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Theory Behind the Budget: Supply-Side Economics

By VVAW

Politicians and businessmen across the country—at least some of them—are proclaiming the economic miracle awaiting America because of a "new" theory called "supply-side economics." But what is this theory that the Reagan administration is basing our future on?

First, the theory is as old as capitalism itself. J.B. Say, an early and obscure follower of Adam Smith first came up with the premise in the late 1700's.

Capitalism has always gone through a boom/bust cycle: it goes from production to expansion to overproduction to depression to war. Capitalists—industrialist and entrepreneurs—develop industry in order to make money; their profits come from producing the goods and services needed by society. They do this in neither a controlled nor a centralized fashion; instead they base their production on what they see as the place where they can make the greatest profits.

At first this development creates new products and technological breakthroughs; it makes for production of goods and services and for hiring of workers. But as more and more is produced and brought where a point of equilibrium is reached: there are enough goods and services to meet the society's needs. But production does not slow down because industries and empires are built on the profits made by selling what they produce. So there is overproduction—more goods than it's possible to sell. Prices fall; warehouses fill up; workers are laid off and a downward spiral begins. Laid-off workers clearly can't afford to buy the goods produced, often not even the necessities. Then is when war becomes a way to expand, to get more markets and more resources at a lower price and maybe more workers, also at a cheaper price. So the cycle goes, sometimes with bigger swings in the cycle, sometimes smaller.

Supply-side economics says that the problem comes from the top layer of the economy—the industrialists—not having enough—not enough money for reinvestment, for expansion, for producing more. The theory basically says that the demand for products is not the most important thing; instead, the production (supply) is more important. If industry keeps on producing then industry must hire workers and the workers will then buy the products.

The problem is that industrialists don't produce according to the needs of a society. If such were the case, we would see American industrialists today building houses. But industrialist instead look for what they can make the most money from; there is no centralized plan but simply chasing after the most bucks. This often means producing luxuries while neglecting necessities—for instance, making video machines but not kidney-dialysis machines.

In fact the supply-side theory was a basic assumption of the Harding, Coolidge (Reagan's favorite president) and Hoover administrations in the 1920's and early '30's; the result was the Great Depression.

Will it work? Well, the theory is based on the assumption that multi-national corporations don't have enough money to invest and re-invest. In fact, according to "Business Week," corporations are sitting on top of "a record $80 billion pile of ready cash." Giving them ore money doesn't mean they will reinvest it or, for that matter, that if they do it will be invested in the U.S. (as can be seen from all the plants and factories being relocated in foreign countries).

According to economist Paul Sweezy, "the trouble with supply-side economics is that ir operates on the principle of moving a string by pushing on one of its ends. The string stands for the economy: one end is labeled supply, the other, demand. The supply-siders propose to move the whole piece ahead by pushing on the supply end. The result, of course, is not to move the string but to mess it up."

And that's exactly what Reagan's economics is going to do to the working and the poor. By cutting all the programs for the poor, by cutting environmental and job safety, by cutting minimum wage and unemployment compensation, it is simply going to mess us up!

Barry Romo
VVAW National Office