Newsgroups: talk.politics.misc,sci.econ
Subject: Re: Supply-side economics
From: demon@desire.wright.edu (Stupendous Man)
Date: 2 Sep 92 13:28:41 EST
Organization: Demonic Possesions, Inc.
Summary: long

In article <1992Sep01.180113.33378@watson.ibm.com>, platt@watson.ibm.com (Daniel E. Platt) writes:
> In article <1992Aug31.120229.3818@desire.wright.edu>, demon@desire.wright.edu (Stupendous Man) writes:
> |> 
> |> 	I've been away from the net for a few days, so I'll try to answer all
> |> the questions in this post. :)
> |> 
> |> 	A) 'Evidence' for supply-side/boom/tax cuts in anecdotal.
> |> 
> |> 	Far from it.  There are numbers galore.  From the Mellon tax cuts in
> |> the 20s, to the Kennedy cuts in the 60s and the Reagan cuts in the 80s.
> |> 
> |> 	Tax cuts have a variety of positive influences:
> |> 
> |> 	1) It puts money back in the supply side of the economy.  This allows
> |> growth to occur.  Increasing demand can not do this.  What good is increased
> |> demand if there is no supply?
> 
> What good is supply if there is no demand?  Why do you think we had this last

	It's the same situation, of course.  But what supply-side does is
increase the *ease of creating supply*.  It does not create supply.  The
business sector must find where the demand is, then use the increased access to
creating supply to fill that demand.

> recession?  Lots of houses on the market, but no buyers.  Sellers are often
> burdened with large debt and cannot lower costs without taking a severe loss.

	Real-estate collapsed because of over-supply (caused by
over-speculation) but that isn't what "caused" the recession.  The recession
came about because government once again started raising a taxes.  That
combined with the real-estate downturn, RTC scam, etc. turned a soft economy
into a recession.

> People burdened by debt are not in a position to aquire more debt to buy cars.
> Car makers and builders find themselves without work.  Supply companies also
> find no work.  There's even less money available for people to buy cars.

	The best way for people to get out of debt is to pay it off, either
through decreasing their spending in other areas or by making more money (or a
combination).
	The problem is, when you increase taxes, they have only one
alternative.  Decrease spending.

> If you have demand, you'll find people willing to provide supply.  That's they
> way competition works.  If you don't have demand, all the supply in the world
> is worth zero.

	Demand without supply will get you inflation.  The point is not to
create supply and hope for demand (like the Soviet system), it is to make
creating supply easier, and let the market decide the when and where.

> |> 	2) People feel that they have both more money and more control over it. 
> |> This leads to greater consumer confidence, greater consumer spending, and thus
> |> a livelier economy.
> 
> The last go around gave us much more spending than revenue.  We have unprecidented
> debt in both private and public sectors.  The debt is more than an obligation,
> it is also an economic burden to people.  It isn't that people don't have income.
> The income is eaten up by servicing their debt.

	Yeah, but that's a little like saying "since people get fat when they
eat too much, the solution is to stop growing food".

	Those who get in over their heads in debt will go bankrupt, leaving the
market with the more efficient operators.

	We don't need to stop providing economic growth to stop people from
obtaining too much debt, we need to keep the money supply tighter, so that
borrowing is more expensive.  It requires a balance, of course.  Cheap
borrowing can spur growth, but then you have to temper borrowing so that it
does not exceed the economic capacity.
	At the same time, you can increase capacity by making the creation of
supply easier.  Let the market decide what needs supplied.  A decrease in
demand is a signal to tighten borrowing for that sector.  Real estate could
have been saved if someone would have looked at real demand for land/housing
instead of letting the speculators have access to cheap money, and create
artificial demand.
	Over-leveraging is a sign of excess, but to cure that you don't need to
remove the growth incentives, you need to control access.

