This Supply Side Recession

Dear Friends,

It seems to me that you cannot fix a supply side recession with demand side fixes. This recession and “recovery” has been characterized with huge upsets in the supply of money to the economy via the banking system, disruptions to the running of all the World’s car companies, and most of all, tsunami after tsunami of regulation washing over the banking systems and every other industry in the US. Getting it right is the most important thing the government can do right now. So many people are in need of a good job. Not only in the US but everywhere.

I explained the difference between demand side economics and supply side economics in a previous blog. It is important to understand the difference. Talking heads come on tv and spew demand side economic thinking as if it is the only game in town. Every time anyone brings up spending cuts the demand siders get red faced. They spout on about if government spending drops then demand will fall. But if, as they say, 70% of the economy is consumer spending, some of the 30% left must be corporate spending, so the economy has at most 20% liability. But we are talking about minute spending decreases not a 100% government shutdown forever. Lowering that 20% to 1-2% exposure for the economy.

The demand siders never stop. They claim demand is demand, but I put to you… Is all demand equal in economic outcome? Lets take $100.00. I could spend it on cocaine or I could buy a skill saw. Is the outcome of each purchase equal in outcome for the economy? No it is obviously not. The production of the skill saw required the coordination of literally hundreds perhaps thousands of industrial outputs. From the oil pipeline maker to the mining equipment manufacturing companies, they all had a hand in producing the skill saw. It doesn’t stop there. The skill saw is a means of production therefore it can be used to produce things that improve the lot on man in the aggregate and individually. The purchase of a skill saw has deep economic impact.

The cocaine however has far less positive economic impact. It went largely under taxed, it was produced with, (probably) with slave labor, the profits go to lowering the lot of Man and corrupting a society. It doesn’t stop there. The cocaine is a consumable and when used will almost certainly diminish the output of the person using it. So we can clearly see from this albeit drastic contrast that all demand is not equal to economic output.

But when there are real regulatory hurdles to starting a firm, especially incoming regulation, the cost of which to the new business cannot be effectively quantified, the leap is insurmountable. As the ability of the economy is eroded by the supply side cramps, and regulation, effectively stopping or even slowing the expansion of supply, then at best, the economy can muddle along. No amount of demand can start a supply if government has made it impossible. Until a tipping point is reached. At that point, if the profitability is so great it offsets the legal implications, then underground firms will open. As in the cocaine trade.

But that isn’t the demand that government spending creates is it? Government demand is specific and requires reams of paperwork. As a result the company that is best at filling out paperwork gets government contracts not the best company for the job. The incentive systems government always set up are always pernicious. They are the epitome of my saying, “The distribution of the goods of society by political favor instead of merit.” What ever money is taxed and spent this way performs as poorly for the economy as the demand for cocaine.

But some might argue that under the Obama administration the number of government workers making over $100,000.00 a year has more than doubled. That creates demand. I have to admit that it does create demand when government workers make double the wage of people in the private sector. The demand is not economic however it is sociologic. The demand is for government jobs not productive real jobs in the real economy that pay far less.

So, we are in a supply side recession, or at least a slowdown. The Elite have been throwing demand side fixes at the economy. Fixes like TARP I, TARP II, QEI, QEII, TWIST, and several stimulus packages, they have done nothing, but driven up inflation. Ronald Regan, repaired the supply side recession in his time with supply side fixes, and it worked in spades. Lets face reality here. Government spending does little for the economy but regulation hurts it a lot! Cut spending and cut regulation! If we want to get America back on the right track we need to follow things that have worked in the past not things that have failed. That is the way to a prosperous future.

What kind of future do you want for your kids… Perpetual joblessness and despair (ala Jimmy Carter and Barack Obama) or low unemployment and a bright future (ala Ronald Regan and Margret Thatcher)? Demand side vs. supply side it is that simple.