A Defense of Supply Side Economics

Supply Side Economics works.

This isn’t a political statement, nor should it be a particularly controversial one either, unless you believe I am referring to the mythical “trickle down” straw man conjured up by some in the political establishment.

By supply side economics, I am referring to the broad basket of policies designed to establish a strong foundation for private sector-driven economic growth and prosperity. These include, but are not limited to, a lower, broader, and simpler tax system, and a reasonable review of business regulations recognizing that entrepreneurship is not an unlimited resource.

We have seen just how successful these policies can be in bringing prosperity to all corners of America with the Trump Administration’s executive order to repeal 2 regulations for every 1 new regulation and, more recently, the Trump Tax Cuts that have delivered rising incomes and new job opportunities nationwide, especially in economically-depressed areas.  As a result, company after company is offering higher wages and bonuses to their workers, while the stock market has soared to record levels.

Progressive macroeconomists and those who find their empirics useful, argue that the most impactful form of economic stimulus is government spending (“investment”), preferably with borrowed money.

The problem with this approach is not only the shaky historical and empirical evidence in support of it, but also that the entire theoretical foundation on which it rests is wrongheaded. Our goal should not be to maximize GDP in isolation, but instead to recognize that GDP is only a meaningful measure of well-being to the extent that it represents the desires of the American people.

In other words, government directed tax and spend (or borrow and spend) policies may temporarily increase GDP, but how do we know that the money was spent on things people value?  Also, how do we know that we are not once again simply borrowing from future growth to spend on yet another government miscue?  Increases in GDP can only be assured to correspond with increased national welfare to the extent that it represents largely free and voluntary exchanges between individuals.

As PRI’s Wayne Winegarden wrote in the “Beyond the New Normal” series, government doesn’t really look at whether the tax dollars it is spending adds value to the economy.  Bureaucrats assume that the increasing the cost of government increases the value to the private economy.  The reality is that government spending doesn’t really grow the economy.  Winegarden concludes that the best way government can help during tough times is to reduce high tax rates and let Americans decide for themselves how to spend their own money.

One perceived disadvantage of supply side economics is the apparent inability to provide Keynesian-style stimulus when politicians scramble to “do something” during economic downturns.

However, there are ways to provide needed short term economic boosts to growth while also making our economic policy compatible with a long-term approach to sustainable growth.

For example, Congress can approve and authorize spending for necessary investment (e.g. infrastructure), including completion of all necessary environmental reviews and/or issuance of permits by deeming them improved in law, but delay spending these authorized funds until times of significant economic downturn, to provide the most beneficial short-term impact.

There should be no simple-minded “dig a ditch and fill it again” spending here, or “maintenance of effort” requirements that serve only to protect and preserve the bureaucracies instead of rebuilding the broader economy. Money won’t simply be authorized on the expectation that “shovel-ready” jobs will materialize. Instead, shovel ready jobs will be “pre-approved,” and then put into action when maximally useful.

There is no excuse for Congress to wait until the next recession materializes before scrambling to find something, somewhere at which to throw money. There is also no need to forgo the long-term economic benefits that low taxes and reasonable regulation provide because of the perceived inability of supply side economics to provide counter-cyclical boosts to GDP.

In our current Keynesian paradigm, we suffer from depressed long term economic growth while also lacking any real flexibility to provide timely and meaningful stimulus during our next recession. Supply side economics can serve both our short and long term economic needs and do so in a more sustainable and efficacious manner than the unsustainable policies that were pursued during the Obama Administration.

Damon Dunn writes the regular “Free Markets 101” Column for “Right by the Bay.”  He is a successful real estate developer, investor and businessman, former collegiate and pro football player, and was a Hoover Institution fellow from 2011-13.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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