If we can peel away the political posturing, there is an important argument in the issue of how best to generate a recovery in our country’s economy. Put simply, the question is whether producers (employers) are the answer and we should do everything we can to encourage them, or whether we should do something to encourage demand for their products.
Jean-Baptiste Say gets naming rights for the law that says that production will encourage demand and thus more production. Proponents of Say’s Law argue that producers can ramp up production which will in turn foster demand for those products, and that demand will flow to greater production elsewhere. The law assumes that business will not hoard capital funds, but will invest them in greater production. In today’s dialogue, when we hear calls to reduce business taxes or relieve business of the uncertainty or burden of government regulation, it is the ghost of Say who is speaking. This position holds that unfettered business will invest in more production and growth, and that will, in turn, generate new jobs and economic opportunity. It is roughly accurate to put the label of supply side economics with this group.
In the other corner is John Maynard Keynes. Keynes argued that the economy depends on the demand for goods and services, and that when necessary the government should encourage that demand through added spending or tax cuts. Keynes felt that encouraging demand, by placing more money in the hands of consumers, would stimulate businesses to ramp up production, which in turn increases employment. Today, Keynesian proponents argue for more government spending, and broad based tax cuts (not the kind of cuts targeted only at businesses).
Both approaches have some grounding in economic theory. The Keynesian approach has a better track record in real life, and there are signs in our current, sluggish recovery, that business is not following the assumptions built into Say’s Law. When President Hoover was faced with the early years of the Great Depression, his advisers followed the main stream economic thinking of the time, which was Say’s Law. In addition, main stream economic thought in the late 1920s/early 1930s felt that the economy was naturally cyclical and would eventually mend itself. Hoover pressed his political base, the producers and manufacturers, to ramp up production. They would have none of it. President Roosevelt took his cue from Keynes’, adding government spending and employment to Federal policy, as a way to pump money into the hands of consumers, which then increased demand for goods and services. For the Great Depression, the Keynesian approach seemed effective while the Say’s approach was not.
Today, many commentators note that corporate America is sitting on large cash reserves, and that they are waiting for consumer demand to strengthen before investing in more production or growth. If that is the case, then more business tax cuts or incentive programs are not likely to speed up the recovery.
As students and citizens, we will do well to consider the conflicting economic theories at work here, and ignore the emotional baggage that hinders civil dialogue.