Political Crossfire Forums

[Howe]

I'd like to throw this idea out for open debate.

Supply side economics has been both reveled and criticized. The way I see it is, supply side works if the policies are in place at the right price and at the right time.

If you change tax policy to benefit the supply side, you cannot be assured that the people will want more of the same widgets or that the supplier can modify the product to meet the consumers' demand.

If you change tax policy to benefit the demand side, don't you, by definition, insure that the money goes where it will be most efficiently used? Put it in the hands of consumers and let them get what they want....

[RueTheDay]

Supply side economics and demand side economics are terms that were made up by the financial press and political pundits; they literally have no meaning within the field of economics.

[Harbinger]

RueTheDay wrote:
Supply side economics and demand side economics are terms that were made up by the financial press and political pundits; they literally have no meaning within the field of economics.


Quote:
Supply-side economics is a school of macroeconomic thought which emphasizes the "supply" part of "supply and demand". The central concept of supply-side economics is Say's Law: "supply creates its own demand", the idea that one must sell before one can afford to buy. Therefore, supply side economic policies encourage increased production via attempts to stimulate demand -- this is the fundamental dispute between classical, supply-side economics and Keynesian economics, also referred to as "demand side" economics. Supply-side economics is often conflated with trickle down economics. Supply-side economics was popularized in the 1970s by the ideas of Robert Mundell, Arthur Laffer, and Jude Wanniski. The term "supply side" was coined by Wanniski in 1975.
http://en.wikipedia.org/wiki/Supply_side_economics


Howe wrote:
I'd like to throw this idea out for open debate.

Supply side economics has been both reveled and criticized. The way I see it is, supply side works if the policies are in place at the right price and at the right time.

If you change tax policy to benefit the supply side, you cannot be assured that the people will want more of the same widgets or that the supplier can modify the product to meet the consumers' demand.

If you change tax policy to benefit the demand side, don't you, by definition, insure that the money goes where it will be most efficiently used? Put it in the hands of consumers and let them get what they want....
Some rare commodities, like gold, are priced based on scarcity. But, because of mass production, prices in our economy are based mainly on demand, not supply. For example, a large quantity of a particular model of fancy toaster would be mass produced all at once and then stored while they are sold over time. The price of this model of toaster is based mainly on how many of these toasters are sold over a period of time compared to other toasters on the market, not on how many of these toasters are in stock. Thus, anything that increases demand would only be met with increased prices. It wouldn't effect production unless the demand is sufficiently high over a long enough period of time to justify another high volume production run.

[RueTheDay]

[quote="Harbinger"] RueTheDay wrote:
Supply side economics and demand side economics are terms that were made up by the financial press and political pundits; they literally have no meaning within the field of economics.


Quote:
Supply-side economics is a school of macroeconomic thought which emphasizes the "supply" part of "supply and demand". The central concept of supply-side economics is Say's Law: "supply creates its own demand", the idea that one must sell before one can afford to buy. Therefore, supply side economic policies encourage increased production via attempts to stimulate demand -- this is the fundamental dispute between classical, supply-side economics and Keynesian economics, also referred to as "demand side" economics. Supply-side economics is often conflated with trickle down economics. Supply-side economics was popularized in the 1970s by the ideas of Robert Mundell, Arthur Laffer, and Jude Wanniski. The term "supply side" was coined by Wanniski in 1975.
http://en.wikipedia.org/wiki/Supply_side_economics


Jude Wanniski was an associate editor for the Wall Street Journal. His degree was in journalism. He had no formal training in economics and never in his life worked as an economist. Like I said, the concept was made up by political pundits and journalists. If you take a degree in economics, you will not be taught supply side economics just as if you take a degree in engineering you will not be taught the construction of flux capacitors and warp drive engines.

[chris_mthomas]

Quote: Jude Wanniski was an associate editor for the Wall Street Journal. His degree was in journalism. He had no formal training in economics and never in his life worked as an economist. Like I said, the concept was made up by political pundits and journalists. If you take a degree in economics, you will not be taught supply side economics just as if you take a degree in engineering you will not be taught the construction of flux capacitors and warp drive engines.
Well said.

