Why do residents of Beverly Hills have such expensive cars? The question is rhetorical. Readers know why. While some will mindlessly contend that all the wealth is inherited, most understand that residents of this globally famous locale are some of the most productive individuals on earth, and are big drivers of economic activity in wildly prosperous Los Angeles. If Los Angeles were a country, it would be one of the world’s largest economies.
Residents of Beverly Hills have fancy cars and majestic houses because the wealth they produce enables both. Their production affords them enormous capacity to consume. Getting right to the point, their gargantuan consumption of some of the world’s finest things is a consequence of their production.
Few would seriously debate the above truth, which means most understand supply-side economics. Though its meaning has been perverted in modern times by media members (and even some self-proclaimed supply siders) as being about the revenue maximizing point of tax rates, the actual truth is that supply-side economics is about production.
Supply siders understand intimately what we all do intuitively, that consumption doesn’t drive economic growth as much as it’s an effect of it. Consumption is the reward for production. Supply side economics is all about removing the tax, regulatory, trade, and monetary barriers to production.
Taxes are a price or penalty levied on work and investment, so the goal of supply siders is to reduce penalties foisted on each. Regulation limits our ability to produce as we comply with the orders imposed on us by people who likely don’t rate actual jobs in the industries they regulate, so supply siders would prefer a reduction in the regulations that almost never work, but that limit our ability to produce.
We work in order to import. Again, to consume we must produce first, which means production is an expression of our desire to import things. This could be from across the street or from the other side of the world, but work is our expression of a desire to get things. Because it is, tariffs on foreign goods exist as a tax on our work. Even worse, they limit our ability to divide up work. Imports are a certain sign that we're getting better with great rapidity. When we’re importing from around the world, that means we’re improving simply because we’re specializing, and when we’re specializing we’re more productive.
Which brings us to money. Money is an agreement about value among all producers that makes it possible to exchange our work product for all the world’s plenty. The more productive we are the more money we receive in return for our work, and the more we can import. Money is what we get in return for our productivity, and it’s what enables the import of goods and services. Crucial about money is that it also frees us to delay importing. Basically we can store our wealth, whereby our consumptive power is shifted to others.
Or we can direct our money to businesses that need trucks, tractors, office space, and labor (among other capital goods) to progress. This is investment. Investment is the greatest driver of economic growth because the capital accessed from the productive makes it possible for those who attain it to produce more and more goods and services at costs that decline over time thanks to the productivity boosting investment.
So while money crucially facilitates the trade that enables productivity boosting specialization, and the investment that enables the constant discovery of new and better ways to enhance how we live and work, it can slow both if its value is unstable. Money is most useful when its value is unchanging. If it is changing that’s a sign that the benefits of trade are being shrunken or redistributed by monetary authorities to either buyer or seller as those who take money in return for actual goods and services are able to command more or less with it.
And then with investment, money that’s declining in value logically exists as a tax on the latter. Why delay consumption with an eye on deferred dollar returns if the dollars will be exchangeable for less down the line?
Thinking about all this in terms of supply-side economics, those who believe in shrunken impediments to production want to remove or reduce the barriers to production that are once again taxes, regulations, tariffs on foreign goods, and unstable money. It’s very simple. Those who make supply side about tax revenues plainly don’t get it.
So why is supply side economics losing ground in the Trump White House? It’s a policy thing. While there are lots of supply siders in and around the Trump administration, it’s apparent from policy of late that the philosophy is mostly losing in the policy debate.
Mostly is the operative word simply because on the regulatory front, supply-side is winning. The numbers change all the time, but the latest heard here is that during President Trump’s time in office, 22 regulations have been abolished or allowed to lapse for every new one instituted. Good. Barriers to production removed.
At the same time trade has been made less free. For some reason Trump believes imports are a sign of Americans being taken advantage of, even though they’re really and truly a sign of Americans being rewarded for their productivity. Americans import a lot because they produce a lot, yet it’s rare for a week to go by without Trump instituting or threatening to institute tariffs on foreign goods. On its own this is really unfortunate, and to supply siders it’s especially so when it’s remembered that Jude Wanniski, a saint to the supply-side set, long ago made a persuasive case in The Way the World Works that the 1929 stock-market crash was a consequence of word reaching investors that President Hoover would sign the Smoot-Hawley tariff bill in 1930. Markets are always pricing in the future.
Considering money, its stability as a measure of value has long been a crucial driver of production for it making exchange and investment much easier. Supply siders have historically looked at gold’s price as an objective measure of the dollar’s stability, along with its direction. The problem there is that the dollar price of gold has declined fairly substantially during Trump’s presidency from $1,100 to $1,500/ounce. A weaker dollar is a tax on investment. As this piece is being read, the fight within the Trump administration about the dollar, and whether it would should continue to be devalued, is ongoing. The gold price signals that devaluationists are sadly winning.
Which brings us to taxes. Supply siders always overrated the original Trump tax cuts. The shame there is that Trump would have signed anything, and despite knowing this, the Republicans handed him largely inconsequential tax cuts too focused on middle earners. Indeed, top earners on the coasts for the most part had their taxes increased by the alleged 2017 GOP tax cuts.
All of this matters simply because tax cuts for anyone but the highest of earners are Keynesian tax cuts. They are because for the typical earner, a tax cut amounts to more spending money. That’s all well and good, but investment is what drives production. That’s why tax cuts for the rich are so crucial to production, to the supply side. Precisely because they have so much unspent wealth, tax cuts for them have a huge impact on growth since they have so much money to invest.
The problem here is that while the Trump administration claims today’s economy is the greatest ever out of one side of the mouth, out of the other it’s plainly scared. And those inside the administration are searching for ways to boost the economy. Fair enough, and investment is the way. Except that what Administration figures are talking about has nothing to do with investment. They’re talking middle class tax cuts yet again. One idea floated last week, according to Fox News, was 10% cuts for middle earners. Payroll tax cuts for middle earners have also been floated. Keynesian tax cuts that will do little to boost output. The rich have the investment funds. Lower their taxes. That’s the supply side answer.
Supply siders found solace in talk of a possible decree from Treasury that capital gains would be indexed to inflation. Assuming it would or will pass constitutional muster, what’s missed here is that during periods of true inflation, as in periods of dollar debasement (think 1970s, 2000s), there are few capital gains to speak of. What capital gains would be indexed? There’s less to this policy idea than supply siders think.
Stated simply, supply side isn’t winning right now. The dollar is shrinking, trade is less free, and now supply siders are talking tax cuts on the Keynesian assumption of “putting money in people’s pockets.” Sure, but consumption doesn’t power growth. In an administration full of supply siders, true supply side economics isn’t finding its way into the policy mix.
So while it should maybe thrill supply side types (including this one) that so many of their people are inside or close to the Administration, there’s cause for worry. They’re sadly not winning. Worrisome here is that if the economy falters, supply side policies will be blamed. That would be unfortunate. Supply side hasn’t been tried yet. Check out the policies.
A version of this piece ran in Forbes