous but where's the reporting on how much debt gets written off every year? And demographics seem to indicate that more and more will be written off in the future and actually lessen the burden on the follow up generations. Especially if they are relieved of onerous tax burdens and govt. hounding and are allowed to build and rebuild their futures. Build it and they will come. It's not a joke, people are happier when they are being productive and when they are happier they grow.
It's way past time to drop the destructive, disrespective, mindless fads whose time has past and get responsible as human beings and men and build a positive future. The transition won't be easy but the demographics demand it.
October 24, 2012 | Unregistered CommenterOp Ed
All this looking back to before the rise of the machines and when China still had a closed economy makes me laugh. Anything economic analysis pre 1995 is pointless. Example?

The Italian American Pasta Company has a new factory which produces 1.1 million pounds of dry pasta each and every day. How many people do you think work in that factory at any one time?

The answer is 2. Yes. Two.

(source: http://goo.gl/8EiOq)
October 24, 2012 | Unregistered CommenterBigWaveDave
Op Ed - Really? Just write it off, huh? That solves all the problems, with no consequences? Street has some solid points (although not explanation of why the useless Congress is soon to come around again to supply side), you have delusions. You can seriously say that all the creditors on the other side of that debt are just going to take it, or if they're forced to do so, there won't be huge economic costs either way? The Fed is already buying up the bad loans Wall Street cab't unload to the tune of $40 billion a month. How is that going to work with "writing off" $16 trillion in debt?

I'd love to hear your explanation of how the US is going to divest itself of $121 trillion (and growing by the nanosecond) in unfunded liabilities going forward without tremendous social, political and economic upheaval.
October 25, 2012 | Unregistered CommenterCHe Cazzo Stai Dicendo?
I am a little doubful that "supply-side" economics is coming back, at least the kind that we have been familiar with in the '80s. I think the U.S. government at the time of the Reagan (the actor) administration was trying to pretend for a time to be able to offset the Federal Reserve's "newly operational" credit expansion system, which began in 1971 when the government took the U.S. dollar off the gold standard and allowed for an unbridled amount of government borrowing. With Reagan's efforts at lowering income tax, capital gains tax rates, and allowing greater flexibility by reducing regulation, the economy actually was stimulated for about twent years. But without the fiscal restraints inherent in a gold-backed currency, the amount of debt created by politicians expanding government bureaucracies and social programs greatly overshadowed any supply-side "hero" approach at attempting to save the economy. The U.S. became too settled with the idea of borrowing money created by the central banks rather than through direct taxation, especially since the 2001 World Trade Center and Pentagon bombings. We may be headed for an eventual global dictatorship.
December 8, 2012 | Unregistered CommenterBig

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