From: platt@watson.ibm.com (Daniel E. Platt)
Subject: Re: Supply-side economics
Date: Tue, 01 Sep 1992 18:01:13 GMT
Disclaimer: This posting represents the poster's views, not necessarily those of IBM
Organization: IBM T.J. Watson Research Center

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
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.
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.

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.

|> 
|> 	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.

|> 
|> 	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).

|> 
|>         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.  

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.

|> 
|> 	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.  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.

|> 
|> 	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.'
 
|> 
|> 	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.

|> 
|> 	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.


Dan
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