Brushfire of Freedom
The Conservative Cowboy
I wanted to take a moment to look at the economy this week; with all of the things that are happening in the news recently with the Chapter 11 filing of GM and the Fed chairmen warning about the deficit. There is also a warning about inflation, and increased worry about how much government intervention is occurring in the financial sector, not just in this country but with the Bank of England in Europe. With all of that being said I want to take a look at simple economics and why these policies will not work.
First thing to understand is a simple supply and demand graph, and the relationship between the two. The relationship between supply and demand is what we call an inverse relationship, where the slope of the supply curve is positive and the slope of the demand curve is negative. Where those two curves meet is the market price for a given product. Now in the current economic struggles we are seeing a decrease in demand, this causes prices to go down. At the same time this also changes the amount of materials that need to be supplied, decreasing the quantity supplied. As you can see with this simple formula jobs are being cut because the amount of material being supplied is less.
Now we can move on to look at what the current administration is doing to fix the problem. The Obama administration is flooding the market with government spending, giving the money to help shore up the large corporations of the country. On the demand side he is trying to put more spending money in the pockets of middle class and lower class individuals with tax cuts. We will call this approach demand side economics, trying to increase demand by giving more money to the consumer. Not a bad idea on paper however, in practice it doesn’t work for several reasons. First the government is giving the money to large corporations with no incentive to increase production. A tax cut for these individuals, however, would provide an incentive to increase production. The incentive is there because in order to maximize the tax cut companies would want to produce and sell more products. The second major flaw in this demand side approach to fixing the economy is the simple fact that the tax cuts for the middle and lower class don’t really add anything to their buying power. A third flaw to this approach is the fact that companies must cut production and therefore cut costs, and that means that there are more unemployed workers in the US and thus those workers are not buying anything outside simple necessities further causing a drop in overall demand.
So how then can we fix this current mess? The answer is simple and it is supply side economics, or Reaganomics. By focusing on the supply side of the economic model you get answers to all of the problems discussed above. Critics of this approach will tell you that the economy during the Reagan administration was not the greatest, however, these policies take time to come into fruition and the booming 90’s can be directly attributed to the polices set in place by Reagan. By cutting costs of suppliers many good things happen to the economy, first of all you have a company that can produce more products at a lower cost. Second you have an incentive to make more products, and making more products involves more workers. With more workers in the workforce demand will naturally go up because more people are secure in their jobs. You also have companies that are more profitable, I can hear the wheels turning in your head…this will just make the rich richer right? Wrong, more profitable companies help the entire country for the simple fact that investment in those companies will rise. That will put faith back in the stock market and the banking system because people are willing to invest. With an increase in investment there is also an increase in the amount of money that banks are willing to loan. I am not talking about the toxic loans that got us into this mess I am talking about solid investments that can only help our country grow.
So when we look at the basics of economics it is simple to see that supply side economics will be the best approach to our current crisis. Mr. Obama, please take a page out of Reagan’s book and push our country forward towards the prosperity that we are capable of in this great nation. Spending for the sake of spending is not the answer!
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