The American economy, or any economy for that matter, is a system whereby products and services are created by some people, groups, organizations, or other unit of society, and obtained (consumed) by another person, group, organization, or other unit of society. Creation usually means the obtaining and conversion of resources into a product (known by economists as Supply), which in theory adds value to the system by creating a product that has more value than the resources used in the creation process. Those who do the creating are known as suppliers. Those who desire the product (consumers) usually obtain it in exchange for something of value that they have acquired and/or earned, in most cases this would be money. The desire of consumers is known to economists as demand. So, you may be able to tell from this description, this system will only work when the desire of consumers for the product (demand) is high enough that they are willing to pay more to obtain it than it costs the suppliers to create it, and this difference is known as profits.
This is, of course, a very basic and simple description of an extremely complex and convoluted process. For instance, the supply/demand dynamic exists in the process whereby suppliers obtain the resources they need to make their products, and in the hiring and work process through which consumers earn the money they use to buy the products. Everyone in the system is both a supplier and a consumer to some extent. So, there are multiple levels of supply vs. demand dynamics going on throughout the entire economic system. And, the whole thing comes full circle because the jobs consumers do to earn money to buy products usually mean they are working for suppliers who make products! So, part of a supplier’s cost of making a product includes paying employees the money they will use to buy products! Are we dizzy yet? But at all levels of interaction, the basic relationship between supply and demand dictates the terms of the exchange of products from suppliers to consumers, and the name for these terms of exchange is price. What does it cost for the supplier to make the product, how much profit do they want to make, and how much is the consumer willing to pay for the product.
But the theory of Supply and Demand goes beyond this simple dynamic to encompass an additional factor, known as competition. Because resources are finite, so to is supply. The same is true for demand. Suppliers compete for limited resources from which they make their products, and they compete for customers with other suppliers making the same products. Consumers compete with other consumers for work and income with which they will obtain products, and because income is also finite, a consumer’s desire and need for one product has to compete with that consumer’s desire and need for other products. The Supply and Demand theory basically says that the variable that is impacted by all this competition on both sides of the equation is price. Actually, the competition impacts the two variables of supply and demand, and these variables then impact the price of the product. As the theory goes, more supply and less demand means a lower price, and less supply with more demand means a higher price.
Well, as with just about everything in life, it’s not really that simple. The main variables in this process, competition, limited resources, desire & need for products, supply, demand, and others are ALL affected by hundreds of other variables, conditions, circumstances, and situations. Just about anything that varies in life can have an impact on the basic economic process. This creates a virtual infinite amount of complexity, which is why fixing the economy is always such a difficult thing to do.
But there are two main philosophies that are derived from the two main variables in the process – supply and demand. On the one hand, some say that making things easier and cheaper for suppliers to innovate, invent, and make products will lower the price of products, create better products, and thus benefit the consumer. This is known as supply-side economics. On the other hand, there are those who say that helping the consumer have more money, get a better job, and have more discretionary income, will increase demand, raise price, increase profits, and stimulate innovation and invention, all good for the suppliers. This is known as demand-side economics. These philosophies are not mutually exclusive, and I do not believe that proponents of either side think that their philosophy can be implemented to the exclusion of the other.
However, these two economic philosophies do drive a whole host of issues, and have created a wide gulf between sides when it comes to government economic policy making. Things like “trickle-down economics,” austerity programs, social programs, taxation policies, and much more are debated and fought over with arguments generally taken from the two main economic philosophies: Supply-side and Demand-side economics. Republicans use supply-side arguments to push tax breaks for businesses and the wealthy (the “job makers”), and Democrats use demand-side arguments to argue for social programs and tax breaks for the average consumer. Both sound reasonable, and one would think that a nice balance between the two would be the most effective. But….
Republicans in Congress, backed by the wealthy and huge corporations, actually do want to implement supply-side economics to the exclusion of demand-side. They use the deficit as a weapon of fear and call for “austerity” to fix the problem. Never mind that the Bush tax cuts were the largest redistribution of wealth in history (from the middle class and poor to the wealthy), and that the wealthy are paying lower income tax rates than anytime in recent history. Never mind that the wealth gap in this country is at record proportions. Never mind that the wealthiest 400 Americans now have more wealth than the lower 150 million Americans. Never mind any of this because Republicans are still fighting tooth and nail to protect the top 1% in this country from paying any more in taxes. Republicans are still fighting to keep subsidies and tax loop holes for the wealthiest corporations. But Republicans do have a plan to fix the deficit – give even more to the wealthy and huge corporations and put the rest of America on an “austerity” program. They want to do this by cutting Social Security, Medicare, and ALL government spending things like unemployment and social programs of all kinds.
So, the Republicans want us all to tighten our belts (even if we cannot afford a belt) while their wealthy donors continue to sit high and pretty, never even feeling any impact from the recession that has destroyed so many lives. When asked why and how this will fix the deficit, the response is the same old tired supply-side arguments – we cannot tax the “job makers” and government spending on social programs is out of control. Only cuts in spending will bring the deficit down, and programs like Social Security and Medicare are too expensive. Again, never mind that none of this is true to begin with, instead let’s take a quick look as way “austerity” will really do.
All things being equal, demand-side economics is more important, and more effective, than supply side. Consider the extremes. If you took all the money away from consumers and gave it to suppliers, there would be no demand. If there is no demand, no business executive in his or her right mind is going to add jobs, invest in more production, or innovate to make better products, no matter how much cash they have in the bank. If consumers have no money, you will have to reduce your price to zero for them to afford it. Now, let’s look at the other extreme. Give all the money to consumers and none to business owners. What happens then. Well, there is this entire industry called banking that would be eager to invest in businesses that have huge demand. The bottom line is that, in the face of great demand for their products, business owners will find ways to increase jobs & production to satisfy that demand. In the face huge supply, low prices, but no money, what is a poor consumer going to do? There is very little they can do.
The fact of the matter is that the flow of money in an economy is unidirectional – from consumers to suppliers. Government intervention to take money from consumers and give it to suppliers bypasses the system and there is NO VALUE ADDED. Helping consumers have more money to spend, even at the expense of the so-called “job makers” feeds the system, adds value, and everyone wins. Every dollar that is not in a senior’s pockets because of cuts to Medicare or Social Security is a dollar that is not spent into the economy. All “austerity” does is slow the economy, reduce consumer spending, kill jobs, reduce income taxes being paid, and yes, that all INCREASES the deficit, not reduces it.