Tuesday, May 18, 2010

Asset-shift and supply-side (Domitrovic post)

(Another original post from historian and Econoclasts author Brian Domitrovic.)

These days there’s worry that if somehow we get the supply-side policy mix of stable money and tax cuts, it might be a little inadvisable given the mammoth size of federal deficits. In the late 1970s and early 1980s, when real conditions were more extreme than today’s, and fiscal ones almost as bad, supply-siders argued that stable money and tax cuts would be so salutary that all cavils would be overwhelmed.

The argument was based on the principle of asset-shift. In periods of lax money and creeping taxation, investment dollars invariably depart from the real economy and into hideouts and hedges, commodities the clear example. The effect of this is that there materializes a dammed reservoir of potential investment capital ready to bound into the real economy once the solution of stable money and low and simple taxation is applied. This asset-shift event will not merely wipe out any unemployment problem. It will create so many job opportunities that the productive capacity of the economy will reach entirely new dimensions. This is indeed was the story of the 1980s and 1990s. Into the bargain, the real economy will displace government, easing the way for spending cuts.

Bad dollar and tax policy draws money out of the real economy that yearns to be there. Goodness knows that over the last decade, and especially recently, money has been scrambling into every nook and cranny to hedge all the macroeconomic mistakes. This is why by supply-side lights, the immediate solution to today’s problem must be tax cuts (or at least stemming the tax increases) and stable money. This stands to break the dam, and hence straight away solve the investment, jobs, and growth problem.

Note that this is not the same thing as saying that tax cuts pay for themselves. Asset-shift makes the funding of budget deficits “rounding errors” (in John Rutledge’s words) in a massive portfolio event. Real assets along with intangible assets (including government bonds) otherwise threatened by inflation and taxes vacuum money out of tangibles and similar hedges. In the 1970s, supply-side economics attracted support because it was clear it stood enormously to affect investment in the real economy. That the deficit would be a non-issue in the offing was almost an afterthought. Supply-side economics caught fire because people caught on to its real, not its fiscal effects. In turn, the fiscal effects would necessarily be trivialities.

(Editor's note: Here's more on this topic from John Rutledge, courtesy of BD.)

1 comment:

  1. Total and complete moonbat idiocy. Just try puttinig forward a politician to run on W's tax cut agenda for the supply-side (the very wealthy) and see how much support he gets. Now that Bush came within inches of destroying the economy of the whole damn country with his SS experiments.

    Not to worry about that happening because a hard lesson was learned by the rational and sensible amongst us and it won't be forgotten soon.