[Brooklyn]

Paul Krugman, in his book Peddling Prosperity, writes a very good decription of the history of the term supply-side economics. If anyone gets a chance to look at it, I would suggest you do so.

[LeopardPM]

Brooklyn wrote: Paul Krugman, in his book Peddling Prosperity, writes a very good decription of the history of the term supply-side economics. If anyone gets a chance to look at it, I would suggest you do so.
sorry, i have read some of his articles and I find him a complete idiot... but thats just lil ol me.

[RueTheDay]

LeopardPM wrote: Brooklyn wrote: Paul Krugman, in his book Peddling Prosperity, writes a very good decription of the history of the term supply-side economics. If anyone gets a chance to look at it, I would suggest you do so.
sorry, i have read some of his articles and I find him a complete idiot... but thats just lil ol me.

Why do you say that, apart from ideological differences?

[chris_mthomas]

Quote: sorry, i have read some of his articles and I find him a complete idiot... but thats just lil ol me.
He's since become an idiot. Read some of his articles back from the mid '90's. While he was still a touch left of me, he was an economist. Think of a Brad Delong with more academic credentials that had the innate ability to communicate economic concepts to the general public.

This is, in my opinion, his best piece:
http://www.slate.com/id/1937/

Since the late 90's he's turned into a complete buffoon. I suppose that being a populist, anti-Bush dittohead of the DNC is what sells the books. It's a shame, because Krugman used to be so insightful. Whatever pays the mortgage, I guess.

Edit: RueTheDay, have you read his NYT editorials lately? Any Economist begining to sound like Barbara Ehrenreich just isn't an economist anymore.

[Rand Knight]

GREAT question by the OP. The easiest way to explain the issue is with graphs, but if you've got a background in econ, you can accept that stimulation of supply (shifts of the supply curve to the right) represent increases in output/productivity and decreases in price. The reason supply side takes longer to work is that it takes time once those incentives are in place for consumption to lead to additional investment (manufacturing, recruiting and training for service industries, etc).

Demand stimulation (a shift to the right of the demand curve) represents an increase in output AND an increase in price. In other words, GNP goes up, but so does inflation. Your proposal is the best way to provide demand incentives, and is a better approach than government usually takes, but it's still inferior to supply side if your goal is to provide strong growth with minimal to moderate inflation.

Demand stimulation seems more rapid, because people now have money to buy more of what they want, but productivity doesn't really rise any faster. You still have the same productivity bottlenecks as you will with supply stimulation - it still takes time to add factories or staff. The reason for the discrepancy is that with buyers throwing more money at a product on a per unit basis, the industry or economy pulls down bigger revenue numbers even if production is exactly the same. In other words, if the video-game industry is pumping out 100 million units a year at $50 a unit, the price going to $100 a unit doubles revenue for the industry, but doesn't immediately affect output or provide consumers with any extra goods. In fact, demand side can actually take very slightly LONGER to lead to productivity increases, as the companies have to sell the units first.

Hope that helps.

[RueTheDay]

Rand Knight wrote: GREAT question by the OP. The easiest way to explain the issue is with graphs, but if you've got a background in econ, you can accept that stimulation of supply (shifts of the supply curve to the right) represent increases in output/productivity and decreases in price. The reason supply side takes longer to work is that it takes time once those incentives are in place for consumption to lead to additional investment (manufacturing, recruiting and training for service industries, etc).

Demand stimulation (a shift to the right of the demand curve) represents an increase in output AND an increase in price. In other words, GNP goes up, but so does inflation. Your proposal is the best way to provide demand incentives, and is a better approach than government usually takes, but it's still inferior to supply side if your goal is to provide strong growth with minimal to moderate inflation.

Demand stimulation seems more rapid, because people now have money to buy more of what they want, but productivity doesn't really rise any faster. You still have the same productivity bottlenecks as you will with supply stimulation - it still takes time to add factories or staff. The reason for the discrepancy is that with buyers throwing more money at a product on a per unit basis, the industry or economy pulls down bigger revenue numbers even if production is exactly the same. In other words, if the video-game industry is pumping out 100 million units a year at $50 a unit, the price going to $100 a unit doubles revenue for the industry, but doesn't immediately affect output or provide consumers with any extra goods. In fact, demand side can actually take very slightly LONGER to lead to productivity increases, as the companies have to sell the units first.

