The Supply Side Economics of President Obama

Monday, December 14, 2009

President Obama is hell bent on helping the small businesses of America. “Better late than never,” some would say, but they would be wrong.

His idea is simple. Too simple. Make more money available to small business by leaning on our banks to make loans they really would prefer not to, and give those small business tax incentives to hire more people… Wait a minute. Just stop for a second. Why would any business, particularly a small, scared business with limited resources, a tiny drop in the ocean which is the American economy, expand its operations without knowing it can sell the additional goods or services it produces? …I’m waiting. …”On spec?” you say timidly. Hey! Who said that?! Maybe in a strong, surging economy, but not in the midst of the most serious economic downturn since the Great Depression. No way.

Think of the logic President Obama is asking us to buy. We’ll loan small businesses money so they can afford to expand. I don’t know how they’ll afford to make the payments, principal and interest, but I’m sure they’ll figure that out – maybe out of the profits they’ll be generating by selling more of whatever they make. And we’ll give them tax incentives to hire more people, tax incentives they’ll realize sometime in the future. So they’ll borrow and hire and expand their operations, and produce more stuff, but wait… Who’s going to buy all these additional goods and services? Where will the money come from to make those purchases? ..Isn’t it obvious? From the wages and salaries all the newly hired employees will be spending. Of course. Why didn’t I think of that?! …Because Ronald Reagan did. It’s called “Supply Side Economics,” and it doesn’t work.

It doesn’t work because it’s contrary to how business people think, particularly in a deep recession. Just because you make something, doesn’t mean that someone’s going to buy it. Sure, companies are always marketing new things. Some catch on. Some don’t. Happens all the time, but during periods of high un- and under-employment? Not so much. When you’re afraid, when you lack confidence in the market, you hunker down and do everything you can to protect the business you already have. President Obama has to overcome that negative psychology, not by talking it away, although some encouraging rhetoric wouldn’t hurt, but by the tangible act of creating new demand. Franklin Roosevelt had the perverse advantage of a World War. The current Administration doesn’t it.

Ours is a demand-driven economy. You don’t put people back to work by asking companies to hire more of them. You give people, especially the ones who are currently out of work, money to buy what they need, but otherwise can’t afford. They reach out to the market. Businesses feel the warmth of new demand and become emboldened. With trepidation, they begin using part-timers full-time, reducing under-employment first. One thing leads to another, and the next thing you know they’ve run out of under-employment to burn and begin hiring the un-employed, and so on. But it all begins with demand.

It really is simple. President Obama and Congress need to put every dollar we can afford – even if means cutting back elsewhere to keep the deficit and national debt from getting any worse… Put every dollar we’ve got into the hands of the families that will convert 100% of those dollars into new demand, immediately. Don’t lower the taxes of people who are already working. You’ll be giving the equivalent of chump change to people who already have jobs and probably won’t be spending every dollar they save. Give the money to the unemployed, stand back and watch what happens. You’ve extended unemployment benefits. That’s good, but you need to do more, much more.

If you have time, you might also want to read, “The Bass Ackwards Economics of Bailout II,” published December 9 on the WordFeeder.

-wf


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