Ways to Manage an Economy From Demand to Supply Siders History of US Economy: Government was non-interventionist. Causes of the Great Depression: 1. 2. 3. 4. 5. Technology in farming lead to over-supply. Florida land speculation and subsequent destructive hurricane. Buying on margin en mass. Artificially high stock values. Rapid descent of stock due to panic selling. Hoover’s response: Weak: Relied on volunteerism Hawley-Smoot Tariff: Recalled loans made over-seas Raised tariffs. Results: Domestically: very little Internationally: intensified the effects of the depression. Brother Can You Spare a Dime Once I built a railroad, made it run Made it race against time Once I built a rairoad, now it’s done Brother can you spare a dime? Once I built a tower to the sun Brick and rivet and lime Once I built a tower, now it’s done Brother can you spare a dime? Once in khaki suits Gee, we looked swell Full of that yankee doodle de dum Half a million boots went slogging through hell I was the kid with the drum Say don’t you remember, they called me al It was al all the time Say don’t you remember, I’m your pal! Buddy can you spare a dime? Once I built a railroad, made it run Made it race against time Once I built a rairoad, now it’s done Brother can you spare a dime? Once I built a tower to the sun Brick and rivet and lime Once I built a tower, now it’s done Brother can you spare a dime? Once in khaki suits Gee, we looked swell Full of that yankee doodle de dum Half a million boots went slogging through hell I was the kid with the drum Say don’t you remember, they called me al It was al all the time Say don’t you remember, I’m your pal! Buddy can you spare a dime? John Maynard Keynes (1883-1946) Advocated government involvement in the economy. Welfare capitalism. Use of fiscal and monetary policy to address the business cycle. Keynesianism (Demand-side economics) Franklin Delano Roosevelt Took office 1933 Extended federal government powers Restored confidence: Fireside chats Emergency Banking Act Ended prohibition Set up the NRA (National Recovery Agency) Alphabet Agencies Was the New Deal an Effective Answer to the Great Depression? No Industrial Production from 1927-40 increased by 32%. But the US Gov’t expenditures rose by 185%. Just a Liberal alternative to Socialism Never alleviated poverty. Yes Improvement in Fed.’s power to enact programs to aid those in need Banking Act 1935 provided insurance on deposits Securities Act 1933 monitors stock market Civil Rights Reasons for the Post-War Economic Miracle Rebuilding of Western Europe and Japan. US emerges as an undamaged economy; largest single supplier. Marshall Plan (Cold War reaction) IMF/World Bank Neo-colonialism All this proves that Keynes was right. CAN PROSPERITY LAST FOREVER? Maybe it could, but the role of government had changed. People expected and got more from their governments. The End of ‘Happy Days’ (1960s) Low productivity levels in US compared with Japan and Germany. Technological gap narrows. Trade surpluses with rest of world diminishes. By the end of 1960s US is no longer in a trade surplus: BUDGET DEFICITS. SPENDING > REVENUES ADD THESE TOO: US PLAYS POLICEMAN IN THE WORLD AND THAT COST$ LOT$ VIETNAM WAR AND THEN: 1973-4 OPEC ENERGY CRISIS prices quadrupled for oil RESULT: STAGFLATION Inflation + Unemployment SO LONG TO KEYNESIANISM HELLO, MONETARISM LET’S JUST MESS WITH THE SUPPLY OF MONEY TO CONTROL INFLATION. WE’LL DO IT CONTROLLING INTEREST CHARGED AT BANKS. ANY OTHER IDEAS? All that meddling in the economy isn’t the job of government! SUPPLY-SIDE ECONOMICS A Quick Look At Taxes Things to Ponder Laffer Curve (law of diminishing returns illustrator) Supply-side Economics (a.k.a. Reagonomics, Thatcherism, Trickle-down Theory) I been laid off from work my rent is due My kids all need brand new shoes So I went to the bank to see what they could do They said son looks like bad luck got a hold on you Money’s Too Tight To Mention by Simply Red Money’s too tight to mention I can’t get an unemployment extension Money’s too tight to mention I went to my brother to see what he could do He said brother I’d like to help but I’m unable to So called on my father, father Almighty father, he said Money’s too tight to mention Oh money money money money Money’s too tight to mention I can’t even qualify for my pension We’re talking ’bout Reaganomics Oh lord down in the congress They’re passing all kinds of bills From up there on capitol hill, we’ve tried it Money’s too tight to mention Oh money money money money Money’s too tight to mention Cutbacks! We’re talking ’bout the dollar bill And that old man who’s over the hill Now what are we all to do When money’s got a hold on you Money’s too tight etc. We’re talking ’bout money money We’re talking ’bout money money Features of Supply-side Focus on production. Deregulation of industries. During recession: Deregulate (see AB in ’93) Reduce corporate taxes (corporate welfare) Lower interest rates. Privatize government owned businesses (see Klein’s AB) Supply-side (cont’d) During inflation: Market will solve it. Use only monetary policy. Allentown by Billy Joel Well we're living here in Allentown And they're closing all the factories down Out in Bethlehem they're killing time Filling out forms Standing in line Well our fathers fought the Second World War Spent their weekends on the Jersey Shore Met our mothers in the USO Asked them to dance “rust-belt” Danced with them slow And