Supply and demand is important economically. But since the Reagan revolution in politics, we have largely focused on growing the supply side.
Now with the current emphasis on austerity, we are actively cutting more and more into the demand side.
Is it any wonder that our economy is weak and not recovery very quickly?
Jack…can you please elaborate a bit…I’m not following your train of thought re supply and demand…thanks…Bill
Bill,
I am not sure it was a totally developed train of thought but here is what I was thinking about. I didn’t write much because I didn’t have much to say.
When Reagan came in we started talking about supply side economics. As I recall the theory was if we cut taxes, people would be able to invest more, and business would have the money to expand, and produce more. This would result in more hiring and more demand for those product. So everyone would be better off. And although tax rates were lower because the economy was bigger and so tax receipts would actually increase.
But if the demand follows after the investment (or supply expands before demand is there), it is in the interest of the economy as a whole but not the individual to invest in something that will not pay off in the short term. The smarter investor could sit on the sidelines until it looks like demand is starting to increase and that could be quite a while if businesses are not expanding.
On the other hand if you act to both stimulate supply and demand in a more balanced fashion (and I don’t know how to get that exactly right), I would think the economy would grow faster. Alternatively you could increase demand without worrying too much about supply and there would be a short term rise in prices followed by increased investments and supply (assuming we have not done something to inhibit investment).
I have not figured out the key to saving the economy but I hope I’ll get there eventually with a little help from my friends. 🙂