The Voodoo Magic of Supply-Side Economics

Reagan's numbers really didn't add up - but it worked anyway.

It's being said more and more often that Barack Obama's presidency is Jimmy Carter's second term.  Aside from killer rabbits and sweaters, that's mostly true.  No matter how much of our money Obama or Carter spent, the economy stayed flatlined; as the federal government drowned deeper in red ink, the only solution proposed by either of them was higher taxes, new government departments, and more regulation.

We recovered from the first Carter administration by putting Ronald Reagan in the Oval Office.  Republicans far and wide have long been seeking the Gipper's modern clone; alas, nobody seems to fit the bill.

Can we simply learn from his policies?  It's well remembered that Fed Chairman Paul Volcker, with Reagan's strong support, ended dangerous inflation by raising interest rates; but despite many predictions, high inflation is the one problem we don't have, at least not yet.

Reagan's headline economic policy was supply-side economics - the idea that cutting taxes leaves more money in people's pockets.  With more money to spend, the theory goes, the more money people will spend.  Supply-siders pointed to the increase in government revenue after the Kennedy tax cuts.  Today's conservatives trumpet their faith that the Reagan tax cuts did the same thing.

How Not to Win Friends and Influence Rich People

This happy historical combination of lower taxes and increased revenue leads Republicans to propose tax cuts to fix nearly anything that ails the economy.  The term "supply side" comes from the notion that if taxes are going down, businesses will have more confidence that they'll get to keep their profits.

Seeing opportunity, they'll invest, which creates more goods to sell, more jobs, and more economic activity, which justifies the investment.  If businesses create supply, economic activity will come.

However, there is what appears to be a flaw in the theory: tax cuts only give more money to spend if you're paying taxes in the first place - and nearly half of Americans don't.  Democrats love to attack tax cuts as being giveaways to the rich.  In a perverse sort of way they're right, because only the rich are paying any taxes to be cut anymore.

Comes the response, "It's the rich that create jobs by making investments and starting companies.  Let them keep more of their money, and jobs will be the natural result."  Let's hear what a very rich and successful billionaire, Wynn Resorts CEO Steve Wynn, says about that:

There are a host of opportunities for expansion in Las Vegas, a host of opportunities to create tens of thousands of jobs in Las Vegas. I know that I could do 10,000 more myself and according to the Chamber of Commerce and the Visitors Convention Bureau, if we hired 10,000 employees, it would create another 20,000 additional jobs for a grand total of 30,000...

I believe in Las Vegas. I think its best days are ahead of it. But I’m afraid to do anything in the current political environment in the United States.

And I’m saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime[emphasis added]

Our Faith-Based Economy

What's the difference between Reagan and Carter?  Just about everything other than race and gender, but aside from their political views, their personal attitudes were as different as night and day.

Carter's message to a struggling American people was, basically, "Get used to it."  The most powerful man in the world's answer to the energy crisis was to slap a solar panel on the White House roof, turn down the thermostat, shiver in a sweater, waste billions of dollars creating an ineffective Department of Energy, and let the hostages molder in Iran.

Reagan, in stark contrast, demanded that the hostages be returned "Or else.  I know were you live!  I'll reach out and touch someone!"  He proclaimed Morning in America.  He reminded Americans of their country's greatness.

He first gave us hope that it could be like that again.  He then convinced us that it would be like that again - and it was.

The Left condemned his plans as "voodoo economics."  The numbers don't add up!  How can people with no jobs go out and spend?

The numbers didn't add up, to be sure, but the answer lies in what, exactly, Americans were spending: they weren't spending money they had.  They were spending their hopes, their expectations, of money they'd have in the future.

The Days of Cash on the Nail

There was a time nearly two centuries ago when Americans spent actual money.  When a '49er needed a shovel and gold pan, he went to the store with a bag of gold dust to exchange for it.  No gold, no shovel - "In God we trust, all others pay cash."  Early Virginia planters may not have had gold, but they had hogsheads of tobacco and whiskey which were just as good.

