Supply Side Madness
SOURCE: AP/Susan Walsh
If it weren’t so painful it would be downright hilarious. There is a seemingly endless procession of former free market proselytizers, including captains of industry, banking, and finance, trudging toward Washington to seek a handout, and it has become too damn expensive to be comical.
Only a short time ago many in that long parade felt a moral obligation to repeat President Reagan’s immortal words, “Government is not the solution, government is the problem,” as frequently as possible. Now they spend their days trying to convince the likes of Barney Frank (D-MA), Chris Dodd (D-CT), Nancy Pelosi (D-CA), and Larry Summers that government is not just the answer, but that for the sake of their share of the private sector, it’s the only answer.
Conservative politicians seem to have completely lost touch with these business leaders, their former patrons. They appear clueless to the irony of these pleadings as well as the circumstances that have brought them about. Over the years they have lost the more nuanced analysis of the American economy employed by earlier conservative leaders such as Dwight Eisenhower, Richard Nixon, and Gerald Ford. The only play in the playbook passed down by the Gipper is to fix the “supply side” of the economy. If anything is wrong it is because the government has unfairly burdened the “producers” in society, and the only suitable remedy is to direct more tax and regulatory relief to businesses and their investors.
But anyone as interested in markets as the rhetoriticians of the right claim to be can easily see that the problem in this economy is not on the “supply side.” A market is created when the owner of a product finds a buyer willing to pay a suitable price. Markets develop as the sellers and buyers grow in proportion to one another. If there is a shortage of products, the market can be only as large as available supply will permit. Conversely, if the number of buyers shrinks, the market can only be as large as demand will allow.
In a word, markets are symmetrical. They are subject to disruptions on both sides of the bargain, and the current disruption is entirely on the demand side as demonstrated by mounting inventories and declining retail sales.
American businesses have been avoiding further investment in plants and equipment for more than five years. They used soaring profits to increase dividends, buy back shares of their own companies, or simply sit on mountains of cash rather than increase productive capacity. Chief financial officers have known for some time that American consumers have been less and less able to sustain the level of demand needed to keep the producers of goods and services operating at full capacity. And they made their decisions even as their allies in Congress put forward increasingly generous supply side policies.
We are facing a demand side rather than supply side problem; this reality is important not only because it shows the philosophical flaws in the alternatives that are being put forth by conservatives, but also because it illuminates the Obama administration’s limitations in building a broader base of support for remedies to address the current crisis.
The argument between Obama and his opponents in Congress is not simply about the role of government in resolving such a crisis; it’s about the nature of the crisis itself. There will be little opportunity for consensus on economic policy as long as conservatives continue to insist, despite all evidence to the contrary, that the current difficulties are supply side in nature and can only be solved by giving bigger tax breaks to producers under the theory that they will increase productive capacity and generate ever larger inventories of unsold products.
Scott Lilly is a Senior Fellow at the Center for American Progress.
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