Neo-Supply-Side Economics, or "Trickle-Up" Economics
Just as Keynesian Economics evolved with the development of Neo-Keynesian theories, Supply-Side Economics, as any economic theory, must also be improved upon and evolve. This abstract is a normative proposal for the evolution of Supply-Side Economics. It is an attempt to build upon the original foundation, retaining the positive aspects and adjusting of the negative.
Before I begin, I would first like to provide my definition of "Supply-Side Economics". I feel this is necessary due to the political nature that this branch of economics has developed. The definition of its principles vary depending on which political party or economist is defining it. To avoid any confusion or misunderstanding, I will thus give my definition of Supply-Side Economics, and then base my proposal on this outlined model. A similar situation occurs with the definition of Socialism, of which I will also provide an outline definition.
First: The history and basis of supply side thought.
The oil crisis of the 70's created abnormal profits for oil producing nations.
The abnormal profits attracted capital to the oil industry.
Many new jobs were created in the oil industry, many new wells were drilled, many new oil fields were discovered. The result was A) a dramatic growth in investment, employment and income of the oil industry, followed by B) a dramatic fall in oil prices.
Second: Economic basics.
Prices rose, and firms developed abnormal profits.
The profits acted a beacon to attract capital and investment.
The capital required labor (jobs) to operate.
The assembly of labor and capital generated production, i.e., increase supply.
The increased supply decreases prices.
Third: Heller and Laffer
Given: GDP = C + I + G + (X-M)
GDP = Gross domestic product
C = Personal consumption.
I = investment, both autonomous and induced.
G= Govt. spending, i.e. fiscal policy.
(X-M) = net exports.
Now, review.
Keynesian economics increased GDP by increasing G.
Heller, a Neo-Keynesian under Kennedy, argued for TAX CUTS to increase the incomes of people with a large marginal propensity to consume (This means that they spend a large percentage of every dollar that they have). Kennedy decreased taxes to battle a recession by cutting taxes. It worked by increasing C, as opposed to increasing G as with Keynesian economics.
Now, what is the problem? Well, in the 60's and 70's we had "stagflation" and "cost-push" inflation. The government, following Keynesian economics, tried to decrease inflation by raising taxes under Johnson. It did not work; "inflation expectations" had set in, i.e., "rational expectations" was born. The stagflation of the 70's demonstrated a break down of the "Phillips curve", a corner stone of Keynesian economics. This break down provided the incentive to develop a new approach to managing the economy, and lead to the development of Supply-Side Economics.
In the 80's, Laffer looked at the success of the Supply-Side Economics in the oil industry, and decided to apply it to the nation as a whole. Where Keynes and Neo-Keynesians increase "G" and "C", Supply-Siders increase "I". Same mechanism, increasing one of the GDP aggregate components, just different aggregate targets.
Under Supply-Side Economics, tax cuts are given to those with a high marginal propensity to SAVE, as opposed to a high marginal propensity to CONSUME. This is where the political passions become involved. The "rich" man, or person with a high marginal propensity to save, is provided with incentives to become even wealthier through investment incentives. This leads to the politically unfavorable event of a widening of the "income gap", or income disparity. But, in defense of Supply-Side Economics, a plant must first be built before a worker can be hired. This is where "Trickle-Down" economics got its name. The wealthy are the first to benefit, but once the plants are built, the lower income members of our society benefit by the creation of jobs. Thus the benefits "trickle-down" from the "rich" to the "poor". Note: I borrow the terms "rich" and "poor" from the popular press, not to introduce a bias or emotional tone, but simply because it is easier than using "people with a high/low propensity to consume/save."
Now, the benefit of Supply-Side Economics as I see them:
Demand is increased for investment goods, i.e., capital. This is likely to have a lower inflationary effect that increasing C, which are consumption goods.
The production possibility curve, i.e., productive capacity of the nation, is increased. Keynes and Neo-Keynesians only expanded production to capacity; they did not focus on expanding capacity.
Supply is increased, lowering unemployment and ultimately prices.
As more firms enter the market, the demand for labor rises, tightening the labor market in that industry, and likely leading to increased wages.
Now as you can see, saying that Supply-Side Economics does not work is like saying Keynesian or Neo-Keynesian will not work. They all work by increasing one of the aggregate components of GDP.
Keynes increases G.
Neo-Keynesian increases C.
A weak dollar, or a successful tariff increases (X-M).
Supply side increases I.
They are all versions of the same mechanism.
Both Neo-Keynesians and Supply-Siders use a carrot, i.e., spending incentives. Keynesians use a stick, i.e., direct fiscal spending.
Now a brief IS/LM approach. We will combine monetary policy, i.e., shifting LM, with Keynesian, Neo-Keynesian, and Supply-Side, i.e., shifting IS.
r = interest rates
y = GDP
.*....................xLM
!......*............x.........
!...........*..x ............
r !.........x......* ............
!.....x..............*.........
!x.......................*.....
--------------------------- *IS
y
IS shifts right with an increase C, I, G, (X-M). LM shifts right with an increase in money supply.
