Want to know the difference between demand and supply side economics? Grab another cup of coffee, ’cause you may find this one ranks with counting sheep. The subject is dull as dishwater, so I’ve injected bits of (excitement) to help you muddle through.
Since the Depression, liberals have championed Keynsian economics. They argue that demand drives economic activity. When demand falls short, the economy dips into recession. Built-in stabilizers help, but, when these aren’t enough (Janet Jackson wardrobe malfunction), the government should help raise demand with stimulus spending (Prince Harry naked in Vegas).
Too often the boom side of this recipe is ignored. During booms, government should run surpluses and restrain demand. For example, during the Reagan boom, Congress should have raised taxes to generate surpluses. Taxes did go up during the Clinton expansion and we got surpluses (Jalapeño cornbread). Keynsians still argue that if Bush had foregone tax cuts in his first term, it would have been easier to cut taxes and run a deficit when we really needed a boost in 2008-9 (Obami Tsunami).
Conservatives don’t like demand theory because it justifies government action. They came up with supply side economics as a counter theory (Cubs win World Series). Supply siders argue we should focus on shifting the supply curve rather than the demand curve. OK, how do we do that?
The answer is you shift the supply curve by lowering costs of production. Republicans seized on a couple of tools to do this, i.e., cut business taxes and eliminate costly regulations. They tend to go a bit overboard (Red Bull martinis). Not all taxes are business taxes. Personal income tax cuts (including dividends and personal capital gains) don’t shift the supply curve. And when you deregulate too much, you risk throwing the (baby sitter) out with the bathwater.
Supply siders could include a bunch of other cost lowering weapons in their arsenal, but they don’t. Improving infrastructure by building better roads, ports, electric grids, the internet, etc. would lower costs for private companies (cheap suits).
Better public education would lower what businesses spend on training. Better healthcare raises worker productivity. Government spending on R & D offers cost savings and productivity gains to the private sector. So if shifting the supply curve is really the answer (cloud computing), why don’t Republicans want to include these strategies in their economic kit bag?
The explanation (Holy Sarah Palin! Sorry – didn’t mean to scare you) is that these strategies also require government activity, and no conservative wants to be caught advocating government intervention, even if it would help end a recession. So ideology trumps economic theory (Crazy Contradictions).