	Let's say I'm a house builder.  I need incentives to build houses and
customers need incentives to buy.  These need not be actual money, but could be 
tax breaks, cheap loans etc.
	By increasing the supply of housing, I have not created demand.  That
demand is either there or not.  If, however, speculators enter the picture, and
begin wholesale buying, in the hopes of reaping profits from rising values,
artificial demand is being created.  You can tell the difference by vacancy
rates.  An increase in vacancy rates is a signal to tighten borrowing for new
construction.  But not for buying.
	If, however, I have capital and want to risk it by continuing to build,
that's my choice and my risk.  RTC has taken away the risk, so don't look for
the real estate speculators to go away.  However, this is no indictment of
cheap borrowing for buying.  What's the difference?  Won't cheap borrowing to
buy simply continue artificial demand?
	No.  Since the incentives to build are gone, prices rise.  The amount
needed to realized a profit also rises.  Remember, speculation is the
assumption of *future* price rises.  The immediate rise produces a lessoning of
speculating, driving down artificial demand.  There will still be those who buy
high and sell low, of course.  But you can't follow people around with band
aids all the time.
	Think of the stock market.  What would happen if the government covered
all losses?  But the fix is not to prevent trading of stock, but to limit
leveraging and speculation--don't let artificial demand mask real demand.

> |> 	3) After the Reagan tax cuts, revenues *increased*.  More people were
> |> paying taxes (instead of hiding it in shelters) because it (once again) became
> |> more profitable to take the smaller hit in taxes and be able to invest the
> |> rest.
> |> 	Tax cuts results in 'smaller' revenues in the immediate sense that
> |> government will take in less money *if all other factors remain the same*.  But
> |> they don't.  More people pay the lower taxes, more people have money to
> |> invest/spend, the economy grows, causing more people to enter the tax-paying
> |> region of income.
> 
> Even so, the government's spending and its revenues do not have to be equal.
> We've been running significant deficits all through the Reagan years.
> The end has been a government whose options are severly restricted by the
> increasing service charges on the debt (interest payments on federal bonds).

	We've been running deficits since 1969.  Increasing charges on the debt
are a problem.  But once again the solution is to *pay off the debt*.  The best
way (but not the only way) is to increase revenues. (Wait!)  And the best way
to increase revenues is to...cut taxes!
	Before anyone busts an aorta, I'm not talking in circles.  By lowering
tax rates, more people pay taxes.  Government also gets more revenue because
the economy improves and people make more money (thus paying more taxes on the
greater income).

	So you can tax someone heavily (decreasing the incentive to earn) and
watch revenues fall as people determine that working is not worth it.  Or, you
can decrease taxes, making earning more profitable.  More people earn more, and
thus the government gets more revenue.

> |>         B) Where's your model?
> |> 
> |> 	Right, if I (or anyone) had a foolproof model, we'd be selling the
> |> house and family to leverage ourselves in the futures markets.
> |> 
> |> 	What I (and others) have been doing is looking at past economic
> |> expansions and looking for common elements.  Because the economic situation is
> |> not static, and never will be exactly the same in the future, the best you can
> |> do is look for elements that have worked in the past and apply them to the
> |> current situtation.
> |> 
> |> 	C) taxes...
> |> 
> |> 	Tax cuts, for example, are not problem.  Despite the cries of 'debt' and
> |> 'deficit' tax cuts enable the economy to grow, providing more revenue.  Only
> |> cutting spending will get rid of the debt.  You could increase the revenues
> |> exponentially, but as long as spending is greater than intake, you'll have
> |> deficits and a debt.  So the problem is not taxes, but spending.
> 
> A HUGE amount of the 'spending' is now involved with servicing the debt.  Other
> huge elements include the huge subsidies that have fed a non-competative medical
> industry.  As much of America becomes greyer, we should be really concerned about
> this.  

	True.  A solution is increased immigration.  (But managed so that
capacity is not exceeded.)

> In a way, spending is part of the problem.  However, rather than equating government
> programs with government spending, we should rather focusing on getting value
> for our tax dollar.

	Very true.  Opening up traditionally government-only serivces to
private competition works well in this area.  Instead of people trying to make
their jobs stay around, you could be paying some company to get rid of the
problem.  Bureaucracies tend to be self-perpetuating.  They don't have to worry
about results, just about justifying their existence.  Which leads to a
tendancy to perpetuate the very problems the bureaucracy was formed to get rid
of.

> |> 	D) Oil caused inflation.
> |> 
> |> 	Not true.  Inflation, coupled with the abandonement of Bretton Woods
> |> caused the devaluation of the dollar.  Since the oil trade uses the dollar, the
> |> OPEC nations were now getting less for their oil.  The "oil shock" was simply
> |> the OPEC nations restoring the value of their oil to the pre-August 1971 value. 
> |> August 15, 1971 is when Nixon abandoned Bretton Woods.  Right after that the
> |> OPEC nations stated that declines in the dollar would result in price
> |> adjustments.  The 1973 price rises can harldy be called "shocking" since there
> |> was two years warning.
> 
> Nevertheless, the impact of this was to raise prices.  

