Friday, August 23, 2013

Would Supply Side Economics End the Obama Recession

Michael Busler, an Associate Professor at Richard Stockton College, thinks so. He argues that
The correct supply side action needed today is to reduce tax rates, especially for the wealthy, reduce capital gain tax rates, remove the stifling regulations and inject a sense of freedom and opportunity. This would increase output, grow the economy, reduce unemployment, eventually increase tax revenue, put downward pressure on inflation and finally end the “Obama Depression.”
While Busler's instincts seem good, I am not as optimistic as he.While removing interventionist regulation of business is a very sound idea, cutting taxes by themselves is no guarantee of economic expansion. This is because government spending must be funded somehow. If not by taxes then by borrowing from the non-bank public or the inflationary banking system. Either way, purchasing power is taken away from people in society and capital is consumed, either directly or indirectly via malinvestment. At the same time scarce economic resources are still consumed be government bureaucrats.

The primary problem is government spending. That is what drastically needs to be cut. Contrary to conventional Keynesian wisdom, reducing government does not reduce economic prosperity. It may reduce statistical GDP, but it does not impoverish society. To the contrary, if the government spends less, resources are freed from government consumption to be used in productive investment. Such investment is a key source of economic prosperity. To truly increase economic output, therefore, we should cut government spending which would allow tax cuts to truly induce economic expansion.


  1. That's not exactly true. If you cut taxes for the middle class, who have a high marginal propensity to consume, most of the tax cut goes to consumption. if that creates a deficit, because government spending has not been cut, then bonds are sold to finance the deficit. Bonds are purchased by investors with disposal income after spending consumption dollars, or, in other words from saving dollars. So the tax cut increases consumption and the selling of bonds has little or no effect on consumption, resulting in a consumption gain which grows the economy.

    1. While an increase in consumption may increase statistical GDP, alas this is not the same thing as economic progress. Sustainable economic progress must be funded by increased saving and investment, which is the opposite of consumption.