Real Wealth Society

Friday, December 30, 2005

Bush supply-side pseudo-economic policies are destroying our economy By Unlawfulcombatant

Bush supply-side pseudo-economic policies are destroying our economy.

It would take all of about 20 minutes to explain to someone how his
economic mismanagement is worsening the economy, in addition to the
complete absence of logic to his economic policies. His policies are actively
worsening life for the lower 98% at present. And they will make 100% of
us poorer in the future.

Tax cuts for the affluent, and other "supply-side" giveaways make no
economic sense. Many people aren't aware of this, because it does take a
little time to explain. But not very much. So I'm going to try here.
Our country became the world's most powerful economy under
administrations that practiced "Demand-Side" economic policies. In general,
demand-side economics centers on consumer spending and demand. Profits are made when goods are sold, not when produced. Industrial production is
driven by DEMAND for goods made from that production. Consumer spending
creates the demand for that production. Without demand, there is no
production. That's because there's no benefit to that production. No profits
can be made from unsold production.

Consumer demand is the ONLY factor that increases job and wage growth.
Demand for goods also creates demand for labor to produce goods.
Increased demand for anything increases the price. Thus, increased demand for labor increases the price of that labor. In other words, it increases
wages. It also increases hiring. Demand increases the number of people
working, as well as the wages of those people working.
If more workers are working and average wages are higher, it increases
the aggregate (or total) demand for goods in our country. Aggregate
Demand, when measured in dollars, is the ultimate limiting factor of
industrial production. Aggregate Demand in dollars is total spendable
dollars available to consumers. (Republicans hate the concept of Aggregate
Demand. It conflicts with their "alternate reality" economic theories.)
Again, aggregate demand for goods is the engine that drives our
economy. It drives production, hiring, and wage increases. The demand cycle
has a self-perpetuating effect. As labor/consumer income increases, so
does the demand for goods. That's because consumers have more money to
spend. This increased demand further increases labor demand. Which
further increases wages and hiring.

Supply-side concepts have never been accepted by a large number of
economists. What I mean here is that they are not even accepted as a valid
economic theory. Many economists refuse to call supply-side policies a
theory. Some refer to them as "voodoo economics." Supply-side policies
are essentially economic mythology. They are a completely illogical set
of ideas that were concocted to justify tax cuts for the rich. The
major proponents were not even economists. Most were actually journalists,
such as Robert Bartley, the late editor of the Wall Street Journal.
Let me try to show the error of some supply-side propaganda. A major
point is about tax cuts for the rich. This is supposed to stimulate
investment. That investment is supposed to go into building production
facilities and increasing production (supply). There is an obvious problem
here. What if consumer spending doesn't necessitate increased
production? If consumer spending doesn't keep up with supply, that investmentmoney is completely wasted. Profits are made by SELLING products, not producing them. Un-sold goods do not "grow" our economy. (Neither do
increased CEO salaries.)

Another less important, but even more illogical assumption, is that if
you tax people less, they will produce more. It may be true that
high-end taxpayers would have more money to invest. However, that's where the truth ends, and the fantasy begins. Even acknowledging that smidgeon of
truth, the benefit of that money is questionable. The extra investment
money is supposed to lead to increased goods production(supply). Again,
there is no benefit to producing more goods than consumers can pay for.
This increased investment money is useless unless demand necessitates
increased production.

There is also a definite negative to these supply-side fantasies.
Increasing the deficit to fund these cuts increases inflation, as well as
devaluing the dollar. That means consumer dollars are worth less. So
consumers will buy less. And provide less demand for goods, causing less
demand for labor. Which starts us on another self-perpetuating downward
spiral.

The big picture is this. In order for production to increase, demand
for production must increase. Consumers need to have enough spendable
wealth to purchase increased production. Increasing production without
increasing consumer spending is putting the cart ahead of the horse. The
cart isn't going to "push" the horse forward. And manufacturers aren't
going to "push" consumer spending forward. Only consumers can drive our
economy. They provide the demand that "pulls" production forward.
Remember the old adage: "Necessity is the mother of invention." So it is
that "Demand is the mother of production." Demand for goods leads to
increased production of those goods. However, supply of goods does not
increase demand. Unsold goods are worth absolutely $0.
Demand-Side Economics were almost universally accepted until the
mid-1970's. However, sometime in the 70's, supply-side mythology was born.
(Under a rock, in a dark cave.)

Today we're seeing the fruits of supply-side mythology.
Consumer income has decreased during Bush's "economic reign-of-terror."
Tax cuts for the top 2% favor investment, not consumer spending. Though
consumer income was obviously declining, Bush decided his rich friends
needed more money to "grow" the economy. According to Bush, they would
produce more goods and increase production capacity. Also, as Bush
dishonestly claimed, they would hire more workers.