Either way, to get something they needed, Americans had to exchange something of value they already had.  There was no prediction or trust needed: the shovel was here, the tobacco was there, everyone knew they had value.  Nobody save government or the new giant railroad corporations ever bought, or needed to buy, something they couldn't pay for on the spot.

That changed in the late 1800s.  Cyrus McCormick started letting farmers buy reapers on credit and pay the cost over the next couple of harvests.  Sears Roebuck noticed that McCormick's sales went up more than enough to cover the occasional bad loan, so they, too, started offering consumer credit.

By the Roaring 1920s, our system of consumer-durables credit had matured: almost nobody had the cash to buy an automobile or a house all at once.  Instead, they borrowed the money from a bank or the manufacturer, paying the debt off over time in an example of capitalism in its purest form.

McCormick, Sears, Ford, and GM all had to have enough capital to cover their manufacturing costs and then wait months, or sometimes years, to be paid in full.  This was a new game that only well-funded businesses could play, and even then, they had to get money from banks or from investors to cover their costs in the meantime.

The Future's Not Ours To See - But Wishing Makes It So

Buying on time added an entirely new element to each shopping decision.  Not only did what was being purchased have to be more wonderful than the money being paid, the buyer had to ponder financial expectations far off in the unknowable future.

The gold miner hoped he'd find more gold with his new shovel, but there were no future financial expectations required for the purchase: either he had enough gold dust on hand to buy the shovel, or he didn't.

From the 1920s through the 1970s, this was no longer true for consumer durables.  The purchase of a house, car, or appliance was a call on future earnings: the buyer expected to have a job for the next five years or however long the loan lasted.  If he was confident of keeping his job, he'd buy; if not, he would make do.  Minor purchases, though, were still made with cash on hand.

Beginning in the 1980s, even this changed: with the invention of credit cards, you didn't need any cash.  You had only to expect to have some by next month's bill, and not even all you'd spent, just the minimum payment.  This shifted all spending into the future; vending machines and fast-food joints take plastic now.

Even people who pay their credit cards off every month aren't spending today's money, they're spending next month's money.  Credit card companies whack people pretty badly if they're late by even a day; those who pay attention to credit card fees cut back if they see mean times a-comin'.  Everybody spends or doesn't spend based on future expectations, not simply today's reality or what's in their wallets at the moment.

Imagining Nightmares Into Life

Switching all spending into the future made everyone's expectations a crucial component of economic activity.  Modern Americans spend only so long as they're confident that they'll have a job at least for the next few months.

If they're confident, they'll spend.  If they're worried, they'll keep the plastic in the wallet.

That's why cheerleading is such an important part of the President's job.  Mr. Carter failed miserably.  Instead of cheering us up, he gave his famous "malaise" speech, promising that things would get worse before they got better, and they might not get better at all.

In Mr. Carter's America, people had no reason to expect that they'd have the money they needed next month or next year.  They had every expectation that the prices of daily living would be far higher tomorrow than today.  Naturally, they stopped buying consumer durables - they had lost faith in their ability to pay off long-term loans.

Without faith in the future, they clung to whatever money they had, and the Carter economy tanked.  Reagan the Great Cheerleader gave Americans hope... and that started them spending.

When they went out and bought things with money they did not yet have, their purchases had to exist in the first place and be replaced with new inventory.  Factories hired, offices were filled, trucks and trains transported new goods, people got jobs which paid off their loans, and the economy grew as if by magic - which, in a sense, it was.  Like Tinkerbell, the economy believed it could fly, so it did.

Depressing Demands

Supply-side economics has become the Republican mantra.  Democrats simply don't believe this narrative.  They don't believe that letting people keep more money will create more demand and more economic activity.

Instead, they hold the opposite view - demand-side economics - based on the observation that when the economy collapses, normal people don't have any money to spend.  The government can always spend money because, unlike you and me, it can create money by fiat or by running the printing presses.

If the government creates money and pumps it into the economy, no matter how, people will have money to spend.  Demand-siders, also known as Keynesians, claim that it's government's job to "prime the pump" by putting money into circulation.

