Sheldon Richman has a website called Future of Freedom
Foundation on which he published an article under the title: “The Economic
Lesson Obama Needs to Learn.” It happened on July 25, 2013. Three days later,
on July 28, a magazine called Reason republished the article under the same
title, but also gave it a subtitle that reads as follows: “Freedom, not
regulation, is what the U.S.
needs right now.”
What is interesting about this article is that it shows how
an economic argument you can use in a situation where it would make sense, is
often turned into rigid dogma, and used – more like misused – in a situation
where it does not belong; where it makes no sense. This is a mistake often
committed, sometimes deliberately and sometimes not, by people usually referred
to as advocates of Supply Side economics.
The arguments most often misused by these people revolve
around the role that the government plays in the economy. And the most glaring
of such misuse happens when they describe the government as being only a
consumer of resources or worse, a “squanderer” of resources. This is how
Richman made his presentation: “first, government is a major squanderer of
scarce resources.” He went on to say: “and second, its regulations are
impediments to saving and investment” which is probably what prompted the
editors of the magazine Reason to add the subtitle about the U.S. being in need
of freedom, not regulation at this time.
The fact is that individuals, companies and governments are
all economic units that do two things at the same time: they produce and they
consume. The first person to fully grasp this concept was Henry Ford who
discovered that he can supply the marketplace with all the cars he wants, but
they will not go anywhere unless there are consumers out there with a high
enough purchasing power to buy the cars and pay for them. And so, Henry Ford
had the good sense to start paying his workers enough money so that they may
buy the cars they produce, and he sends out to the marketplace.
That point made clear, it shows that unless there is a match
between the two sides of the economy – the supply side and the consumption side
– the economy will only be as good as the weaker of the two sides. That is, if
you can supply 5 billion dollars worth of goods and services but that the
consumer has only 4 billion dollars to spend, you will only generate 4 billion
dollars worth of economic activities. And, of course, should the situation be
reversed whereby the supply side can only produce 4 billion dollars worth of
goods and services – well, this will only be how much activities you will
generate no matter how much purchasing potential the consumer has.
And this is where the government enters the picture. It can
happen at times that the consumers will get ahead of themselves and spend more
money than they can afford by borrowing more than they should. When they
realize they have gone too far, they curtail their borrowing and spending
binge; moves that create and sustain the famous “economic cycle” which no one
has yet been able to repeal.
And what this says ultimately is that the marketplace is not
as efficient as it is claimed to be by the advocates of Supply Side economics.
In fact, being driven primarily by fear and by greed, the marketplace
continually makes mistakes that require the sort of corrective action it cannot
itself produce without making matters even worse.
When the economic activities turn very quiet, the production
part of the economy is put at risk because it cannot sell what it has the
capacity to produce. Rather than see it operate below capacity and perhaps
degenerate from there, the government steps in and starts consuming to make up
for what the public is not doing. But this is only one of the ways by which the
government helps the supply siders stay healthy while the economy is
staggering.
The government also intervenes when new opportunities are
made available as a result of scientific and/or technological breakthroughs. In
such cases, large expenditures would be called for upfront while promising
results that will not materialize for several decades. For this reason, only
the government would be in a position to take the risk, and assume the early
expenditures. For example, it will help launch projects the size of the
national railway system, the network of highways or the program to explore
space among others. And when the thing begins to run at a cost that the private
sector can handle, the project is handed over to those who can run it
privately.
All in all, because people are realizing that an economy is
too complex to be either this one thing or that one, it is increasingly
happening in America and around the world that private/public partnerships are
formed to launch and run projects that initially require the economic clout of
the government and the business savvy of the private sector. And projects of
this kind are proliferating because they are showing good results.
In short, people everywhere are realizing that an economy is
too complex to be reduced to the simplicities of a political argument. And the
sooner the Supply Siders in America