From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: Supply-side economics
Date: Tue, 01 Sep 92 16:51:31 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

In article <1992Sep1.124643.16441@ms.uky.edu>, fehr@ms.uky.edu (Jeff Davis) writes:
|> In article <Dhl-2rB@engin.umich.edu> jwh@citi.umich.edu writes:
|> >
|> >Check the growth of the money supply.  You will probably find that it
|> >increased during the time of high inflation.  The boom was probably
|> >fueled by a combination of reduced tax rates, which encouraged increased
|> >economic activity, and loose money, which artificially encouraged
|> >increased economic activity.  The boom caused by tax cuts would not
|> >lead to either inflation or recession.  Increases in the money supply,
|> >or artificially low interest rates will cause businesses to expand
|> >more than they would otherwise.  The loose money gives a false impression
|> >of the state of the economy.  At some point reality clicks in and you
|> >have a recession.  Allowing people to keep more of their own money
|> >will not lead to inflation or an overheated economy.
|> >
|> 
|> It's just that these magical varieties of money which require a leap of 
|> faith.
|> 
|> money in the pockets of the wealthy = good money, productive money
|> money in the pockets of the poor = bad money, inflationary money
|> 

Who said that?  I certainly didn't.  'Bad' money is the result of
the government increasing the money supply, particularly at a rate
greater than economic growth.  When governments print money it
dillutes the value of money in circulation.  Those who receive
the newly printed money first benefit, however those who receive
it later are worse off due to the inflationary effects of the
increase.  This has nothing to do with money in the pockets of
the wealthy or the poor being good or bad.

|> money from tax cuts = good money
|> money from cheap credit = bad money

Money from tax cuts is simply money retained by the person who
earned it.  I guess I would consider that a good thing.  Credit
is not bad except when the government artificially lowers 
interest rates.  This results is excessive borrowing and the
resultant headaches later.  I guess I would consider this a
bad thing.

|> 
|> I'm really trying to understand. How does money know if its good money
|> or bad money? Why do businessmen fueled by low credit make bad
|> decisions? 

Businesses make decisions based on information provided to them.  If
money is cheap it may be in their best interest to take out loans.
Interest rates are simply part of the price mechanism.  As is true
of all markets, when the government mucks with the price mechanism,
bad decisions are made because prices don't convey accurate information.
Imagine a situation where a government keeps the price of a commodity
at a low value without much regard for the supply of that commodity.
This results in higher demand for the product than should really
be happening.  At some point a crunch occurs when demand outstrips
supply and shortages occur.  Can you say oil crises of the 70's?
It was a direct result of government meddling in the price system
for oil.  As a result, consumers made 'bad' decisions because 
prices were artificially low.  The same thing occurs when money
is 'too' cheap.

|> Why do businessmen fueled by low taxes make good decisions?

They don't, necessarily.  Those who make good decisions will
prosper, those who don't will fail.  However low taxes do
not create an artificial environment.  Low taxes simply mean
that those who do the work get to spend their own money.  Lower
taxes also mean that people are less inclined to shelter
income or avoid profitable ventures to avoid paying taxes.  This
is why lowering tax *rates* can increase tax *revenues*.  The
rate cut results in more economic activity.  A bigger economy
means more tax revenue.

|> Why don't businessmen, hip to the problems with low taxes, just  
|> pretend that this money in the street was theirs all along and
|> make good decisions? Is low credit BAD all of a sudden? I'm really 
|> trying to understand, here.

I'm not quite sure what you are trying to say in this paragraph.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         

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