Tuesday, April 3, 2012

The New Age of Supply-side Economics and Policy

Blame it on James and Fuzzy. In commenting on my post last week they both agreed I was not a nut-job. I am now emboldened by their trust and have focused my attention on Come and Go. Some of you remember the 50s song by the Dell-Vikings, Come and Go With Me. While the song has nothing to do with economics the words Come & Go suggest that things like Keynesian Economic Policy will come and go. And in this blog please underline the word GO. It is time for Keynesianism to go and I try to explain why here in less than half a million words. I am selling PUTS on Keynesianism. Please send your money directly to the IU Credit Union in my name.

Everything comes and goes. My baby boomer friends personally remember the Age of the Dinosaur. The smart brontosauri who saw the end coming transformed themselves into elephants and business school deans and survive until today. Look around and notice – no dinos. The Age of Dinosaurs is over. Similarly, the Age of Peyton Manning is over. Forward-looking Indianapolis Colts players and coaches jumped to other professional football teams or became lawyers. But look. No more Manning at the Colts. The age is over. Kaput. Adios. On Yong he ka sayo.

The above lucid examples and your local funeral parlor prove that nothing lasts forever (except for Nancy Pelosi and Jerry Lewis). And this truth applies to Keynesian Economics (KE). Just like horses were replaced by cars and my comb gave way to a nose and ear hair clipper, KE is giving way to something else. And even though you have sworn a pledge to never say these words – Supply-side economics (SSE) – I brazenly predict that SSE will soon replace KE. You readers who are still awake may have noticed I got tired of typing and have replaced the longer phrases for the abbreviations KE and SSE.

This is bad news for Larry Summers, Paul Krugman, Martin Wolf and a host of other sweet but misguided guys I have written about in this blog. I shouldn’t be so harsh. KE had its place in history. There were time periods when the harm done by KE Policy was possibly over ridden by the benefits. But give your kid a bath too many times in one day and he gets wrinkled and itchy. Baths are like lots of things – just the right amount at just the right time can be really good. But too many baths or a bath at the wrong time or a three day soak in the tub just causes problems down the road.

Sometimes it takes a while for people to discover the end of an Age. Think of all the diets you have been on. You don’t really know squat about nutrition. But you keep trying to lose weight. You probably keep trying similar diets only to discover that no matter how many pounds you lose you always gain back that many plus 10. The body is a very complicated and uncertain system. It takes a while before we finally figure out that some of us are born with a cookie monster inside of us. To rid yourself of this cookie monster you have to buy special cookie monster dust. That is the only thing that will work. But don’t tell anyone I told you.

The point is that the economy is pretty complicated and even after about 60 years of experience with KE we are just now seeing why it must come to an end. It had its time and it probably succeeded a few times. But it has hit its limit and the ball game is over.
How do I know the ball game is over? I can think of at least four good reasons why The Age of KE is over. First, the essence of KE Policy is managing spending. It involves finding ways to get people to spend more during a recession. Well, after a Whopper Super-Size government stimulus, people are still reluctant to take the bait and will not spend much more.

Second, KE Policy has backed itself into a corner. Whether the government does more demand stimulus or less, people are not going to spend more. With less stimulus (or what people are calling more austerity) the obvious result is not more spending. But doing even more stimulus won’t increase spending because most people will associate higher government stimulus with economic failure and increased uncertainty. They may also associate more stimulus with higher inflation and increased debt – equally worrisome and bad for confidence and spending.

Third, if one takes the time to read Keynes, he believed monetary policy could not revive spending in a severe recession because people have low confidence. If Keynes was alive today, he probably would abolish KE himself since he would apply his negativity abut monetary policy to fiscal policy too.

Finally, one reason KE is wrong today is that it has its eye on the wrong ball. The problem today is not a lack of spending. The problems today involve the adverse impacts of globalization, aging, sovereign debt, industrialization, excessive leverage, deer over-population, and male pattern baldness. These are problems that need myriad and targeted solutions. If you were experiencing fever and high temperature because of multiple breakdowns in your heart, liver, foot, brain and several other places – you might be a little skeptical of a doctor who advised you to take a larger dose of aspirin…or of any other single treatment.

