Demand-Side Economics, for a Change

by Mark Wilson

“Supply-side economics” really just means “bring our costs down.” Lower taxes, fewer government regulations, and all that. Republicans believe in supply-side, and that’s why they want lower taxes and fewer regulations. Businesses aren’t making money because so much of their money goes to paying all this other stuff. That’s why we’re in a recession.

Except that’s not true. Bruce Bartlett, late of the Reagan and H.W. Bush administrations, disagrees. The Bureau of Labor Statistics has been tracking mass layoffs for years, and when they occur, BLS sends the firm a survey asking why they laid off workers. In 2010, how many firms cited “government regulation” as the reason? 0.2%. Two-tenths of one percent. How many firms cited “lack of demand”? 30.6%.

What’s with the head-in-the-sand? To be a believer in demand-side, you’d have to come to some conclusions: (1) there’s no problem with government regulations; (2) firms are firing (and not hiring) because people aren’t buying enough stuff; (3) tax cuts for the wealthy don’t enable people to buy more stuff; (4) something out there has to increase demand.

To a supply-side believer, saying “aggregate demand” is a dirty-word that conjures images of John Maynard Keynes. The funny thing is that Keynes works and supply-side doesn’t. Supply-side economics ignore the fact that businesses make money when people buy stuff; if people aren’t buying stuff, then they can’t make money. Tax cuts for the class of people who buy things? That means more disposable income. That means more buying stuff.

And while we’re at it, how about a government stimulus to cajole businesses into producing things and hiring people? The private sector — i.e., consumers — clearly aren’t interested in that right now.