Does this make any sense? Will a company hire more workers just because
they have more money? Do they hire more just because they can afford
to? No, absolutely not. They only hire workers when they NEED them. No
amount of corporate giveaways will increase hiring, unless demand for
production increases, which increases demand for labor to provide that
production.

Let me give an example. Let's say I'm a doctor who sees 6 patients per
day. I need one nurse. What if my new friend, George Bush, gives me $1
million because he likes me. (for some unknown reason.) Will I hire
more nurses? Of course not. I don't NEED more nurses. They won't increase
my profits any, and they will cost me money. So I'm not going to hire
them.

Let me change the example. Let's say I'm the same doctor, and my
ex-friend, George Bush, takes back the $1 million. He then gives it to the
potential patients who live around my office. Now more people can afford
medical care. Now I have 30 patients per day. Am I going to hire more
nurses? Yes, indeed. Because now I NEED more nurses. The DEMAND for
nurses has increased. Hiring more nurses will increase my profits.
In the above example I hired more nurses only when I NEEDED them. I
hired none when I didn't need them, even though I could afford them. Being
able to afford hiring of nurses had no effect on hiring. Demand for
their services did. This increased demand was due to increased consumer
income. Increased consumer income ALWAYS increases aggregate demand. (It
may effect demand for individual products differently. But is still
increases the sum total of demand for goods and services produced.)
In the above example, nurses spendable income increased because of
demand increase. In turn, their income increased aggregate consumer income.
This increases demand for the goods they buy, and the labor that
produces those goods. It helped the entire economy as a result.
Again, increased consumer income increases demand for production. But
how does consumer spending increase, if consumer income decreases? It
increases through credit and borrowing. Current consumer spending has
been maintained through increased borrowing and credit card spending. To
phrase this differently, it has been maintained by consumer "deficit"
spending. And this is becoming an increasingly larger portion of consumer
spending. A lot of this deficit spending has been financed by the
artificially increased value of homes, and the resulting increase in home
equity loans. Interest rates have almost a direct effect on the market
value of homes. The higher the fraction of buyer's cost going to
financing, the less the market value of the home. This is because the seller
receives a smaller fraction of the total payment. If interest rates are
low, the seller receives a higher fraction of the buyer's payment.
Let me give a brief illustration. Let's say I want to buy a home. Let's
say I am a perfect example of all potential buyers in my area. I'm
willing to pay $300,000 total for a home. This includes all finance
charges, as well as principal payment. Let's say the total financing costs
$150, 000. That means the seller will get the other $150,000. That means
the market value of his home is $150,000, because that's what he
actually gets.

Let's change the finance charges. I'm still only willing to pay
$300,000 total for the home, including all finance charges. But the finance
charges are only $50,000 now, because of a lower interest rate. The
seller now gets $250,000, instead of $150,000. The market value of his home
is now $250,000. The market value of his home has increased $100,000
because of a reduced interest rate. The reduced interest rate accounts
for 100% of the increase in market value. This increases the equity, and
increases the amount he can borrow off this equity.

Lowered interest rates have greatly increased home equity values. They
have also greatly increased the amount of money that can be borrowed
off this equity. This money has made a significant contribution to
consumer spending during the last 4 years. Current estimates are that it
contributes $200-300 billion per year to our $12 trillion GDP. This is 1.5
to 2.5% of our GDP. Borrowed money has prevented consumer spending from
sinking. As interest rates rise, home equity values will decrease.
Money borrowed from this reduced home equity will also decrease. The
contribution to consumer spending from this money will also decrease.
From this, it becomes obvious that consumer demand cannot be maintained
by this consumer deficit spending. We are nearing the limit now. We are
going to reach this limit in the near future. The home-refinancing loan
bubble, and its contribution to consumer spending, is about to burst.
When it does, consumer spending and demand will drop. And they will
continue to drop, because this is also a self-perpetuating cycle. As
consumer demand for production decreases, so will the demand for labor to
provide that production. As a result, hiring will decrease and layoffs
will increase. This will further decrease consumer income, and the
spending that comes from that income.

We need to change our economic course. We can't let Republicans
distract us from major issues. We can't let them waste our time with
discussion right-wing planted distractions. Subjects such as steroids in
baseball, the Robert Blake trial, Michael Jackson, and Terry Shiavo provide
cover for what the Republicans are really up to. Corporatization of
social security and extension of tax cuts for the rich affect all of us. Job
loss to the cheap slave labor of foreign countries affects all of us.
Let's not help provide cover for the Bush/Snow/Greenspan "economic
axis-of-evil."

Clinton was right. It is "the economy stupid." Let's not let the
Republicans convince us otherwise.

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