A couple weeks back I put my hat into one of the most sophisticated economic arguments, monetary vs. fiscal policy. An argument that is even more sophisticated is one on supply vs. demand side economics. A demand sider, or often called a Keynesian, believes that getting an economy out of a rut requires stimulating demand. By this I mean that a demand sider would want to do things to stimulate consumer spending. A supply sider believes that the best way to stimulate an economy is to stimulate business investment. Now President Elect Obama is CLEARLY a demand sider. Since the beginning, he has staked out a position in which the middle class get more tax cuts, rebate, and spending so that the middle class spends more. His package includes only breaks for those in the middle. He has nothing for those on the supply side, the wealthy and businesses.
One of my problems with demand siders is I can never tell where politics end and where policy starts. It's easy to be a demand sider since it is also a very populist position. After all, you are giving to the class of people that has the bulk of the population, the middle class.
My main problem with demand siders is there is no solid evidence in history of demand side economics ever working. Supply side economic policy, on the other hand, has a fairly rich history of working. For instance, Ronald Reagan was a supply sider. He cut the top rate from 70% to 28% and within a couple years our economy was humming in what amounted to a near 25 year roll of economy prosperity. Ireland cut their corporate tax rates dramatically and it lead to a massive growth in that country's GDP. President Bush, 2001-2003, cut all taxes across the board and staved the economy from a serious depression and ultimately lead to a period of growth that lasted five years, until recently of course. JFK made similar tax cuts with similar results as well.
Demand siders often point to FDR, but as I analyzed, his economic record is rather complicated. Others point to the Clinton years, though it's still unclear to me what Clinton did to stimulate the economy. Besides these two examples, one is hard pressed to show any historical examples of demand side economics working.
One of the reasons that demand side economics has such popularity is the media's total distortion of the two policies. Because Republicans are most commonly associated with supply side economics, its effectiveness is downplayed. Whereas it is Democrats that are more commonly associated with demand side economics, and thus, the media plays up its effectiveness. For instance, George Bush rarely gets credit in the media for the effectiveness of his tax cuts. Clinton's economic policies are played up. FDR has been so lionized that his economic policies have been played up way beyond their actual effectiveness in my opinion.
As such, we are about to enter a period of serious economic malaise with an economic policy that is totally unproven. Rather than cutting taxes that have worked in the past. Rather than going with a strategy that has a history of effectiveness we are going with one that has scant evidence it works. This incarnation of demand side economics may in fact work but if it does, it will be the first time, from my view.
Please check out my new books, "Prosecutors Gone Wild: The Inside Story of the Trial of Chuck Panici, John Gliottoni, and Louise Marshall" and also, "The Definitive Dossier of PTSD in Whistleblowers"