On supply-side economics

Supply-side economics sums up the economic theories that came of age in the 1980s under Margaret Thatcher and Ronald Reagan. They were a reaction against the ‘Keynesian’ consensus that the state should intervene in the economy to promote full employment, and prevent excessive inequality. Taken together, it was thought that these would help to create widespread prosperity.

The policies that SSE promoted were a response to the economic crisis of the 1970s that brought an end to the ‘Golden Age of Capitalism‘ and the Keynesian consensus. Growth in output and productivity were slowing, and inflation and unemployment rose at the same time, an outcome that discredited the Phillips curve which posited an inverse relationship between the two variables.

Although Thatcher and Reagan attacked ‘big government’ as the problem, their policies involved substantial intervention in the economy to weaken labour and restore the profitability of the private sector. So there was still plenty of government ‘meddling’, but the interests it supported changed. The power of trade unions was much reduced and deregulation and privatisation became fashionable.

The downward trend in profitability was arrested, but inequality, particularly in the US and UK, began to rise steeply, while unemployment rose significantly overall compared with the Golden Age. Also less noted is that, with the deregulation of the financial sector, the growth of private debt as a share of the overall economy began, laying the foundations for the Great Financial Crisis of 2008-9.

Here is Michael Hudson on supply-side economics, taken once again from his J is for Junk Economics (p.218-219):

 “[Supply-Side Economics is] a rationale for cutting taxes on finance and property. The Laffer Curve, named for Republican economic adviser Arthur Laffer, pretends that the deeper taxes are cut, the more tax revenue can be collected. The cover story is that higher-income recipients will have less incentive to cheat or hide their profits abroad in offshore tax havens – as if their accountants don’t always try to keep every dollar of profit away from government. The actual result of such tax cuts is a deepening budget deficit, creating pressure to raise taxes on labor and consumers to balance the budget.

The pretense is that what needs to be “supplied” to spur economic growth are tax cuts and hence more net income for the higher tax brackets. The false assumption is that leaving the One Percent with more income will be an incentive for them to undertake more capital investment and job creation.

The sophistry continues by promising that inasmuch as corporations and rich people employ labor, cutting their taxes will enable them to employ more workers. This implies that the wealthy will create jobs by investing their gains in new production – not outsourcing, downsizing, looting pension funds and driving the economy into debt. Such lobbyists never mention corporate raiders, downsizing or outsourcing jobs.

What is “supplied” is simply more income, asset-price gains and hence political power to the vested interests, leaving them with yet more to lend back to the increasingly indebted 99 Percent. The effect is to shrink output and employment, and deterring rather than inducing new capital investment.”

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