It is obvious that Jeff Dorfman views himself as a Supply
Side economist where supply side means having a one track mind with regard to
what constitutes a good economy. Here is what he says in this regard: “Policy
makers should … focus on … tax reform that simplifies the tax code and lowers
marginal tax rates.” In fact, this is how he ends an article in which he
displays a wide and solid grasp as to how an economy works. So you ask: Why
then is he displaying this kind of narrow mindedness when he has that much
grasp of the subject?
You may find the answer to that question in the article
where Dorfman discusses his many points. The article came under the title:
“Earth To Keynesians, Government Spending Isn't Demand” and was published on
July 15, 2013 in the online publication Real Clear Markets. You may decide that
perhaps the author overstated his case to convince the government that it
should stop spending on stimulating the economy. This is something he regards
as a temporary measure, the reason why he wishes the government would do
something different to fix the economy permanently – something like lowering
the tax rates, for example.
He cannot deny that the American economy is experiencing a
recovery at this time, so he uses the fact that it seems like a jobless
recovery to explain why lowering the tax rates rather than spending by the
government will prompt the employers to hire more workers. To make that point,
he attacks what he calls the Keynesians who, in his view, make the claim that
the recent recession and weak recovery were due to a shortage of demand by
consumers. To this end, he mocks the Keynesians by putting words in their
mouths as if they were saying: “If only the government would spend more money …
we could fully recover … miraculously” after which the private sector is
supposed to take over the management of the economy.
This is not happening, he says, because government demand is
temporary whereas private sector demand is continuing. And this makes it so
that the two demands have different impacts on the economy. To elaborate on
these points, he does two things at the same time. One thing displays the wide
grasp he has of the subject; the other shows how narrow minded he can be.
Here is where he displays savvy: “It is not the dollar size
of an economy that counts, but its real size measured in terms of the amount of
goods and services produced and sold.” And here is where he displays narrow
mindedness: “demand cannot produce economic growth [because] every buyer
requires a seller; you cannot buy a product unless somebody has manufactured it
and is ready to sell.” What he tries to convey here is that there are no
wholesalers or retailers managing inventories, sitting between the manufacturers
and the consumers. And of course, he does not mention the fact that the
inventories are quickly replenished the moment that they reach a critical
minimum level whether or not clients are knocking at the door.
Thus, you see that the man who noticed the recovery to have
been weak and jobless, now fails to notice that inflation has not been a
problem. And so he adds the following to his commentary: “If the supply of
goods to sell is unchanged, an increase of demand simply results in bidding
wars among buyers and higher prices … More demand without more supply does no
good, since it does not result in more goods and services being produced.” But
how does he explain the lack of inflation? He does not even attempt to explain
– but wait till you see what he does.
For one thing, he lectures to those he calls the Keynesians
telling them that to be effective, government spending must convince suppliers
to increase the supply so as to avoid inflation. Dorfman does not come right
out and says how the government can do this, but hints at something that you
will recognize as being vintage Supply Side economics. Here is what he says:
“An increase in supply can come from companies investing in new productive
capacity.” In other words, he says that government stimulus should go not to
the consumers but to businesses so that they may invest in new capacity. And
now – only now – does he praise the virtues of inflation: “as prices rise,
profits will return and firms will compete for market share.” Ah, those savvy
and narrow-minded academics! How much they can befuddle you with their bright
ideas!
Having made those points, you would expect him to end the
presentation and sit on his laurels ... but that's not what he does. Instead,
he attacks the Keynesians again for thinking that government spending is a good
thing, and he attacks the government for doing just that. All the while, he
interweaves this talk with a description as to how an economy that has been
dormant for a while begins to revive and catches speed.
However, being conscious of the fact that this may well be
happening right now, and loathe to let the government take credit for the
recovery, he inserts a word of caution: “Perhaps businesses will soon believe
that conditions are favorable … If so, we may return to more normal
unemployment levels … if that happens, it won't be because of any government
stimulus spending.” We hear you, Jeff Dorfman but we can only laugh.
You must hand it to him. The man tried hard but the fact
remains that an economy runs not on Keynesian ideas only, or Supply Side ideas
only, but runs on a mix of ideas from both schools of thought. And this means
we must all become Supply Side Keynesians.