Letting people keep more of what they earn doesn't help if they aren't earning anything.  Government giveaways give money to everybody who's a friend of the administration.

There's a problem with this scheme: people still spend or don't spend based on their expectations about the future.  If people are pessimistic, they'll cling to whatever money they get, whether they earn it or it's given them by the government.

The first time government spending was tried on a massive scale, it didn't work.  A full ten years after the 1929 stock market crash and well into Roosevelt's presidency, Treasury Secretary Henry Morgenthau despaired:

We have tried spending money. We are spending more than we have ever spent before and it does not work... After eight years of this administration we have just as much unemployment as when we started... and an enormous debt to boot!  [emphasis added]

Why didn't it work?  Because government jobs do not create a working economy.  Mr. Roosevelt criticized businessmen as much as Mr. Obama has, and he kept creating new government agencies and new rules.  Nobody would create productive private sector jobs when they didn't know what the rules were going to be or when they were being called greedy scumballs and worse.

Furthermore, everyone knows that loans must be paid back, whether they're making them or the government is.  The money for the trillion-dollar Obama stimulus plan wasn't created out of thin air; it was borrowed from the Chinese, and they expect their money back with interest regardless of the fact that, as Obama himself admitted, the "stimulus" failed miserably.

Where's the trillion bucks coming from?  President Obama's made it perfectly clear with his insistence on "increased revenues" as part of any deficit-reduction plan - his hand is in your pocket, mine, and everyone else's.  Is it any wonder that people from Steve Wynn on down are hanging on to every cent they've got, hiding it, and moving it overseas?

The Obama Malaise

Mr. Obama has created as much malaise as Mr. Carter.  He's piled on regulation after regulation.  He claims that the banks ought to lend, but bankers are scared - they don't know what the rules are today, much less what they'll be tomorrow.

Suppose they make what would be a perfectly acceptable loan under the old rules.  Dodd-Frank may change the rules.  All of a sudden, a "good" loan becomes a "bad" loan and they get yelled at.

It's better to sit on the money until the rules settle down which will take years and many court decisions.  Mr. Obama has bashed businessmen as badly as Mr. Roosevelt, with exactly the same result.  His scary statements have depressed the American people just as much as Carter's.

It's hard to imagine how people feel when the President of the United States keeping calling them evil.  I knew a midsize businessman who had a couple of hundred employees during the Depression.  He worked extremely had to keep his factory open and take care of his people.  There were layoffs and he barely broke even, but he kept many employed.

His reward?  To be called bad names for years, as one of the evil rich people who had caused the Depression.

His feelings about Roosevelt were so strong that for the rest of his life, local shopkeepers knew to examine their coins so they wouldn't give him a Roosevelt dime.  "I won't have that man's picture in my pocket!" he'd exclaim, and stay away from the store for weeks until he cooled down.

It's Animal Spirits, Not Supply-Side Or Demand-Side

Economists won't acknowledge it for fear of losing their jobs, but supply-side economics and demand-side economics are equally worthless.  Mr. Reagan turned the economy around, not by tax cuts per se, but by constant cheerleading.  His tax cut helped only because it gave him something concrete to talk about and gave Americans a vaguely rational reason to feel better.

The true Reagan miracle wasn't laws, tax policy, or even regulatory reform.  It was that the Great Communicator got Americans to unleash what he called their "animal spirits."

Mr. Deng, the boss of what was then Communist China, accomplished the same thing in an even more effective way: he decided to stop shooting businessmen because people needed jobs.  His protégé Hu Yaobank imitated President Reagan by creating the slogan "To get rich is glorious."  The Chinese economic boom resulted once businessmen were convinced that it was OK to create jobs and become wealthy thereby.

More now than ever, people spend money based on confidence in the future.  Mr. Reagan told us over and over that America was a wonderfully exceptional country and that we'd be wealthy again as soon as we got over the Democrat's mistakes.

Mr. Obama, in contrast, refuses to admit that there's anything exceptional about America other than all the harm it's done over the years, much less that he's made any mistakes worth noting.

