Keynesian vs. Supply-Side "Reaganomics;" do consumers create the demand or do the "suppliers" create the demand maybe this will help us decide which economic policy we should follow. Both have worked at one point, but which one will work when we need it most, NOW. Personally I believe the private sector creates demand causing consumers to spend more generating more growth, hence the "trickle-down" effect. For example, in an economy where no one wants to spend money and instead are paying down debt and saving, Apple sells more products than it can keep up with. Consumers did not create the need for an iPod or an iMac or even an iPad, but Apple did. Yes this is a very simple dissection and perhaps a naïve explanation, but let's face it this is pure fact. When gas prices began rising out exponentially consumers cut back on driving so what happened? Car companies saw the need for a change and then came the electric car. Car companies created an artificial demand. As long as innovation continues people will continue to buy, this is what made the United States the greatest country in the world, but will innovation continue?
Ronald Reagan popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to invest and produce economic benefits that trickle down into the overall economy. The single biggest distinction between Keynesian theory and supply-side economics is: Keynesian believes that consumers' demand for goods and services are key economic drivers, while a supply-sider believes that producers and their willingness to create goods and services set the pace of economic growth.
Supply-side economics also suggested that some tax cuts actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate. With threats today to raise taxes and more government spending than we can handle, is this really what our economy needs? Keynesian Economics worked wonders for the UK in the 1930s, but has not performed so well today. Government intervention has crippled free markets and sparked gloom over our economy that erases confidence. There has been an $800B stimulus package, then $420B, $780B, $830B, etc. The national debt has increased from $9 Trillion to over $15 Trillion since the start of the recession. That's an increase of about 67% in the debt, and there are still talks of more government spending. The dilemma with Keynesian's theory is: creating too much inflationary liquidity, or not sufficiently "greasing the wheels" of commerce with enough liquidity. Therefore, the Fed may inadvertently stifle growth by contributing to deflation (which is what looms over the horizon) and encouraging investors to horde dollars.
It is so shocking to see how carefully woven and intertwined the economy really is. The collapse of the housing bubble brought down financial institutions, which caused wide-spread layoffs and panic, credit crunch and unemployment, etc. This is exactly the same way a recovery would work. Creating supply through marginal tax cuts would create artificial demand thus workforce would increase, more workforce equals more taxes paid, etc. Maybe I am missing something but how would raising taxes stimulate any kind of growth? Or adding to the debt, which has Americans shaking in fears of stagflation: happened to Japan and UK now is coming here. The U.S. lost their AAA credit rating in part to the growing debt. The higher the unemployment is the lower amount of taxes collected no matter how much you raise taxes (and take away incentives to earning more in the process).
If we could reduce this number to 1990 levels of 20% through a flat tax or through increasing employment levels cutting unemployment to 4-5% there would be no reason for a stimulus (and unemployment benefits would obviously be cut in the process). Of course lowering unemployment it is easier said than done, but is nothing we have not done before. We are a country of innovation and growth. Maybe a little push towards supply side economics is just what the economy needs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.