So KE had its day and there is no hope for its continued influence. Betting on KE to solve today’s problems is a loser. The Put is in. It is time to buy SSE and SSE Policy. SSE Policy is the perfect way to directly attack US problems. But talking about SSE Policy is like talking about someone passing gas. It just isn’t done in polite company. SSE Policy has been called a lot of names: Trojan Horse, Voodoo Economics, and Trickle Down to name a few. Those are not nice things to call an economic policy. Each phrase, however, exhibits a real reservation people have about SSE and each term is worth addressing. But calling SSE Policy a bad name or referring to a president as a bad actor and or a cowboy does not automatically disqualify SSE Policy. So let me explain why. 

I see that I am coming close to using up my weekly allocation of JD. And I am at my word limit too. So let’s postpone the positive story about SSE and SSE Policy to next week.  So take a little time off – pet the wife and kiss the dog and otherwise enjoy the week. 


  1. Comments: I can only think on a smaller scale like my home town (Daytona Beach) economy. Federal funds come here in several ways...grants, stimulus, subsidies, tax cuts or increases in Federal programs. Our other two sources of outside income are tourist which is low paying and those dollars typically fly out of the community for standard things tourist buy like food, beer and room nights for franchise hotels. The dollar turn over is less than 7. For local businesses the dollars fly out slow because they pay more for labor who in turn buy local products and service along with products and services that are imported. Federal and state funds derived from tax dollars are used to attract new economic development as well as incubate and grow local businesses. If taxes and regulations are eased on small businesses and maybe larger ones, then those businesses will have lest cost and will make more profit which is typically invested back into the business for growth and hiring more employees..unless they are totally automated. Even then they have to hire high profit IT people to service or set up the digital systems used to support automation.

    Pushing more cash into the local system from Government spending is not sustainable and does not build an infrastructure or stage to grow the local economy. The exception would be programs like NASA which lasted 35 years and grew a large base of high paid engineers and managers...who for the most part stayed here to create their own businesses when NASA stopped the program.

  2. Lar, you should not be so hard on Sir Lord Keynes. He himself would probably not recognize the system he imagined and called KE. I will submit that he had probably consumed one schooner too many when he came up with the concept, but it wasn't all bad....there just wasn't a lot of good to it, either. What we have today which the Krugmans...or would the plural be "Krugmen?"...of the world love is a severely bastardized form developed to sooth the savage breast of the expansive liberal. Even Lord Johnny said that a national debt in excess of 12% of GDP was the place to yell "WHOA!" 12% to this crowd at the WH is a mere pittance. To paraphrase Everett Dirkson, "A trillion here, a trillion there. Pretty soon you're talking big money."

    Perhaps the Colts will be worse than the Falcons for a while.....but only marginally.

  3. Dear LSD. Geese, with all those letters/abbreviations I feel like I’m swimming in alphabet soup. Insofar as a policy “correction,” I like simplicity – don’t spend more than you have and if your expenses are too high then go in a budget: eat more v-e-g-e-t-a-b-l-e soup.

  4. Makes sense! The best SSE Policy is a conservative spending policy! Thanks Charles.

  5. Amen! I see where the FED is now reluctant to do any more easing...several $trillion later. Bottom line is that our leaders are self serving on both sides of the aisle. Even the chairman of the budget committee ..Ryan Paul..His first budget last year followed the recommendations of the two special non partisan committees. This year it follows a few things but then provides spending for several pet's of the R group. The O man is trying to pander to the small businesses and moderates by producing some legislation that significantly weakens rules designed to protect investors. I have a small business and we raised our capital under the FTC rules. Even then my fellow partners managed to raise funds on the edge of the envelope. Those rules did not hold us back. If a business has a product that is wanted or needed and prices according to a willingness to pay by the buyer based on perceived or known value built in...then that business will succeed ...assuming its managers know how to manage capital, production and sales. Weaker regulations would have hurt our fund raising because we would have gotten into trouble left to our own devices.

    Point is...again the O man knows little or nothing about the economy and his advisers are old school K people.

  6. James -- thanks for adding the real business-guy perspective on these things.