California-bred supply-side economics is coming back

Oct. 23, 2012

By Chriss Street

The Great Recession was primarily caused by the collapse in economic demand as 70 million baby boomers born between 1946 and 1964 moved out of their peak spending years in their mid-30s to mid-50s and into retirement in their late 50s and early 60s.  The U.S. government over the last five years squandered $7.6 trillion on Keynesian demand-side stimulus programs, trying to resuscitate this demographically shrinking demand.

With only 23 million born between 1995 and 2012 in Generation Z, this population is just too small for demand-side stimulus to revive the economy.  America is now deep in debt, facing 23 million unemployed, and needs to fund the baby boomer’s retirement.  Consequently, politicians are being forced to abandon demand-side stimulae and re-embrace supply-side economics.

The Revolutionary War was sparked by Great Britain’s demand that the American Colonies pay increasingly higher taxes to support England’s expanding national debt.  Once independent, the new U.S. Constitution’s Commerce Clause established a free-trade zone among the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay off any outstanding national debt.  These policies created an economic boom that allowed the United States to be debt-free by the 1830s.

This concept of encouraging long-term economic growth by lowering taxes on income and reducing regulatory burdens that serve as barriers for people to produce goods and services is referred to as “supply-side economics.”  The Founding Fathers understood that a greater supply of goods and services produced increases demand by lowering prices for consumers.

But during the Great Depression, Washington politicians abandoned supply-side and imported Keynesian “demand-side” economics from Great Britain.  Demand-side economics argues that, in the “short-run,” productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand may not always equal aggregate supply (the total productive capacity of the economy), because private-sector decisions often lead to “inefficient market outcomes.” Therefore, government should create demand through targeted spending.  Armed with this smoke screen, U.S. short-term spending has risen every year since 1948, as politicians always found some inadequate market demand that needed more spending.

California revival

California’s own President Ronald Reagan revived supply-side economics in the 1980s with Reaganomics.  The policy ended the oil windfall profits tax to stimulate oil production, passed the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 to cut taxes and eliminate deductions, and instituted a payroll tax to begin a “sinking fund” to reduce the accumulated liability of Social Security and Medicare.  Although Reagan was never able to reduce total spending, he did start a huge economic boom that lasted until 2001 and led to huge United States Treasury surpluses in the late 1990s.

Most Americans do not realize that Reagan’s biggest ally for his supply-side encouragement of economic growth was the demographics of the baby-boomers.  Studies demonstrate that 50 percent of all durable (cars and houses) and non-durable (food and clothing) expenditures are directly related to household demographics.  Spending tends to peak as families grow and people reach their mid-30s to mid-50s.  Then spending declines rapidly after the mid-50s.

When Reagan began Reaganomics in August 1981, the first baby-boomers born in 1946 were just turning 35 years old.  By the time those first baby-boomers hit 55 in 2001, the NASDAQ over-the-counter index of growth stocks had risen from 190 to more than 5000, a jump of 2,600 percent.  As the boomers hit 55 and begin to retire through 2019, only 30 percent as many Generation Z members will replace them in the work force.

Politicians love demand-side economics because they get to look busy spending lots of money creating “demand” for their crony capitalist friends.  On the other hand, a part-time Congress could manage a supply-side economic policy, because the policy is set once to encourage long-term economic growth.

But as we have been observing, the United States government will go bankrupt long before politicians can “create” enough demand to replace the shrinking consumption spending as the baby-boomers continue to rapidly retire.  Having tripled the national debt since 2001 and recently suffering a credit downgrade, Congress has no other viable option than supporting a return to supply-side economics to encourage growth.

I expect Congress to soon update President Reagan’s playbook for supply-side growth.  The United States has the world’s largest oil and gas reserves and last year those proven reserves rose by the highest amounts ever recorded.  Much of the un-tapped oil is on federal land and Congress will begin deregulating the energy market to capture huge royalty payments on higher energy production.

Congress will also deregulate the utility industry.  This will encourage up to $6 trillion in private-sector capital spending for new pipelines and refineries across the nation to connect and distribute new production.  Corporate taxes and crony tax deductions will be slashed and individual taxes and deductions will be reduced.

America is on the verge of a huge economic expansion.  Enjoy the ride!

Chriss Street appears on “THE AMERICAN EXCEPTIONALISM RADIO TALK SHOW”
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12 comments

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  1. us citizen
    us citizen 23 October, 2012, 13:10

    Hmmm I thought the housing fiasco started the melt down. Too many buying houses they couldnt afford or those loosing their jobs. And many baby boomers cant retire. They are still in the job market. They havent saved enough. Would I like to see a turn around. You betcha! But if BO becomes Pres, there is not going to be a turn around. Business’s dont like him at all.