we're living here in Allentown But the restlessness was handed down Off-shore And it's getting very hard to stay production Well we're waiting here in Allentown For the Pennsylvania we never found For the promises our teachers gave If we worked hard If we behaved So the graduations hang on the wall But they never really helped us at all No they never taught us what was real Iron and coke And chromium steel And we're waiting here in Allentown But they've taken all the coal from the ground And the union people crawled away Every child has a pretty good shot To get at least as far as their old man got But something happened on the way to that place They threw an American flag in our place Well I'm living here in Allentown And it's hard to keep a good man down But I won't be getting up today And we're living here in Allentown Example of “Corporate Welfare” in Alberta Insurance Industry 1,000 % profit increase Logging Lowest royalties and stumpage fees in the world. Big Oil 300 % increase; lowest wellhead royalties and fees in the world Cigarette Industry 300 % profit increase Banking 600 % profit increase Meat Packers 300 % profit increase Positives points of Supply-side. U.K.: Decreased inflation, 18% in ’78, 3% in ’88. Manufacturing improved, 5% increase in 1980s. Real wages went up Home ownership up. Stock ownership up. USA: Inflation went down Unemployment dropped. Productivity went up. Negatives of Supply-side U.K. Unemployment stayed high, 11% Labour rights lost. Two tiered health care system. Public education suffered. Income gap increased. USA: Created a huge debt (1997 $4 Trillion) Explosive social setting: Crack cocaine. Top 20% controlled 80% of wealth, 1% controlled 40%. 35 million without healthcare insurance. Let um feel the beat first I'm bout to come through your stereo Should my rhyme start with the hook Start with the hook Next Friday By Wyclef Jean To my people who don't wanna go to work Thank God it's Friday Cover me she bout to put up her skirt Thank God it's Friday Do Your mom know you act so berserk Thank God it's Friday What's the track, what's the track girl? She don't wanna, she don't wanna work on Monday (I wanna thank my hood) For makin me a star before I had fast cars And couldn't tell the difference between Whoppers and caviar Before the fame Way before things changed All I wanted to do was freestyle and get a name I used to work at the fast food restaurant For minimum wage Dreamin I'm on stage At 17 I left the house Cause my father was a minister And I didn't want the Marvin route What's goin on? Today to sell a song you need a video with soft porn MC's in the industry You wanna tip? Don't let them pimp you like Goldy And tell Sony they better have my money Cause I play wit the Comodores and be like Lionel Richie Low Income, I stay so hungry that if 50 Cent came to rob me He'd be part of my charity (I wanna thank my hood) To my people cuttin here in the shops Thank God it's Friday To the thugs sweatin up in the chop shops Yo, it's Friday To my people that don't got no job Everyday it's Friday What's the track, what's the track yo? She don't wanna, she don't wanna work on Monday All the Ladies sing [Ladies:] I don't feel Like cookin you no breakfast This mornin (Wyclef: All my hoodlums say) [Guys:] You don't have To cook me breakfast Cause your girlfriend will After you leave (I wanna thank my hood) For the love of money I know kids who'll slit your throat Friday the 13th Jason wit a trench coat But you can't scare Suzie Cause her man got so many uzi's you'd think he was Cadivi Meanwhile, she's getting her nails done Crystal clear so they could shine like wit diamonds It's such a shame what happened last week Man they found her under the sheets with a letter from the Son of Sam It said to tell New York I ain't sleepin You want to be clubbin then you better pack your heat in And to my man G Swar Rest in Piece I still poor liquor 1 draw on the cocoa leaf Inhale, exhale smoke grasses Polices in the area, but ain't no need to panic You wit Wyclef you getting in If not, then we gonna make CNN (I wanna thank my hood) To my people who don't wanna go to work Thank God it's Friday Cover me she bout to put up her skirt Thank God it's Friday Do your mom know you act so berserk? Thank God it's Friday What's the track, what's the track girl? She don't wanna she don't wanna work on Monday Yo, to my people cuttin here in the shops Thank God it's Friday To the thugs sweatin up in the chop shops Yo, it's Friday To my people who don't got no job Everyday it's Firday What's the track, what's the track yo? She don't wanna she don't wanna work on Monday All the Ladies sing [Ladies:] I don't feel Like cookin you no breakfast This mornin [Wyclef:] All my hoodlums say [Guys:] You don't have To cook me breakfast Cause your girlfriend will After you leave Unemployment Natural rate = that rate at which full employment does not lead to inflation. Higher levels give business owners the ability to “discipline” labour. Lower levels give labour the ability to negotiate for higher wages, hence the possible cause for inflation. Governments that attempt to achieve full employment (Milton Freidman) run danger of activating high inflation. True? Wealthy people (bond holders) like higher rates of unemployment. Why? Means interest is low; thus, bonds pay higher returns. Conclusion: it was Keynesian focus on achieving “full employment” that caused its demise by right-wing economists.