[quote=EconProf]CAR: I agree with you about the importance of demographics in shaping economic outcomes. But I doubt the impact of the baby-boomers was as big as you suggest in boosting the economy during the Reagan years.
Reagan’s supply-side policies aimed to increase output by freeing up businesses and workers to produce more in a free market environment. In contrast, the Keynesian demand-side policies of the past ten years pump out monetary stimulus and government spending in hopes that the economy recovers. We now have great empirical evidence contrasting the two approaches. Reagan inherited a recession and inflation in some ways worse than Obama, with inflation peaking at about 13% in 1980, and unemployment peaking at 10.8% in November of 1982. Yes, that was two years after Reagan got elected, but supply-side policies were not fully in place yet, and Volcker’s harsh (and necessary) tight monetary policy was still wringing inflation out of the economy. But real GNP growth resumed as the economy bounced back like a coiled spring and unemployment steadily fell to 5.5% in 1988.
The demand-side policies of recent years have served to drive us deeper into debt and sapped our appetite to hire and expand production via the exact opposite of supply-side incentives. Businesses and entrepreneurs are afraid of the EPA, looming Obamacare costs, and Dodd-Frank compliance costs, among other job-killing laws. Of course they are moving jobs overseas! Worse yet, the new programs, handouts, and government agencies are entrenched now in our economy, and will be impossible to pare back, as demonstrated by the recent budget debate that achieved so little. The new recipients of the largesse, whether banks, car manufacturers, “green” companies, or those getting 99 weeks of unemployment will fight to keep the money coming.
The Reagan-Obama comparison above is imperfect in many ways, as nit-pickers will point out. But there are plenty of lessons we could learn from that era, and I suspect the coming months will give us a fuller debate about the contrast between supply-siders and Keynesian demand-siders. I
welcome it.[/quote]
EconProf,
SK in CV made the same points I was going to make, but will add a few more here.
At first, I wondered how you could characterize the past ten years as being Keynesian or demand-side, but upon further reflection, I can see you you might make that point. We just disagree on HOW demand is spurred, and whether or not it’s healthy or sustainable. Expanding credit for consumption (which is how one can make the argument that 2000-2010 is an example of “demand-side” policies) is neither healthy nor sustainable over the long run because at some point, that debt PLUS INTEREST needs to be paid back, which means that there will be a drag on growth at some point in the future. I’ve always criticized the Fed for lowering rates at the beginning of the decade and for lowering them in the past few years as well.
Lowering tax rates when starting wars is completely reckless and irresponsible. Not only that, but taxes were lowered primarily for speculators/investors, not so much for workers. If you believe that tax policy can change behaviors, then how would you justify rewarding gambling over productivity?
It’s also important to distinguish between what I see as two types of “investing.” One type of investing is when we invest in a company that produces goods or services needed by society. This takes work, but provides a benefit to society and to our economy, in general. This creates jobs and creates growth in a way that does not impoverish one group in order to make another group rich.
The other type of investing is what I call “speculating.” This consists of buying up assets that are already in existence, with no intention of adding value or using them for personal consumption. These “investors” simply buy assets with the intention of making money on price movements. This adds no benefit to society or our economy. It is behind the boom-bust cycles that we so often see in history, and it impoverishes one group in order for another group to become wealthy (zero-sum).
The monetary and tax policies of the past ten years have not distinguished between these two VERY different types of investing. Since starting an actual business that employs people and makes things requires very real WORK, people will not do it if they can just as easily “invest” in assets and sit back while the Fed does their bidding. This is one of the many reasons we’ve not seen real job creation during the past few years.
If it were up to me, I would increase top marginal tax rates on ALL income, and have lower taxes on labor than on investment income (we want to encourage productivity and work, right?). I would differentiate between capital gains earned from asset price speculation and gains earned from directly investing in businesses that build things. I would enact tariffs on things that are cheaper only because of labor explotation, low/non-existent environmental protections, and foreign govt subsidies, and would use those tax revenues to rebuild infrastructure and increase spending on basic research in healthcare, alternative energy, and energy conservation (among other things). I would reduce unnecessary regulations and ENFORCE necessary regulations that help level the playing field, ensure decent working conditions, and protect the environment.
Both Democrats and Republicans are guilty of destroying our economy, so I don’t buy into the notion that one side or the other will save us. I’d like to see a system where we vote for individuals instead of parties. It would require people to actually do RESEARCH on the candidates, and it would prevent those who seek to concentrate power from dividing us with silly emotional rhetoric while they loot us from behind.
