Tuesday, November 12, 2002

The Steffans Manifesto-Part I-Macroeconomics for Dummies-Here's an interesting proposal from Jason Steffans-he posted this last week, and it skipped under my radar during election week.
But once, just once, I'd like to see a Republican essentially say that the Democratic charge is right. Just come out and say: "My opponent charges me of being 'tied' to corporate interests. While I am not tied to whatever corporations want, I am in favor of creating an environment in which corporations can do the things they do best, things they do better than anyone else. Corporations create jobs like no one else can. Competition between corporations drives down prices for consumers. And corporations, in general, create retirement assets through stock value appreciation. That is why I favor reducing the corporate income tax rate, tort reform, and not increasing the minimum wage. The resulting growth in the economy, which benefits all of us, will more than offset any loss of government services, many of which are grossly inefficient. When my opponent says to you that corporate interests are not worth looking out for, he is saying to you that he is not going to allow the economy to grow, because he would rather have the government grow. That view is wrong. And that is why you should vote for me." Make that the primary campaign issue. Just run with it. I don't know if it would work. But I'd like to see it. It would certainly create a more interesting race than what we normally get.
The key part in this will be selling the benefits of tax cuts to the average voter. The readers of this blog aren’t the average voter, but y’all will (hopefully) be explaining the advantages of a lower-tax, free-market economics to your friends and acquaintances. Here’s a quick primer on modern economics, both the standard Keynesian approach to economics and the modern “supply-side” alternative. There are two ways in the basic macroeconomic model that you can stimulate the economy: boosting aggregate demand and boosting aggregate supply. The traditional1 Keynesian method is to focus on demand. Some background first. The basic Keynesian model divides GDP into consumer spending, business investment spending, government spending and net exports. Since Keynes was doing his writing in the 30s during the Great Depression, the proscriptions of Keynesian economics were devised to get out of an economic downturn. If business isn’t building new plant and equipment and consumers are tight with their money during bad times, it's up to the government to step in and stimulate the economy by extra government spending and tax cuts. There are some things that will stimulate private-sector demand; lower taxes, greater overall wealth, better economic expectations and lower interest rates. However, Keynesians tend to focus on government spending as a stimulus, as the government spends the whole amount, while a tax cut will be partly spent and partly saved. This gives the excuse for the more socialist partisans to spend, since it's a better way to stimulate the economy. Keynesian econ has its merits if you're fighting a recession. If you're going to build roads, schools and tanks, it makes since to do it during lulls in the economy, where you can get the resources on the cheap. However, Keynesian economics doesn't do that well in growing economies without a lot of excess capacity to soak up. At some point, you need policies that will encourage the development of extra supply of goods or else any extra demand will just drive inflation to the moon. Traditionally, Keynesians ignored aggregate supply, thinking it was a non-factor in recessions (excess capacity there to be sucked up by demand) and fixed once "full-employment" was reached (once everyone's working, the economy's maxed out). The last quarter-century's seen a growth in economists who have started to look at stimulating aggregate supply as a way to stimulate economic growth, especially in low-unemployment settings. The focus on aggregate supply led to the nickname "supply-side economics." What stimulates businesses to grow, starting more businesses and adding capacity to existing businesses? Some major ways to stimulate supply are improved technology/innovation/productivity, lower cost of capital/interest rates, lower taxes on corporations and investors, lower regulations and lower factor costs (such as oil or wages). Things that stimulate aggregate supply will lower inflationary pressures while expanding the economy. The economy as a whole will tend to grow, making us collectively richer. Lower tax rates, especially if they are seen to be permenent, will reduce the cost of capital. As tax rates go down, it will increase the after-tax returns on investments, making people willing to accept a lower nominal rate of return than before. Lower corporate tax rates will increase the after tax-returns on corporations; without a corporate tax cut, only unincorporated businesses or S-corporations (who pay taxes like partnerships) would get the full benefits of a tax cut. Lower regulations would lower the cost of doing business, this making people more interested in expanding businesses or starting new ones, as would lower prices of things you need to buy in order to run the business; the costs of your supplies would be lower if taxes went down for your suppliers, for they would be able to get the same profits at a lower price. However, the fans of larger government will oppose many of these policies. Looser regulations will be opposed by people who like the regulations as they are. People who want to use the tax revenue to fund government programs will oppose tax cuts. What dynamists (a.k.a. free-market conservatives) need to stress is that there are two benefits to a tax cuts. The first benefit is that they have more disposable income after a tax cut. The second benefit is that they will have an economy that will grow faster than in a higher-tax environment. The dynamist can sell this as a two-for-one “You’ll have more money in your pocket now, and even more money down the line as the economy grows. That's better than a slightly-bigger set of government programs." The people who will directly benefit from those added programs might complain, but they are in the minority. It's the people who are the indirect beneficiaries who need to be educated into why a smaller government is better. The person who wants Granny to have help with her drugs or to get government funding for this or that pet project needs to see how they will pay for it with lower take-home pay and a slower economy. 1 Update 6:30 11/13-I used "Classic" here at first, a poor choice of words. Jeffrey Collins reminded me that Classical is the name used for pre-Keynesian free-market macroeconomics-you can call the supply-siders neoclassical if you want to add some gravitas to your arguments

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