It is obvious that many politicians who call themselves supply-siders really don’t understand what the term means.
Gov. Tim Pawlenty, who is running hard for president — though not officially — apparently falls into that category. In a speech in Iowa last week to potential contributors, the governor criticized Congress for wasting its time on things like health care while we are in a recession. Instead, he argued, it should focus on one thing, jobs.
On the surface, that seems a coherent supply-side thought. Don’t supply-side economists advocate low taxes, especially on high-income people, to motivate increased savings and thus higher investment in factories and equipment, thus fostering long-term economic growth and, with it, higher employment? Yes, that is all true.
What the governor ignores is the important adjective “long-term.” In ignoring it, he misses the fundamental argument of the original supply-siders, that government should not even try to manage the short-run economic fluctuations we call the business cycle.
Such stepping-on-the-economic-gas-and-brake-pedals lay at the heart of the Keynesian policies supply-siders adamantly rejected. John Maynard Keynes and his followers argued that governments could damp inflationary booms and high-unemployment recessions by manipulating an economy’s overall demand for all goods and services.
The slower money growth manifest in higher interest rates combined with government spending cuts or tax increases would constrict this “aggregate demand” and fend off inflation in a boom.
A bigger money supply that pushed interest rates down, coupled with lower taxes and greater government spending, would increase “aggregate demand” and minimize unemployment in a recession.
Keynesians thus wanted to control inflation and unemployment by manipulating demand.
Thirty years of such policies, however, led to the stagflation of the 1970s, with both inflation and unemployment at high levels.
Supply-siders got their name because they argued this short-term focus on only the “demand side” of the economy was self-destructive. The whole idea of micro-managing the business cycle was wrong, they said.
Forget about short-term fluctuations. Focus on the “supply-side” of the economy, on factors that influence long-term growth rates. Remove disincentives to long-term economic growth, like high marginal tax rates or inefficient government regulation, and let the economy grow. A prudent central bank could maintain stable prices. And just ignore recessions. Trying to manipulate policy to counter recessions was counterproductive. That was the core of supply-side thought.
A true supply-sider would not want Congress to focus on jobs “like a laser” right now just because we are in a recession.
That is Keynesian thinking, just like the calls for tax cuts to stimulate consumer spending President George W. Bush and congressional Republicans made in the heat of the 2004 and 2006 election campaigns.
Instead, true supply-siders would say Congress should pay no more attention to jobs now than at any other time. Yes, it should support long-term tax and regulation policies to foster economic growth. But it should not be seduced into trying to manage the business cycle.
The problem is that, in contrast to 80 years ago, the general populace now believes government is responsible for fixing unemployment. So true supply-side arguments don’t win many votes at times like these.
That leads us to the hybrid of two irreconcilable views, supply-side and Keynesian, which characterized the George W. Bush years. Aspiring candidates, like Pawlenty, who pick it up really don’t understand what they are doing. They are SSINOs, Supply-Siders-in-Name-Only.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.