Caveman Books

The Caveman Explores Economics & Politics

Thoughts About Economics

Part I.

Part II, THE INVENTORY ... MODEL OF MONEY

Part III, The Overall Model

Part IV How Much Cash Is Needed In An Economy?

Part V, Money Needed ... Determined By Production Increases

Part VI, How Do Profits Impact ... An Economy?

Part VII Assets

Part VIII Summary

Part IX, Money and Fractional ... Reserve Banking

Part X, Government

Caveman Articles

Money

Government and Taxes

Creating Money & Inflation

Tax Rates VS. Tax Receipts

Taxing The Rich

Government Debt

Government Stimulus



 

 

 

 

 

Supply side vs. demand side economics

 

Economists keep arguing about whether supply side economics or demand side economics is the proper theory as to how the economy works. If the economists were involved in some obscure science where the outcome of the debate mattered little to the population, then they could continue to debate and it wouldnít matter much. But unfortunately, politicians look to economists to help decide on government policy. Since the debate is not settled, the country switches from a demand side to a supply side policy depending on which party is in office.

 

Demand side theory is closely related to the work of Keynes who believed that if the government fed money into consumers, they would demand more products, forcing or encouraging the suppliers to build more products. Ways to do that has been to print more money or reduce taxes to the consumer class (the working class). How to spread this printed money to the proper people has never been clear. The recent attempts in this regard were to feed more money to banks in the hope it would filter down to the right people. The size of bonuses in the financial arena show that the money didnít get to the right place.

 

Supply side theory, usually associated with Reagan, theorized that if the manufacturers could be encouraged to build more products, then the consumer would buy. Though Reagan pushed for lower tax rates for everyone, the pundits argued that it was the rich that benefited the most, the rich being the supply side.

 

A logical argument on the supply side is that if taxes were lower on the producers, they would lower their prices. This would in turn allow consumers to buy more of the product at these lower prices, encouraging suppliers to produce more product, lowering costs and prices even more. On the other hand, with demand side theory, if the consumer is given more money to buy, that too should result in more production which would further reduce costs and prices.

 

Letís back up a moment. This is really is a silly argument. You need both, demand and supply. You need both consumers and suppliers. It takes two to tango. Production without consumers is a sure fire way to bankruptcy. And demand without production will surely raise prices. How do we get both, supply and demand? The simple solution is to cut government and cut taxes across the board. Then both suppliers and consumers have more money. And money is not wasted on government activities, which it certainly is now.

 

When we look back at the Reagan tax cuts, they were across the board, benefitting both suppliers and consumers. Reagan, however, chose to outspend the Soviets on defense. In a short-sighted sense, this was wasted money in that defense spending did little for the general economy. In the longer view, the fall of the Soviet empire had great benefits to America and the world in general. Without the Soviet threats and with a true cutting of government spending, the economy would have blossomed even more than it did.

 

Today, we are looking at demand side incentives without any supply side benefits. And we are looking at a hugely bigger government along with deficits that dry up money for productive things. Demand side economics takes money away from the producers of products in the form of either taxes or capital supply. It is no wonder that this is not working.

 

Letís get rid of the argument of supply side vs. demand side. The proper conclusion is that government produces nothing of value for consumers, other than their safety. Yet our government attempts to do far more than protect us. Defense and police are only a small part of the overall government budget. Everything else takes money without producing things people want. Applying this money to useful things would help the economy. The answer is simple: Cut government and cut taxes. Balance the budget and focus only on the proper things for a government to accomplish.


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