WASHINGTON, Aug. 9, 2016 — The New York Times editors called Donald Trump’s economic plan a “scary economic blueprint.” After reading the editorial it looks like it’s actually the NYT editors that have the scary view of economic policy.
The editors said that Trump “offered a grab bag of ideas borrowed from discredited supply-side economics.” The reality is that supply-side economics has been discredited only by people who don’t seem to understand how the economy works. These people have economic goals that are not consistent with the principles of freedom, democracy and individual responsibility, all of which are precisely the things that made this country great.
America went from being a new, inexperienced country to becoming the strongest, most powerful and most productive nation on earth over roughly 160 years, easily surpassing the performance of longstanding countries that were hundreds and sometimes thousands of years old.
In the late 1970s, the U.S. experienced an era of severe stagflation (stagnant economy, rising inflation) during which unemployment approached 10 percent and inflation exceeded 13 percent. Supply-side economists convinced policy makers that to end stagflation, economic policy should be geared toward increasing output (the supply side) rather than trying to manage demand, which is what Keynesian economists recommended from the early 1960s to 1980.
In fact, it was those Keynesian economists advocating demand management who were responsible for setting the policies that led to stagflation in the first place. In contrast, the supply-side premise was very simple. By encouraging business to expand, and producing more output and increasing supply, downward pressure would be exerted on prices, creating greater consumption. The subsequent economic growth would then lead to a reduction in unemployment, a virtuous cycle that would be accomplished by creating an environment that would encourage growth.
That environment included removing barriers to growth and deregulating industries by letting the market regulate supply and demand while increasing the two basic inputs into the economy: capital and labor. To increase capital, taxes were lowered for all Americans, but particularly for high-income earners. Welfare programs were reduced to encourage people to seek jobs rather than encouraging people to not work and collect government payments.
The results were stunning. Inflation fell from 13 percent to less than 3 percent just four years later, and it continues to remain low today. National unemployment fell from over 10 percent to under 6 percent during the Reagan administration and continued its downward trend until 2008. The stagflation problem was solved. Economic conditions remained very good until 2008, except for slight hiccups in 1991 and 2001.
Supply-side economics, also referred to as trickle-down economics, worked marvelously.
Then the 2008 financial crisis hit. The popular view promoted by the Obama administration was that it was the economic policies of George Bush and the supply-siders that caused the financial meltdown and the resulting severe recession. They believed that government intervention was needed to fix the problem.
The truth was that the federal government created the financial meltdown. How?
In the late 1980s, sociologists convinced Congress that social problems like high crime rates, high high- school dropout rates, teenage pregnancies and blighted neighborhoods are minimized in areas where people own homes rather than renting them. At the time about 63 percent of households owned homes, with the remaining households being renters. Congress set a goal to raise that ownership rate to 70 percent.
In order to do that, 7 percent of households seeking home ownership had to be permitted to take out mortgages they simply could not afford. Initially, this tactic seemed to work. By 2006, the home ownership approached 70 percent. But by 2008, almost all the new subprime loans had defaulted on their average $200,000 mortgages, creating a nearly $2 trillion problem for banks and lending institutions, which eventually caused the financial crisis that became known as the “Great Recession.” Today, America’s home-ownership rate is less than 63 percent, about where it was before the government decided to interfere with the housing market.
Simply stated: Had the government not interfered in the market, there would have been no financial crisis.
The basic difference between the policies promoted by President Obama, Hillary Clinton and the New York Times vs. those put forth by supply-side economists becomes more clear when examining the economic goals of each side. While every economics textbook will state that the goals of economic policy should be economic growth, price stability and full employment, the Obama/Clinton/NYT view is that the primary goal of economic policy should be to cure perceived social injustices.
That is the precise reason why the economy has averaged about 2 percent annual growth during Obama’s presidency. Growth will continue to limp along at that subpar rate as long as policy makers ignore the real economic goals that drive the nation’s current underperforming economy. The economic reality is that curing perceived social injustices can only be accomplished when the economy is strong.
As if to emphasize the point, in the late 1990s President Bill Clinton used supply-side economics to stimulate growth by lowering capital gains tax rates, reducing welfare rolls and regulation and declaring that the era of big government was over.
It is scary indeed to think that the New York Times, for all its staff expertise–including its Nobel Prize winning economics columnists–simply cannot understand basic economics.