Building Confidence

Mr. Reagan told us over and over that he knew we'd do the right thing as soon as he got government out of the way.  Mr. Obama doesn't even trust us to decide what kind of food we ought to eat or what kinds of loans we ought to make.

Human beings aren't purely rational Vulcans that deal in numbers, statistics, and economic projections alone.  We operate on psychology: the economy won't turn around until enough people believe it will.

The Obama administration shot its credibility by talking about "green shoots" that everyone knows didn't exist, while writing all kinds of laws and regulations which everybody knows kill jobs.

The Reagan boom wasn't caused by his economic polices, although they helped.  His prosperity came because he made Americans feel good about themselves.

What about the Clinton boom?  He was a lovable rogue who encouraged the nation, but he also got so caught up in scandal that there wasn't time to pass any job-destroying laws.

The Clinton period of "benign neglect" let the economy boom, proving Reagan's point that the American people will do just fine for themselves if government just stays off their backs and stops changing the rules.

It's the economy, stupid - but what the economy needs is cheerleading more than it needs any specific policy.  Mr. Obummer is the wettest wet blanket in living memory, casting doom and gloom at every opportunity.  No boom for him!

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments

"In God we trust, all others pay cash."


July 26, 2011 10:05 AM

The answer is actually really simple, anyone can understand it, any government can do it. The problem is that the solution takes the power away from the politicians. The Fair Tax Act would create an immediate stimulus by allowing 16 trillion overseas to come home and 430 billion that we spend on filing taxes to be spent on goods and services rather than on government compliance. Add to those two factors that the Fair Tax Act would make the US the tax haven for the world and manufacturing jobs would return our shores and we would have extremely low unemployment. A study was done and it asked the 400 largest corporations outside of the US what impact the Fair Tax Act would have on them was this: 240 said that they would build their next plant here and the remaining 160 said that they would move their corporate headquarters here. Add to that the little guy, Joe Six Pack would have more money in his pockets via no federal or FICA taxes being taken from his paycheck and he would receive from the government a check for $498 monthly as a reimbursement for the taxes that he spent on the first $26,000 of his purchases and he did not have to file taxes and keep records our economy would soar. When Joe Six Pack finds out about the Fair Tax Act I would not want to be a congressman or senator in his district when Joe asks why we haven't passed this yet. The 535 rock stars in congress will hide it as long as they can but Joe is not as dumb as they think he is. The debt would be paid down to zero and the debt ceiling would become a thing of the past. With money in one's pockets there will be optimism. Don't allow the state what to do with your money, you decide what to do with your money.

July 26, 2011 10:59 AM

I agree 100% with bassboat. FAIR is where it's at. You eliminate all the loopholes, eliminate the IRS, eliminate corporate shell games and just collect the same amount from each head at the cash register according to their consumption. And no, it's not a regressive tax because rich people buy vastly more than poor people. (What would the tax be on a jet or yacht?) It's not a progressive tax either. It's F-A-I-R.

July 26, 2011 11:05 AM

.."despite many predictions, high inflation is the one problem we don't have, at least not yet."

Are you living on another planet Petrarch?

Voodoo is right, this is complete nonsense.

Inflation is simply measured by a drop in the purchacing power of a monitary unit. In this case the US dollar.

There has been a series of set-ups and smackdowns, good-cop bad-cop confidence games played in teams on this nation for over a hundred years - and throughout the entire period one faction has steadily gained in power and wealth; the banking cartel behind the Federal Reserve.

All of this political mythology is hokum fairytales from the crypt.

Reagan was no less a front man for this gaming operation than Carter, or any other modern president.


July 26, 2011 11:21 AM

Animal Spirits...???

No, seriously..?? You should write science fantasy novels Petrarch.
This article is filled with the type of verbosity that could lift a zeppelin with a cargo of gold bullion and send it right to the City of London.

July 26, 2011 11:32 AM

"It's being said more and more often that Barack Obama's presidency is Jimmy Carter's second term."