	But not the cost!  Dollars worth less were being used.

> Much of our industrial
> production, raw materials (plastics), transportation, domestic heating and
> energy use, etc derive from oil.  Regardless of the mechanism by which
> oil price increases occured, the impact was inflation.

	Devaluation of currency will always bring inflation.  Increasing oil
prices were merely a symptom of devaluation.  Since OPEC had to trade in
dollars, a devalued dollar required more of them for each barrel.
	Consumers had to "pay more" and companies had to "pay more" in terms of
dollars, but the dollars were worth less.  The cost did not change.  This will
always happen when sources of supply rely on the value of the dollar.  The
actual cost of oil did not go up, only the amount of dollars necessary to buy
it.  This is a symptom of inflation, but not a cause.
	The dollar was already worth less.  If you check, you'll see that the
"new" prices were exactly the same in terms of gold as they were before August
17th, 1971.  (1/32 of an ounce per barrel, if I remember correctly.)
	We couldn't very well expect the OPEC nations to accept less value for
their oil simply because we had inflation in the US.

> |> 	E) It's not that simple.
> |> 
> |> 	Of course not.  But cutting taxes is a start.  As is reducing spending. 
> |> And reducing the capital gains tax (down to zero, say :), etc.  By applying
> |> incentive-based economic policies, you reward economic success.  When people
> |> are rewarded (instead of taxed) for succeeding, a lot more are encouraged to
> |> try.
> 
> This would make sense if we didn't have such high services charges on the debt.
> However, the amount we can *afford* to play with would be effectively insignificant
> to most taxpayers.
> 
> |> 	Someone posted that I wasn't taking human nature into consideration. 
> |> Quite the contrary.  As the current consumer confidence levels demonstrate, the
> |> people will not spend money unless they feel the economic future is good. 
> |> That's why interest rates are not tied strictly to inflation, but must also
> |> take into condiseration what people feel future inflation will be.
> |>
> 
> I'd likely pay of my debt with any tax relief.  Since I incurred most of my
> debt trying to fix my old car, and then buying a new one (something I would
> not have done without need), taking less from my taxes would not have a
> significant impact on my spending.  I expect that most of the $'s 'given back'
> in taxes would not end up 'in the economy.'

	Paying off debt helps.  Without debt you'll have more to save/invest. 
Priming the pump for others.

> |> 	In the past, cutting taxes and providing supply-side incentives has
> |> resulted in economic growth.  Reversing those policies has brought about the
> |> end of those periods.  The US in the 20s, 60s, and 80s.  Mexico today.  You
> |> might consider it 'anecdotal', but it's historical fact.
> 
> I'd strike the '80's from that list.  Given how much of the stimulation came
> from the increase in the debt, and the impact of that debt on our current
> fiscal situation, I would say that the actual benefits are at best questionable.

	The increase of the debt was no the cause of economic growth.  We've
had increasing debt for decades.  What spurred growth was the increased ease of
creating supply.
	Government received more money after the tax cuts.  It *could have*
paid down the debt.  Instead it *spent more*.  That is the problem.

> |> 	And people don't want to go back to those polices because there is no
> |> absolute theorem to prove it will work?
> 
> Theorems are based on postulates; the postulates may not be correct to begin
> with.  The reason so many economists have indicated raising taxes would be
						      ^^^^^^^	
> a bad idea is that 1) not much would happen to help the economy due to the
> large consummer debt; 2) the impact on the federal debt would be excessive.

	(Was this supposed to be cutting taxes?)

	I'll assume it was:

	Cutting taxes will not have the long-term effect of increasing the
debt.  More revenues will be taken in, and it is congress to use those funds to
decrease the debt.  If they spend more, the debt will get bigger, tax cuts or
not.
	The individual consumer will not have a noticable effect.  It is the
sum total that will produce positive results.  Even if everyone simply paid off
debt with their additional funds, it would have a positive affect on the
economy.  The *potential* demand would increase.

Brett                                                      
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