Alright, I hold a master’s degree in Economics, but I am going to part with a dirty little secret; I don’t feel as if I have mastered the subject completely.  I of course would like to claim, like Socrates that I have just become aware of my own ignorance, but I think to be fair the truth is that I just don’t really know that much.

For instance, what is it about supply-side policies that make them so favored by government, and what problems do these cause?  My gut instinct is to break the subject down into some manageable parts, to abstract and then use Hegelian dichotomies to understand trade-offs and weights.  So, what are the aims?  We can look at history to determine what was available as a policy tool before supply-side (for this modifier almost surely separates new policies from old).  So we go back to Keynes and the stimulation of aggregate demand.  In this world, the problem is animal spirits, which people just want to buy a baseline of goods to satisfy natural urges.  This is some decreasing function of the income that they have so if we can increase the income of the masses then we get more consumption goods, and an economic recovery.  It sounds fairly simple, but the problem is that redistribution has many various and complicated effects which are hard to think about, much less explicitly name.  For instance, the choice to invest in large government works projects carries with it the problems associate with any public good.  We first have to justify the investment of these resources, at this time, and in this particular good.  There might be a reason that the market has not invested in infrastructure, possibly the market is not failing; we just see it this way.  The most common example is an investment in an interstate system to accommodate consumer travel, but years later an airport system is comparatively advantageous, so maybe there is misplaced investment.  A better historical example which I have looked at is the convergence to canal systems for transporting goods, until the invention and the standardization of rail roads supplanted that and showed the mal-investment in canals. 

Regardless, the money that the workers earned is good for the economy, right?  I mean if they are employed by the state then they have more income and then buy more goods, right?  This assumes that there is a baseline of wage.  In an economic downturn, one of the possible concerns is that people value their labor at a higher rate than the market does.  There are many arguments for why a person might choose to stay out of the work-force.  I for example was part of a large movement of working people who returned to college for graduate school.  We figured that since our opportunities were not what we expected, we would “sit out” the economic downturn, and invest in our human capital.  That way when the economy “picked up” we would be able to reach the branches of economic plenty first because of our new-found certificates.  My peers that are looking at the job-market right now are seeing that some level of this is rooted in reality, since there seems to be a shortage of master’s level analytical persons looking for their first job.  My own phone is “blowing up” with job offers, even though I am not on the market.

So we took on debt during a downturn because of projected future gains.  Maybe we were just lucky.  What about those without skills?  It may seem harsh, but sometimes the struggle to survive means that you are willing to accept wages below some “golden” $5.25.  These cheaper labor costs might be the thing that helps a new entrepreneur to finance a great new idea.  So the re-evaluation of the value of an input may in fact encourage growth in a certain industry.  We don’t like to think of labor as an input like machinery, but in an economic sense it is.  The entrepreneur who sees this opportunity will sort the market out.

So I have made a really weak case for leaving the economy alone.  I should spend more time and create a thesis for specific empirical examples in the Great Depression, but hey this blog is called off-the-cuff, the sole intention of it is to make me write each day (and I fail at even that).  So I am left with my original question:  Why does supply-side make sense?  I think I have proven that we need to be wary of government action, but as a society we expect that we can do better through the application of reason, that we can by just doing something.  This is why basketball players have coaches, this is why we submit to managers at work.  Somehow a group needs a head to direct it.

So we look back at the demand-side policies and see inefficiency.  What happens if we force a minimum wage, yet give the employers more money to invest in future exploits?  This way we give a similar incentive to the businessman that cheaper labor would have given.  We can stimulate production of new goods.  This sounds great, we capture the supplier interest, and we “trickle down” more income to the labor class.

I am not sure however that the government bureaucracy is making the same type decisions of the market.  When bad entrepreneurs (hear defined as those unable to read the market) start manufacturing something, they have greater insulation from their mistakes.  The supply increases of goods formally demanded.  The consumer therefore sees increases in inventory.  This subsidy is lowering the relative price of goods being shipped to the market, somehow this makes inferior products compete with better products, and when customers choose on price and this sends a signal back to the manufacturer to continue making the product.

Granted this part of my rant makes little sense, I am working on understanding this argument.  So somehow “supply creates its own demand.”  I would love it if someone could help me understand this argument better.  But in this world, the incentive for the supplier can be seen to undermine the market system and create a world of wealth concentration.   If those already in power gain an advantage from the government, and it has these re-enforcing characteristics, then maybe there is a problem here which the neo-Marxists have uncovered.  It would take someone much more sophisticated than me to figure that out.  The new entry of participants into long-standing and large industries, in this country has the effect of injecting “new blood” into this world.  If we don’t allow this instability to persist, then maybe we become less competitive on the world market.  The dichotomy between macro and micro can teach us the ultimate lesson of this logic, that there will be benefits to stabilizing the global situation, so that international competition is no longer interjects dynamics on this static equilibrium.  This may in-fact explain the war-mongering which is increasingly popular these days.