Last year’s election centered around several key issues, and the American economy was at the top of it all. Debates raged about how to alleviate poverty, fix the deficit and boost the economy overall.
On the left, the consensus is that anyone with money is evil and you can only gain wealth by taking it from others. This is why they favor welfare programs that use the government to do just that.
The opposing point of view is that production can lead to harmonious gains for all income brackets. This time around, we’re going to study a little economic theory to see what really does and doesn’t work.
Supply-Side Economics
Critics love attacking this model by calling it “trickle-down” economics. So what is it, really? We’ll touch on trickle-down criticisms in a minute, but supply-side economics is the basic theory that innovation and production lead to more economic growth than anything else, and they are the driving force behind prosperity.
The theory is not a whole-view picture of all economics, but it is important enough that Robert Mundell won a Nobel Prize in Economics for the theory in 1999.
The general idea behind supply-side economics is that government policies should favor investment and innovation if you want to promote the strongest economy possible. These encouragements often come in the form of deregulation and tax breaks, particularly for capital gains and other investments.
Now, supply-side economics does have its limitations. Eventually, freeing funds for investments will hit diminishing returns and you run out of capital to keep pushing innovation. That doesn’t stop innovation, it just slows economic acceleration.
Supply-side models also tend to struggle during recessions. When investor confidence is down, having more money to invest doesn’t generate returns as fast, mostly because those with money tend to be more conservative with it. These limitations are the bulk of attacks against supply-side theory, and they are the basis for the primary opposition to the theory: demand-side economics.
Keynesian Models
You’ve heard a lot about Keynesian economics in the last decade. This is mostly because it was the economic gospel of the Obama Administration. When the recession hit, the leadership subscribed completely to Keynesian theory, modelling much of their policy after the reforms of the Great Depression (where John Keynes invented his model).
The reason this reaction was so ineffective is because the major good points of Keynesian theory were already in place. The government already backed banks to prevent runs, and the Fed was already closely managing interest rates. These are the bulk of Keynesian practices that have proven to have long-term benefits.
Other short-term ideas that can work through these models are heavy government investments and spending, but that’s not the route Obama took. Instead he amped up entitlement programs, and as we’ve discussed at length, that doesn’t grow an economy. Infrastructure spending could have been the boon Obama needed, but that opportunity is now in Trump’s hands.
Examples through History
While it’s possible to use these two theories in harmony, political climate usually forces them to class when it comes to shaping policy. If you look through historical examples, Keynesian actions rarely have long-term impacts.
Supply-side theory is supported by several major changes. The most famous is when Henry Ford reinvented mass production. That spurned a level of economic growth the world hadn’t seen before.
Similar innovations had large-scale effects with the airline industry, personal computer and the internet. All of those innovations led to massive economic growth and periods of extreme prosperity. You might note that in each of those periods, poverty levels dropped to new lows.
Sustainable Problem Solving
This brings us to the crux of the whole argument. Trickle-down economics is an attack designed to perpetuate the idea that the rich get richer at the expense of the poor. It’s another propaganda piece designed to seize the moral high ground, regardless of the reality of the situation.
History has shown, unequivocally, that welfare programs can’t end poverty. In fact, they help it grow. The only sustainable way to reduce poverty is through job production. This is the primary difference between the liberal and conservative approach to economics, and it is why the Obama Administration oversaw record increases in poverty, even after the recession was officially declared to have ended.
Neither side wants to see Americans homeless, starving or otherwise destitute. The realists understand that creating more jobs is the solution, and that can only be done when those with the ability to create jobs are given the freedom to act.
Going too far can be counterproductive, but the current situation is that America’s investors and businesses are too restrained with excessive taxes and regulations. A little freedom can go a long way, and the Trump Administration is quickly proving that supply-side economics are the key to the future.
Regards,
Ethan Warrick
Editor
Wealth Authority