This is an odd assertion. What I am reading is that Barack Obama's presidency is very much like GWBush's third term. Nothing has changed, but has only gotten more extreme.
Sure the Tango and flamico guitar of the costumed hoochie dancers in DC goes into high melodrama gear, as the Repumplicams and Demonkrackers square off with their barfight with sugarglass beer bottles. It's the best selling show.

You tell me what's different but the tenor of the honk.
We'll ALL be giblets by mid 2012.
Meanwhile the party still goes on in the middle of the tracks while the express train bears down.

July 26, 2011 12:26 PM

Ronald Reagan, as governor of California, increased the size of government (I believe by about 10,000 employees) and increased the debts of the State. During his time on the stage of the Federal Government, his strings were pulled by the same people. Reagan's pithy statements were written by a speech writer - albeit a good one.
Ronald Reagan was no Conservative, he was a good cheerleader. I remember one time in high school with a cheerleader... What?! Gotta keep it clean?!

In 2006 a candidate for the U. S. Congress, Mr. Ken Wegner, reported that if we brought the troops home from just Japan and Germany we would see an annual savings of more than $16,000,000,000.00. He also asserted that if those troops were placed on the border between Mexico and the United States of America, we would create 250,000 new jobs in this country. Our troops would remain in the other 130 countries which we are occupying. And it is an occupation. When foreign troops are on your soil, prepared to commit violence, it is an occupation.

The FAIR tax is a hoax. There is no need for any federal taxes other than the excise taxes as provided in the Constitution for the United States of America. Too many of us are willing to tax someone else. If all foreign aid were ended today, all entitlements that no one is entitled to were ended today, the department of stupid, I mean the Department of Education, the Department of Energy, we probably would have a surplus of money in the Federal Government in 5 years.
I only have about 15 or 20 years before I will be required to attend a funeral, so I will stop here. But you get the idea.
Thank you,
Robert Walker

July 26, 2011 1:43 PM

“my mommy told me to pick this very best one...”

Does anyone know where this rhyme originated?

That's right, on Wall Street – back in 'the day' when it was a slave market for the Africans coming into port in NY.

Ah Wall Street, what a heritage hath thou.

Maybe that's where they learned voodoo..??

July 26, 2011 2:43 PM

Alright, let's cut to the chase. I have asserted here that the Federal Reserve is a criminal cabel. A secret system put in place to run a gaming operation to suck the wealth out of the US.

Now for the very first time in history the FED has allowed an audit of its nefarious affairs. Why now? This is a question I will return to later, I will name it; 'Revelation of the Method", but that needs a definition and explanation.

First, I will show that the assertion that the FED is and hs been a covert confidence game - a ponzi scheme, and that this is illustrated by this historical peek via audit...Nest Posting >>

July 26, 2011 5:43 PM

First Fed audit reveals $16 trillion in secret loans; conflicts of interest

Among the investigation’s key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report.

“As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,” said Sanders. “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”

Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.
William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds. One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

[ Duh - "might"? "appearance"? - It *IS* an obvious conflict of interest.]

This is a revelation of prima facea criminal fraud.
These few paragraphs are simply a digest of the larger picture that developes with further chains of damning evidence - most of which has already aired do to dilegent research over these many years.

July 26, 2011 5:49 PM

Why now? The Revelation of the Method.

Why now is answered by this term - Fruition. This means that it is a done deal. The die is cast, the product delivered the fate is sealed.
In other words, it's all over but the screaming.

The Revelation of the Method is at once a boast and a contract.
To those who comprehend, the message is, "This is simply the way it is. Now you know up-front, and thus you are contracted in the open to deal with it," a proclamation as it is.

This means that the plutocratic power cabal is confident it has already won. It has the system sewn up, and any struggle will be as a fly caught in the spiders web. can dream on and simply deny that you live in this world, or you can take the challange.

July 26, 2011 6:02 PM

@Willy - you said, "[ Duh - "might"? "appearance"? - It *IS* an obvious conflict of interest.]"

Wnat conflict? It doesn't conflict with THEIR interests, only ours. Who czres about us anyway but us?

