Supply side economics

[Ddrak]

This is a pretty well written article I just saw which explains what I mean when I'm saying jobs are created by demand and not companies (emphasis from the original).

Hanauer takes home more than $10 million a year of income. On this income, he says, he pays an 11% tax rate.

With the more than $9 million a year Hanauer keeps, he buys lots of stuff. But he doesn't buy as much stuff as would be bought if that $9 million were instead earned by 9,000 Americans each taking home an extra $1,000 a year.

Dd

[Lurker]

Yep. Great article. Everyone should read the Hanauer Op-Ed too.

[Minute]

Great stuff right there.

[Partha]

Supply side economics

don't work. End of Story.

[Torakus]

This guy's income from selling a company that had few employees to begin with is hardly a good example of supply side economics not working. I think Embar can state it better than I can, because he is an example, but the income streams of business owners and their principal investors investments (not .com owners) being reinvested back into the business as infrastructure improvements or new hires or many other types of growth. Are you suggesting that the economy would be better off if we were to take away the assets of successful business people after they sell their business and redistribute it? If so you are insane. The big corporations already shelter their wealth in other countries with more favorable tax codes. Wouldn't you think if we made ours more favorable and invite them back that our economy might improve? 50% of nothing is a lot less than 25% of anything.

[Ddrak]

Reinvestment in business is pointless if there's no one able to buy your goods. That's the whole problem with supply side economics. "If you build it, they will come" may work for Kevin Costner but not for real life. Sure, once there's demand established then you can ease up on the supply side to balance things, but you have to deal primarily with the demand side to ensure profitability all around.

The idea of "taking away the assets of successful business people after they sell their business and redistribute it" is just silly because no one is suggesting it. That's a flagrant strawman that often gets dragged out whenever anyone dares suggest the demand side is important. Historically, businesses have thrived with marginal rates of up to 90% and right now they're at around the lowest in history so I really don't think your statement is in any danger of ever being enacted by anyone.

As Embar so often points out, a lot of the economy is in small to medium size business. Dropping the tax rate to bring the big corps back would be a net negative on government revenue, so therefore pointless. It's better to close the loopholes that permit tax shelters in the first place, preferably by simplifying the tax code.

Dd

[Embar Angylwrath]

What Dd fails to grasp in the supply side theory is the notion of "demand". He infers that "demand" is organic, in that it naturally arises from consumers.

He is wrong.

Demand is created by business. It's marketing. It's invention. It's a creation of a service and/or product, and then the marketing of that product, that produces demand. We lived just fine without a 4G iPhone, but Apple, in its marketing, created a "demand" for the phone. We lived just fine without Starbucks, but (and god bless their evil capitalistic hearts), they created a "demand" by offering yummy coffee treats. So other than food/clothing/shelter, all consumer demand is created by businesses that convince people that the service or product being offered is essential to having a better life. We don't need 60 inch plasmas or smart phones for 12 year olds, but businesses have convinced us we do.

Knowing that, successful businesses compete to push their messages out to the consumer. Seen what the fashion industry can do to womens' collectiove self worth? That's a great example of the power of businesses to create a demand. Women don't have to buy diet pills, starve themselves, eat special diets, buy special exercise equipemnt, get the newest skin creme, buy the latest fashion, purchase the "better" make-up etc in order to be "real" women... businesses convince them they have to do it. Therefore the demand for all those diet pills, exercise equipment, special foods, etc. arise from a business... not from the consumer. Businesses tell consumers what to demand.

Businesses create the demand, and they create the jobs. I don't see how anyone can't grasp that.

[Partha]

They don't see it because, of course, it's pure nonsense. You can't build demand on something that people don't want, but you CAN build demand on something people want but haven't articulated. People have been toying with the base idea of being able to talk to someone long distance quickly since the beginning of civilization, so if you have a means to make them do it faster or with some desirable additions to what they're doing now, you don't need to do much selling of the idea.

[Jarochai Alabaster]

Demand is not created by business. Demand is tapped by business. Parents have always had a demand to maintain contact with their children. Hence, kids with cell phones. People have always had a demand for delicious food and beverages. Hence, Starbucks. People have always had a demand for the newest technology. Hence, plasma TVs. People have always wanted to be attractive to the opposite (Or in the case of some of us - same) gender. Hence, beauty and diet products. It is impossible for a business to "create" demand, but it is common for businesses to identify and tap previously unmet demand. All the marketing and inventiveness in the world won't help a business if consumers simply don't want the product or service they provide.

[MeGusta]

They don't see it because, of course, it's pure nonsense. You can't build demand on something that people don't want, but you CAN build demand on something people want but haven't articulated. People have been toying with the base idea of being able to talk to someone long distance quickly since the beginning of civilization, so if you have a means to make them do it faster or with some desirable additions to what they're doing now, you don't need to do much selling of the idea.

^This

Demand is tapped by business. Parents have always had a demand to maintain contact with their children. Hence, kids with cell phones. People have always had a demand for delicious food and beverages. Hence, Starbucks. People have always had a demand for the newest technology. Hence, plasma TVs. People have always wanted to be attractive to the opposite (Or in the case of some of us - same) gender. Hence, beauty and diet products. It is impossible for a business to "create" demand, but it is common for businesses to identify and tap previously unmet demand. All the marketing and inventiveness in the world won't help a business if consumers simply don't want the product or service they provide.

^and This

[Torakus]

I don't think supply side and demand side economics need to be mutually exclusive. I don't even argue that demand side can't work as long as the government spending does something useful, like create real short or long term jobs. If all your spending does is create 22 million low wage short term labor or service sector jobs (yes I know it is oversimplifying it a lot) then all you do is increase the average consumer's propensity to save, not spend. That type of spending is a self licking ice cream cone. Create a bunch of low wage jobs, point to vast number of low wage earners as reason for spending that creates more low wage jobs. Doesn't it make much more sense to take a balanced approach?

[Ddrak]

If you're talking about the narrow demand for a particular product then Embar's correct. The problem is this doesn't translate into any macroecconomic model because the demand for a particular product comes from the broader capacity of the consumer to spend. Increasing demand for iPhones (for example) reduces the demand for feature phones, for Nintendo DS's, for iPods and for the competitor's phones. It's pretty close to a zero sum game because the consumer only has a certain amount of cash to spend.

That's the problem. Moving the demand around using supply-side theories just moves it around. It doesn't increase the overall demand or do anything to your economy as a whole. To increase the economy you have to increase the spending power of the consumer for an overall increase of total demand and not specific demand for an individual product.

Now, if there's a supply of untapped demand then making it easier to supply that demand is certainly going to be your best bet. When people have excess cash (indicated by an increase in savings and decrease in credit) then moving to the supply side to ensure that demand is met is the sensible thing to do. The thing is, supply side economics only makes sense once the demand side has been successful so while it's nonsense to suggest people will buy more if you just given them more to buy without giving them more cash to spend, it's valid to say that giving people more cash and THEN easing the supply side makes sense.

Dd