Hope that helps.

You're trying to apply a partial equilibrium microeconomic approach at a macroeconomic level. A supply curve is just a schedule that indicates the quantities of a particular good or service that firms will be willing to provide at different prices. As the price of something increase (relative to other goods and services), firms will be willing to supply more because the profit maximization point will shift. This makes sense when looking at markets for individual products. It makes no sense at all when looking at the overall macroeconomy. The concept of a supply curve loses all meaning at the aggregate level (overall supply does not increase as a function of the overall price level). I know many introductory macroeconomics courses feature the AS-AD model with an aggregate supply curve that looks like a backwards L. That's largely nonsense, IMO, for the reason stated above. Thus, talk about "supply side economics" and "shifting the aggregate supply curve" is also nonsense.

[chris_mthomas]

Quote: I know many introductory macroeconomics courses feature the AS-AD model with an aggregate supply curve that looks like a backwards L. That's largely nonsense, IMO, for the reason stated above. Thus, talk about "supply side economics" and "shifting the aggregate supply curve" is also nonsense.
RueTheDay, my background is in Finance, and Economics is mostly a hobby for me. I've only taken three econ courses, so excuse my ignorance.

I thought that in the AS-AD model, an increase in productivity was manifested by this increase in the aggregate supply - increased productivity increases the capacity of the economy. Because of this, the backwards L seems accurate: when capacity increases, output can increase while inflation remains steady. Where am I wrong?

[RueTheDay]

chris_mthomas wrote: Quote: I know many introductory macroeconomics courses feature the AS-AD model with an aggregate supply curve that looks like a backwards L. That's largely nonsense, IMO, for the reason stated above. Thus, talk about "supply side economics" and "shifting the aggregate supply curve" is also nonsense.
RueTheDay, my background is in Finance, and Economics is mostly a hobby for me. I've only taken three econ courses, so excuse my ignorance.

I thought that in the AS-AD model, an increase in productivity was manifested by this increase in the aggregate supply - increased productivity increases the capacity of the economy. Because of this, the backwards L seems accurate: when capacity increases, output can increase while inflation remains steady. Where am I wrong?

You're not wrong. However, the effect you described is the result of one of two things - either 1) a shift from a point inside the production possibilities frontier to a point either closer to or on the production possibilities frontier, which implies using resources that were previously idle or 2) an actual outward shift in the production possibilities frontier itself, which implies a change in "technology" that allows more to be produced with given resources. None of this has anything to do with a "supply curve" which plots quantity supplied as a function of price. The AS-AD model attempts to cram that PPF analysis into the framework of a supply curve, which, in my opinion, is nonsense. While the concept of the backwards L is intuitive (quantity increasing without a price increase as long as there is idle capacity and then price increasing without a quantity increase when that capacity is used up), that simply is not what a supply curve represents.

[Brooklyn]

Quote: my background is in Finance, and Economics is mostly a hobby for me

Ive found that finance provides me more satisfaction than economics. Maybe it is because there are actually real answers to the questions asked in finance. In economics, there are only more questions. Though my major is economics, I seem to enjoy finance a little more.....

[Free Thinkr]

Brooklyn wrote: Quote: my background is in Finance, and Economics is mostly a hobby for me

Ive found that finance provides me more satisfaction than economics. Maybe it is because there are actually real answers to the questions asked in finance. In economics, there are only more questions. Though my major is economics, I seem to enjoy finance a little more.....
Yeah, that's because politics aren't intertwined with finance.

[RueTheDay]

Brooklyn wrote: Quote: my background is in Finance, and Economics is mostly a hobby for me

Ive found that finance provides me more satisfaction than economics. Maybe it is because there are actually real answers to the questions asked in finance. In economics, there are only more questions. Though my major is economics, I seem to enjoy finance a little more.....

You can always double major in both. That's what I did.