July 26, 2011 6:03 PM

Robert W.,
I agree with you on no taxes even though I am a Fair Tax advocate. If the Fair Tax was passed don't you think that it would be a bridge to the method of collecting taxes like you want? You have to do what is possible and the Fair Tax has a long way to go before it is passed. I think that given the option between our current method of collecting taxes and the Fair Tax you would choose the latter. Of course you may not and I have totally misread you.

July 26, 2011 6:35 PM

Indeed, the FAIR tax could be used as a bridge, if the clowns that call themselves Congress, wanted to actually do what is right.
WW pretty much covered the bases when he pointed out that we are now in an open contract with the International Bankers and the central banks of the world, of which the Federal Reserve Bank here in the United States, is the main one.
Let's take a look at the foolishness that we have allowed ourselves to be fooled with.
The Congress of the United States of America gives - GIVES - foreign aid to China. The Chinese then loans money to the United States of America - AT INTEREST!!
The Congress of the United States of America gives - GIVES - aid to more than 150 (Venezuela and Cuba among them) of the approximately 192 countries of the world. How many of them loan money to the United States at interest? Of the billions given - GIVEN - to Israel every year, how much is loaned back at interest?
How much longer will it be do you think, before the blood starts running in the streets?
Thank you,
Robert Walker

July 26, 2011 7:11 PM

Yea Fred,

It is true, I was talking as if this is a rational world...
It is a bias of mine to speak from this position. But I certainly see the point you are making.

July 26, 2011 7:36 PM

Robert W.,

You refer to them as clowns, i refer to them as self proclaimed rock stars, they are really pitiful. Yes, shut down the fed, yes, cut out most foreign aid, and yes, back the Fair Tax Act before there is blood in the streets. You have to put money in the little's pockets and the Fair Tax is the best, quickest, and fairest way. If you have not read the book I encourage you to read it, It takes abut 4-6 hours to read, you'll be glad you did. Thanks, Bassboat

July 26, 2011 7:39 PM


I see you aren't getting the picture. It's too late to fall in love with Sharon Tate.

We are in the END GAME. Diddling around with little fixes in this system is delusional. Waiting for the next election cycle to see what happens is delusional.

THIS IS NOT A TEST - this is the real thing -it is here now - this is not hyperbole.

"When in the course of Human Events it becomes necessary"...DO IT

July 26, 2011 9:27 PM

Don't think I'm picking on you bassboat...hardly ANYONE gets it.

That is why the Plutocrats are so confident. That is why they are in your face with this blatant criminality.
They have shown their hand now - all Jokers, but nothings wild.
They only win because they say so.

I am not advocating violent revolution - I am advocating everyone stop.
Stop everything don't pay the mortgage, the rent, don't go to work...
Bring the system to a standstill. That's all it would take. But as you know that is hard. So what will happen is the austerity will grow drip by drip, and the draconian state will pick us off one by one. and at some point there will be the beginnings of the hard core pogroms.
After the attrition - when the people are at the weakest point.

I'm just glad I'm old - I had my life and it was full...I pity the young.

July 26, 2011 9:54 PM

"An “uprising of understanding” ..Non-compliance will begin to throw truckloads of wrenches into a grossly unfair and fraudulent “system” that serves only the oligarchy."

This is how one of my compatriots on COTO1 puts it.

July 26, 2011 10:20 PM

And just one more comment for those who still think the Repukekanards are going to be the knights in shining armor in 2012>>

Raging Zionist, Boo Hoo Boehner built his career on being a conduit for passing public money to corporations.
His major accomplishment was the (at least) $700 billion bailout of the big banks (TARP) which he helped punch through, after receiving four million dollars from the financial services industry over his career.
Before that, he helped co-author the “No Child Left Behind Act,” a “grotesquely expensive expansion of federal power” which increased federal education spending by 80%. He also passed the obscene Medicare Part D, which Taibbi calls “a staggering $550 billion handout to the pharmaceutical industry.” He helped pass the Bush tax cuts for the wealthy lowering their rate from 40% to 35% – the lowest rate in the history of the USA.

July 26, 2011 11:30 PM

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