Now, the IS curve shifts right by increasing C, I, or G. A right shift in the IS curve above leads to HIGHER interest rates, "r", and a higher GDP, "y". In order to maintain a stabile, "r", the Federal Reserve must increase the money supply, i.e., "accommodates" the fiscal policy. This leads to an even higher "y", capacity allowing, with stabile interest rates, "r". This did not happen in the 80's, however, as a relatively tight monetary policy combined with extra ordinary government borrowing maintained interest rates at a level above that desired by the supply-side theories. The money that would have gone to investment and expanding the productive capacity of the nation, instead went to buy T-bills, and pay for entitlements, ending the cold war, and an S&L bailout.
I would argue that Supply-Side Economics has not yet been adequately attempted. One can point to the oil industry for a micro example\case study of its possible success. Supply-Side Economics is not much different than Keynesian\Neo-Keynesian economics, relying on an identical mechanism, but targeting different aggregate categories, i.e., C, G, and I.
No one would argue that a weak dollar will likely decrease imports, and increase exports and GDP. No one would argue that Keynesian Economics worked great pulling us out of the depression. No one would argue Neo-Keynesian tax cuts to increase consumption would not increase GDP. Why then is there this disagreement and such passion attached to Supply-Side Economics? The only reason I can find is that it first rewards the savers, i.e., the "rich". This is a political argument, not an economic argument. As long as one member of society can be made better off without making another worst off, than economically, the society is still moving towards Pareto optimality. The growing income gap, however, is a political problem, and that is where I feel Supply-Side Economics has developed such interest and ignited such passions. My personal belief is that Supply-Side Economics is more beneficial in the long run than either of the Keynesians theories, especially in an environment of free trade and increased competition. In layman's terms, give a man a fish, feed him for a day, teach a man to fish, feed him for life. Keynesian and Neo-Keynesian's give the man a fish. They provide temporary spending fixes, without expanding capacity, increasing competitiveness, or creating potential jobs.
Supply-Side Economics takes longer, but once the factories are built, they provide jobs for an extended period of time. Net layoffs are a rare event in expanding industries. When is the last time you heard about a layoff in the oil industry? Software? Computers? Net job loss in telecommunications, i.e., MCI, LCI, and Sprint hired far more people than AT&T laid off. Note, all these industries are micro examples of Supply-Side Economics implemented by the private sector. Other examples are the U.S. auto industry, Internet companies, memory chips manufacturers(Micron), disk storage manufacturers(Iomega), Iced Tea(Snapple), Coffee(Starbucks), etc., etc.. All these industries turned a profit, attracted capital, created jobs, increased supply, resulting in a decrease in prices. These industries are an example of Supply-Side Economics at work. The government does not even have to encourage it through tax incentives; the market often does it on its own.
Socialism, as Supply-Side Economics, is difficult to find a universally accepted definition. Socialism in this paper refers to a socioeconomic system characterized by government ownership of selected industries. The government owns the firms, hires the workers, and distributes the profits, if there are any, as it sees fit. There is no private ownership in these industries, and there are no stockholders. History has demonstrated that this system is more inefficient than capitalism, but does have a better record at equalizing income distribution, everyone has less but relatively equal amounts.
Now, using the above definitions as a model, we can turn to improving upon the system. The main focus of Neo-Supply Side Economics is to maintain a mechanism that increases investment and supply, while directing the early benefits more towards the lower income sector of society. This is essentially a "Trickle-Up" theory, where the lower income groups benefit first, and their actions also later benefit the upper income levels. This system has both economic and political benefits, with benefits going to all income groups of society.
Current open-market economic thought paints a bleak picture for labor in the United States. The Hechsher-Ohlin, Rybcznski, and Stolper-Samuelson theorems all foretell of increasing gains to owners of capital, and continued downward pressure on wages. The capital intensive United States will likely continue down the path predicted by these theories. Any attempt to prevent the continuance down this path will benefit one group of society, the owners of labor or capital, at the expense of another group, the consumer, and result in a decrease in the total utility of society.
With these theories we can identify both the problem, and the solution of Supply-Side Economics. The market solution is already occurring, just in a union\labor unfriendly manner. Today, major corporations are outsourcing their unionized/manufacturing aspects of their businesses. Eventually this will lead to what I would call a "virtual corporation", with the main aspect of the corporation being focused on the nonunion aspects, and the union aspects being outsourced. To use GM as an example, GM will likely evolve into a GM focused on auto design, retail, and marketing. The manufacturing will be contracted out to other firms. This can already be seen in the joint ventures with Japanese firms. The U.S. firm buys a Japanese car, puts their label on it, sells it as an American auto, and makes as much profit on it as the auto they manufactured in the U.S.. The U.S. firm has no need to actually manufacture the auto.