    Reply this comment
  2. Ulysses Uhaul
    Ulysses Uhaul 23 October, 2012, 16:39

    Supply laughing curve,voodoo economics doesn’t work in our debt ridden service economy….what a laugh….give a person a ball cap and an apron….he can feed himself forever….how bout his family?

    Reply this comment
  3. Rex the Wonder Dog!
    Rex the Wonder Dog! 23 October, 2012, 18:39

    Hmmm I thought the housing fiasco started the melt down
    ==
    It was not the housing meltdown that caused it, it was the LOW INTEREST rates Greenspan kept in place for 7 years, that was 75% of it, the other 25% was the non existent underwriting standards for the loans.

    Reply this comment
  4. BobA
    BobA 23 October, 2012, 20:23

    Rex:

    You forgot to add the primary cause that inflated the housing bubble to begin with: the Community Redevelopment act. It all but did away with mortgage lending standards and forced banks and lending institutions to make mortgage loans to people who would’ve never qualified for a home loan under normal circumstances.

    I personally know a couple who bought a $650k home with a $10k down payment. Their combined income was approximately $85k/year. They took out a 2nd on the mortgage a few years later to buy an expensive BMW and took a month long vacation in Europe. They were living large and didn’t think it would end in the way it did.

    They ran into trouble in 2005 when the balloon payment came due and their monthly mortgage payment doubled. My friend started working a part time job to make ends meet in a valiant effort to keep his home and he and his wife maxed out their credit cards during that time.

    But when his wife got laid off from her job in 2006, well, the end came 6 months later when their home went into foreclosure. They were one of the many who tossed the keys into the mailbox and walked away. Their credit was all shot to hell so it didn’t make any difference to them.

    The sad part of it all is that they blamed everyone else but themselves for what happened to them. When the blame Bush mantra came along, they fell right in line.

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  5. Rex the Wonder Dog!
    Rex the Wonder Dog! 23 October, 2012, 20:59

    Even with the weak underwriting standards, there is NO WAY the number and dollar amount of loans that were funded would have been anything near what it was w/o Mr Bubbles (Greenspan) keep interest rates artificially low.

    Reply this comment
  6. BobA
    BobA 24 October, 2012, 09:12

    Rex:

    All to true. The low interest rates coupled with the CRA led to the eventual housing bust.

    For what it’s worth, it reminds of the Savings & Loans fiasco in the late 80s. Entire new neighborhoods of new housing were built in the Palmdale area that never got sold and was eventually razed for a lack of buyers. It looked like a ghost town or more appropriately, ghost neighborhoods.

    The Construction companies and the banks all got bailed out via the then RTC at tax payers expense. When will we learn, WHEN will we learn?

    Reply this comment
  7. cynthia curran
    cynthia curran 24 October, 2012, 09:17

    Well generation z is about 45 percent hispanic in California while the babyboomers were mainly white. Whites have higher income than hispanics. See Us Census on younger generations in California being less white.

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  8. cynthia curran
    cynthia curran 24 October, 2012, 09:24

    I think you are a little incorrect here because of high immirgation from the 1990’s until 2012 overall birthrates were as high as the babyboomer period. Hispanic women particulary immirgants were having over 3 kids until the recession.

    Reply this comment
  9. Ulysses Uhaul
    Ulysses Uhaul 24 October, 2012, 10:11

    Thefd is no and never will be a housing bubble in Adelanto and Randsburg due lack of modern facilities and uncivilized bunker dwellers.

    Reply this comment
  10. Hondo
    Hondo 24 October, 2012, 13:40

    No one making 85K a year has any business buying a house for 650k. At most a 300k house. And no mortgage company had any business giving them a loan.
    A 650k mortgage should be at least 5grand a month rounding out to around 60k a year. That’s 3/4 of their income on housing. Insane.
    And Obama, man of the people that he is, has not indicting any of those bankers who made those insane loans, bundled them, and sold them on wall street as AAA+ rated financial instruments.
    Hondo…….

    Reply this comment
  11. Queeg
    Queeg 24 October, 2012, 15:47

    Housing is high due to the weather and gazillions of people living here….the only way to change is for a bunch of you doomers to move….all aboard!!!!!

    Reply this comment
  12. BobA
    BobA 24 October, 2012, 20:14

    Hondo:

    It happened. I tried to warn my then friend that he was taking a big risk but I was more or less told to mind my own business. I have a couple of relatives who made the same mistakes years earlier so I saw the consequences of “living for today and screw tomorrow.”

    After he lost the house and his wife later left him, we had several conversations where he expressed regret for not taking my advice at the time. He even starting drinking heavily and had to seek out professional for his depression. I don’t drink and don’t enjoy the company of people who do so we parted ways three years ago last month.

    Reply this comment

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