Browsing the blog archives for September, 2014.

Republican economics

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Larry asked a great question in response to my last post…so are the republicans supply side economists or Austrian economists?

If you are referring to Republican (or Democrat) politicians, most are attorneys, not economists, and there are different views within each party. The following is my oversimplified interpretation of national politics.

Let’s start with the Democrats. In general, most are part Keynesian and part central planner. Keynesians recognize some value in free markets but think they will ultimately self-destruct if not constantly reigned in by government. Central planners could be socialists, fascists, or some combination of the two; they believe that markets just don’t work or are overtly unfair. I don’t think most Democrats want to completely destroy markets; they just want to “control” them for the better. Obamacare is a great example because it touted “managed competition” in healthcare markets. Of course, competition is–by definition–free and cannot be managed.

It’s not easy to get a good read on Republicans as a group. Most campaign like Austrians in the primaries, promising to cut regulations and scrap the current tax code in favor of a flat or fair tax. They campaign like supply-siders in the general elections, promising a softer version of tax cuts and general regulation relief while promoting certain types of central planning, such as healthcare and education. They usually end up governing like soft Keynesians, favoring a combination of pro-market policies and populist, anti-market intervention.

When you mix the Democrats and Republicans in Washington, you get a blend of hard and soft Keynesian economics, a far cry from either the supply side or the Austrian views. This general mistrust of free enterprise explains why Washington’s best effort at reform typically regresses to talk about cutting the growth of spending or running existing programs more efficiently, and even watered down proposals like these usually don’t go anywhere.

Now back to the specific question…There are some exceptions to the rule, but most Republicans are neither supply sider nor Austrians. They’re middle-of-the-roaders who really favor a mixed economy. They want the growth of free enterprise and the security of big government, and don’t understand why the two cannot peacefully coexist. But trying to do both simply breeds cronyism. Supply-side policies are a move in the right direction, but a more potent Austrian approach attacks cronyism at the core.

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Supply-side economics revisited

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In my recent post on Obama’s “bottom-up economics” I referred to supply-side economics and largely positive but with shortcomings. My reference to shortcomings generated multiple comments and questions on- and off-line. Let me explain—at the risk of oversimplifying some complicated issues.

Economics is about supply and demand, but most “mainstream economists” tend to emphasize the latter. When consumers demand more goods and services the economy grows. This is true to a point, but Keynesians and other demand-side economists are shortsighted. Their solution to a stagnant economy is always about increasing demand and they prefer government spending to tax cuts because they can directly control how the money is spent. This ultimately leads to more centralized control, large deficits, and the like.

Supply-side economists like famous Reagan advisor Art Laffer emphasize the other side of the equation. From this perspective, lower barriers to production and greater access to capital increase supply and grow the economy. Laffer is known for the “Laffer curve,” a simple but powerful supply-side concept about tax rates and tax revenues. According to the Laffer curve, when tax rates become too high, a cut in taxes can actually increase government tax revenues by increasing incentives for companies to produce and individuals to work. There are a lot of other factors that influence government tax revenues, but the Laffer curve helps explain why Reagan’s tax cuts spurred both economic growth and increased government revenues. Reagan fell short of tackling the deficit, but that was largely a spending problem, then as it is today.

There’s no question that supply-side economists offer a breath of fresh air to a Keynesian-dominated world. Supply-siders attack burdensome regulations and confiscatory tax rates, both of which are byproducts of a demand-side approach. Unfortunately, they don’t go far enough. Most supply-siders don’t object to Federal Reserve intervention in an economy. While they tend to be more sensitive than demand-siders to Fed abuses, they take a middle-of-the-road approach and fail to see the long-term problems with an activist Fed.

Second, supply-siders don’t directly address the problem of cronyism, the ongoing collusion between politicians/bureaucrats and private interests. While a regulation rollbacks and tax cuts tend to reduce the influence of cronyism, most supply-siders are satisfied with a tax system with certain elements of social engineering (i.e., special deals designed to favor special interests) and heavy government control in select industries like healthcare and education.

My views are more closely aligned with the Austrian school of economics. Austrians realize that most—not just some—government intervention in the economy is detrimental. They don’t just favor tax cuts, but instead a complete overhaul of the tax system in favor of a fair tax or a flat tax with low rates and few deductions. They also insist on substantial reductions in government spending, not just minor tweaks, reductions in spending increases, or spending freezes. Government spending has always been and continues to be the number one problem. Austrians understand the importance of addressing this head-on.

At the end of the day, I agree with much of what supply-side economists have to say. Reaganomics was certainly a step in the right direction, but the current situation is dire and requires stronger medicine. The Austrian approach offers a more complete solution.

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Obama’s Bottom-Up Economics

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In a Labor Day political push for a minimum wage increase, President Obama ridiculed trickle-down economics and reiterated his support for what he calls bottom-up economics. The former is the pejorative frequently associated with former President Reagan’s supply-side economics, a philosophy built on lower business/corporate tax rates and reduced regulation. While Reagan’s approach was largely positive, it’s fair to say that supply-side economics has some shortcomings. That’s a topic for another post. What’s interesting here is that Obama seems to have backed into the truth with a catchy, but poorly understood quip.

I’m sure bottom-up economics has been thoroughly tested with focus groups or the President would not be using it. While it rings of concern for the common man–the “bottom” of the supply chain–Obama is anything but willing to let individuals determine their own economic fate. His proposed minimum wage hike is a top-down, centrally planned approach to economic growth. It would cost jobs by raising the cost of labor for employers. Prices of products and services generated by minimum wage workers would also rise as employers pass along the increased labor costs to consumers. There’s nothing bottom-up about raising the minimum wage, or about health care mandates, carbon taxes, or most of his fixes for our stagnant economy. Obamanomics is top-down economics.

Many on the left think that corporations control free markets, but consumers have the last say in a free economy. At the end of the day, buyers decide what to buy and companies must compete to win their favor. While many corporations wield lots of power these days, this is due to cronyism–collusion between firms and government–not the free enterprise system. The President has is backwards.

Contrary to the President’s rhetoric, a bottom-up approach to the economy should mean letting individuals make their own choices in the marketplace. Government interference picks winners and losers, and constitutes the very cronyism that is stifling economic growth. I’m all for bottom-up economics. The President is the one who doesn’t understand it.

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