Economics 001

by on August 3, 2011 · 9 comments

in Economy

Republicans insist–and their devotion to supply-side economics strongly suggests–that the rich and powerful are the key to economic growth.  But the wealthy don’t create demand in an economy, the middle-class masses with money to spend do.

So I was reading Joan Walsh’s Salon column about her Twitter war with Saddleback Mega-Church pastor Rick Warren.  The more I read, the more irritated I got because it served to further demonstrate just how ignorant and disconnected from reality conservatives are.  It’s like they’ve never taken a single Econ class in their lives.

In her column, Walsh reprints a letter written to the Salon “letters” section by Warren in response to their Twitter exchange.  In his letter, Warren promotes a conservative economic viewpoint, in effect calling for less government, lower taxes, and bigger handouts to the wealthy.  “My view is that a better solution to increasing revenue is to focus instead on incentivizing JOB CREATION which will spur both consumer spending AND tax revenue,” he writes.

This is typical conservative nonsense, and is indicative of the lack of understanding on the part of big ‘C’ Conservatives-slash-Republicans on the basic concepts of economics.  This isn’t even Economics 101.  It’s Economics 001.

It’s the basic economic principle of supply and demand:  Businesses produce just enough to meet demand.  The greater the demand, the more a business will supply.  The lesser the demand, the lesser the supply.  Businesses cannot make money by creating a massive quantity of products that no one wants—or can afford.  And that’s the crux of the problem.

Economies grow due to increasing demand for what they produce, and right now in the United States demand is very low.  Why?  Because unemployment is high, and people don’t have any extra money to spend on products and services that they may want, but don’t need and can’t afford.  Hell, they barely have enough money to purchase the bare essentials, let alone luxury items.  And while the cost of living went up during the Bush administration, real wages remained stagnant, meaning that average Americans were stuck spending an ever greater proportion of their earnings on just basic needs—like housing and food—and leaving less for discretionary spending.  With less discretionary spending, the economy slows down and eventually grinds to a halt.  (Of course there were other significant factors that went into creating the current economic calamity we’re in, but in the interest of simplification, this is one huge factor in a nutshell.)

With little or no demand for the products and services they provide, businesses are forced to cut back, often meaning employee layoffs.  More employee layoffs means higher unemployment.  Higher unemployment means even less discretionary spending—it means even less money available for even the bare essentials.  Which only serves to further exacerbate the overarching economic problems.

Now, I may not be a trained economist, but I do have a business degree and I have had a few Economics classes during my high school and college careers, and this is pretty simple stuff.  And this is why Republican “trickle down” economic theory is so puzzling to me.  Businesses create enough products and provide enough services to meet the demand for those products and services.  When demand increases, businesses increase supply.  Sometimes businesses have to expand in order to meet that increased demand.  And they expand by hiring more workers; by hiring more workers and increasing their output, it means that they have to purchase more supplies, which in turn fosters the growth of their suppliers, which means that their suppliers will in turn have to hire more workers to meet their increased demand.  And on it goes.

By producing too much, businesses actually lose money because they cannot sell what they’ve created.  And when they have an excess of inventory, there is no need to continue to make more goods and provide more services.  When there is no longer any need to make more goods and provide more services, businesses find it necessary to cut back on their expenses, which usually means eliminating part of their workforce.

“Incentivizing JOB CREATION” as Warren says is a complete waste of time and energy.  Businesses are not able to create jobs that they have no need for.  There must be a rise in demand for the products and services they provide, which will in turn incentivize job creation on its own.

The problem we have is that there is no demand.  There is no demand because people don’t have any money to spend.  Businesses cannot and will not expand for the sake of expanding.  It’s counterintuitive:  You don’t invest money when you have little to no chance of making that investment back.  And when businesses can’t expand, and individuals and families can’t spend, there is only one entity left that can spend.  And this is the premise of Keynesian Economics.

Keynesian theory holds that when individuals and businesses cannot spend and cannot grow, then it is incumbent on government to provide that spending to spark growth and economic expansion.  In fact, governments become the only entities capable of sparking that growth.  It was Keynesian theory that was employed by President Franklin Delano Roosevelt to pull the United States out of the Great Depression.  Programs like the Works Progress Administration and the Civilian Conservation Corps provided jobs for a large proportion of the massive number of unemployed.

WPA and CCC employees in turn provided a valuable service by constructing public buildings and roads, and creating hundreds of national parks.  WPA and CCC employees were also provided with money in their pockets to spend, which went into local economies and created demand for more goods and services.  (Then there was, of course, the ultimate public works program known as World War II, which only further proves Keynesian theory.)