Now, faced with this predicament, the problem of Supply-Side Economics becomes apparent. The original Supply-Side approach encouraged the wealthy to accumulate more capital. In an open market, the benefits will go the owners of capital in the capital intensive U.S.. Labor is left out of the main benefits of the original Supply-Side Economics and the open market policies of NAFTA. Concentrating the ownership of capital in an open market environment will only worsen the income disparity. A majority of the benefits from an open market go to the owners of the nation's abundant factor. In the U.S., that factor is capital, not labor. The original Supply-Side theory, through its concentration of capital ownership, was the exact opposite approach that should have been attempted in an environment that was moving towards an open market. This approach would likely increase the income disparity, and leave-out a large proportion of the population from the benefits of free trade.
With the opening of the market, the owners of capital also have an incentive to substitute capital for the more expensive labor. The recent coercive behavior of the unions is likely to do nothing more than hasten their demise and widen the difference between the incomes of the owners of capital and the owners of labor. It is unlikely that the win/lose approach of today's labor relations/negotiations will benefit society as a whole, and are unlikely to benefit the union in the long run. How then, could a compromise win/win solution be developed? The solution I would propose is a union\labor friendly Supply-Side Economics. Encourage laws and labor policies that would support corporations to sell/divest in their manufacturing functions to the unions. This is essentially "Trickle-Up" economics. Labor, not the "rich", are given the incentives to invest. With the sale of the capital, the previous owners of the capital then receive the sales revenue, i.e., "Trickle-Up". The previous owners of capital now have cash (technically a very liquid form of capital), with which they can then go on to build other businesses. The final endpoint, the "rich" getting money or incentives to invest occurs under both Neo, and original Supply-Side Economics. The main difference is that labor first gets the money/incentives to invest, with the benefits later "trickling-up" to the wealthy.
For example, this would essentially create two GMs. One GM, say GM class 1 stock, would be focused on retail, design, and marketing. The other GM, say GM class 2 stock, would be focused on manufacturing, and OWNED by the union. This is a Hechsher-Ohlin, Rybcznski, and Stolper-Samuelson friendly approach. Labor becomes the owners of the capital. Labor becomes the beneficiaries of free trade. They would then receive all the profits generated by the GM class 2 stock, control the CEO pay, wages, hiring, firing, and every other aspect of the of the company. GM has recently done a similar action with its divestiture of EDS. EDS was sold as a separate entity. GM will continue to give EDS business and contracts, but now, EDS is free to seek business elsewhere and expand their market. This is a win/win solution. GM made money on the sale, and can now focus on its main mission, building, designing, retailing, and marketing autos. EDS continues to gain contracts from GM, but now can expand into other markets and grow.
Note: This is like socialism on a micro-level, with the government or middleman being eliminated. No longer does the government own the firm, collect the profits, and then distribute the profits back to the people. Now, the people own the firm directly and benefit directly from the companies profits, without having an added layer of government bureaucracy.
Today, corporate America, as it downsizes/outsources, closes plants and then lets them sit idle. This is a tremendous waste of capacity. Laws and policies should be enacted to encourage firms to sell these closed plants to the union. The government could also provide tax incentives, loans and other support. The union can then staff the plants and bid for the contracts that are going elsewhere. It does not ensure the retention of the jobs, but it provides an opportunity for the union\labor to control its own destiny and become the owners of capital. Union ownership would remove the tremendous inefficiencies generated by union management conflict. Tremendous sums are spent/wasted in conflict. GM and the Unions spend countless hours on the nonproductive actions of strikes, prolonged negotiations, and excessive labor regulations. GM wants to do it one way, the union wants to do it another. Union ownership would eliminate this problem. Unions know how to build autos, GM knows how to design them. A "virtual company" would let each do what they do best. GM could free itself of the manufacturing aspects, which it will eventually do anyway, and the unions could eliminate the need to follow GM's style of management.
Now, if this is taken on a national basis, the benefits would multiply. If GM, Ford, Caterpillar, McDonnell Douglas, Boeing, etc., etc.. would divest their manufacturing plants, it would free all the plants to bid on other companies production contracts. GM manufacturing would no longer be locked into doing work just for GM. Contracts could be accepted from and bids offered to Toyota, Nissan, Saab, etc., etc.. This would greatly increase the opportunities for union employment, while allowing them to control their own destiny.
The benefits of a labor friendly Supply-Side Economics do not need to be limited to union members. The privatization of social security would also provide a similar benefit. By redirecting an individual's social security tax into a private IRA would further disperse the ownership of capital. This would allow retirees to live off the income generated by their investments, and have something to pass on to their heirs. The government would benefit by increased inheritance taxes, and the reduction of the social security burden. The government would no longer be responsible for 100% of the social security payments, they would only need to make up the difference between the IRA pension income, and the defined "safety net" level of income.
As this abstract has demonstrated, it is possible to develop a labor friendly Supply-Side Economics. It addresses the short comings of the original Supply-Side Economics, and evolves into a theory that is more friendly to labor, society as a whole, and shares the benefits of the open market. If the U.S. is going to continue towards greater access of its market, the government must find a mechanism by which to disperse the ownership of capital. Neo-Supply-Side Economics or "Trickle-Up" economics does just that.
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Topic: Neo-Supply-Side Economics, or "Trickle-Up" Econ