Keynesian theory says that governments should keep spending until such time as the economy can stand and grow on its own, at which time governments can begin to reduce their spending.  And as private investment grows, government investment can further recede.

It was trickle down—or supply side—economics that has slowly but surely ground this economy to a pulp over the last 30 years.  It was Keynesian theory that rescued the United States during the Great Depression.  The Keynesian model works; the Republican supply side model does not.

The key to economic growth is a robust middle class that has enough spending power to foster demand.  The uber wealthy won’t do it by themselves because they can’t do it by themselves.  All they can do is line their pockets with the government handouts conservatives insist will grow the economy.  And in that regard conservatives have it back assward.


Former Labor Secretary Robert Reich was on with Lawrence O’Donnell last night, and talked about much of this.  And just for the record:  I wrote this piece BEFORE the show aired.  Great minds, I guess, think alike.

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{ 9 comments… read them below or add one }

avatar doug porter August 3, 2011 at 11:37 am

and if you need to have the US economy explained via video try this:


avatar Citizen Cane August 3, 2011 at 12:36 pm

I heard on the news this morning….45 million Americans now depend on food stamps. In Alabama it’s 36 percent of the population. I was reading about point-of-use solar power at the same. It made me think about point-of-use food programs. It looks to me like 36 percent of Alabamans could benefit from more community farms and victory gardens. Surely it’s not some desert where food doesn’t grow.

We need more point-of-use food here in San Diego, too. Think about that next time you eat some bagged salad grown in central California or Arizona.


avatar RB August 3, 2011 at 1:01 pm

I would hope that in either economics 101 or 0.001, when they discuss supply and demand the instructor would start with PRICE. Supply and demand curves are constructed using the PRICE variable only. In supply and demand curves, the only variable that determines the quantities bought or sold is PRICE.

The current Keynesian directed government programs have failed. They have increased energy cost, employee costs, uncertainty about taxes and future business opportunities, and have ruined the value of the dollar.

Note; It seems to me that the unemployment number are about to go up rather than down.


avatar Andy Cohen August 3, 2011 at 1:07 pm

What Keynesian policies? We’ve been living under the auspices of supply-side economics at least since 2001. How’s that worked out for ya? All of these drastic increases you cite happened under Republican–and thus, trickle-down–rule. What other explanation do you have for the drastic increase in the income disparity?


avatar JEC August 3, 2011 at 1:26 pm

Reagan championed supply-side economics. His policies essentially remain in place today. RB reminds me of an old axiom – in a desert who is wealthy; the one with gold or the one with water? Demand starts with need – it’s not discretionary. Like food, water, energy, shelter. The ‘cost’ is not always about supply. Consider diamonds, one of the most plentiful minerals on the planet. By corporate control and marketing people believe this common element is rare. And Keynesian policies – helped guide FDR – true enough. And even Eisenhower. And those years were horrible; every major dam, the interstate, harbors, schools – most of America’s infrastructure. Terrible, just terrible. Certainly RB most of us would disagree with your statement. Please, flesh out your model – please share your insight.


avatar Andy Cohen August 3, 2011 at 1:30 pm

Under Clinton we shifted back toward a Keynesian model, if only ever so slightly. Notice that as the economy got stronger under Clinton, the government actually SHRANK to its lowest levels in decades. Clinton ran the smallest, most streamlined and efficient government in decades, relatively speaking. And that’s the way it’s supposed to work under the Keynesian model.


avatar mr.rick August 3, 2011 at 2:25 pm

Citizen Cane mentioned Alabama and locally grown food. Here in Tennessee there are alot of locally grown food but none of it can be had with food stamps. That money is designated for corporate America. That why the change from food stamps to EBT cards. Keep it out of regular peoples hands. They might use it for the local good.


avatar Old Hermit Dave August 3, 2011 at 2:43 pm

Why can’t everyone just pull themselves up by their bootstraps like the Kenny Bunk Port Cowboy did? Just have dads friends buy you a baseball team or get a Saudi dude to buy you an oil company. Heck you might even someday get to PLAY president of the United States.


avatar Marilyn Steber August 4, 2011 at 12:50 pm

I recommend reading the article on Common (January 26, 2009) discussing the Two Santa Claus Theory. Thom Hartmann wrote about the recommendation by Jude Winniski that Republicans spend like crazy when they had the helm and then yell that the ship of state was going aground when the Democrats were in.
Poor Greenspan! Remember how he cried that he had no idea that the big money guys would be so greedy?
Apologies are cheap.


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