Ways to Manage an Economy

From Demand to Supply Siders

History of US Economy: Government was non-interventionist. Causes of the Great Depression:

1. Technology in farming lead to over-supply.

2. Florida land speculation and subsequent destructive hurricane.

3. Buying on margin en mass.

4. Artificially high stock values.

5. 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 DimeOnce I built a railroad, made it runMade it race against timeOnce I built a rairoad, now it’s doneBrother can you spare a dime? Once I built a tower to the sunBrick and rivet and limeOnce I built a tower, now it’s doneBrother can you spare a dime?

Once in khaki suitsGee, we looked swellFull of that yankee doodle de dumHalf a million boots went slogging through hellI was the kid with the drumSay don’t you remember, they called me alIt 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 runMade it race against timeOnce I built a rairoad, now it’s doneBrother can you spare a dime? Once I built a tower to the sunBrick and rivet and limeOnce I built a tower, now it’s doneBrother can you spare a dime?

Once in khaki suitsGee, we looked swellFull of that yankee doodle de dumHalf a million boots went slogging through hellI was the kid with the drumSay don’t you remember, they called me alIt was al all the timeSay 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 THATCOST$ LOT$

VIETNAM WAR

AND THEN:

1973-4 OPEC ENERGY CRISISprices quadrupled for oil

RESULT: STAGFLATION

Inflation + Unemployment

SO LONG TO KEYNESIANISM HELLO, MONETARISMMONETARISM

LET’S JUST MESS WITH THE SUPPLY OF MONEY TO CONTROL INFLATION.

WE’LL DO IT CONTROLLINGINTEREST CHARGED AT BANKS.

ANY OTHER IDEAS?

All that meddling in the economyisn’t the job of government!

We’ll just reduce corporate and individual taxes.That’ll get the ball rolling.That’ll increase SUPPLY.

SUPPLY-SIDE ECONOMICSSUPPLY-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 dueMy kids all need brand new shoesSo I went to the bank to see what they could doThey said son looks like bad luck got a hold on you

Money’s too tight to mentionI can’t get an unemployment extensionMoney’s too tight to mention

I went to my brother to see what he could doHe said brother I’d like to help but I’m unable toSo called on my father, fatherAlmighty father, he said

Money’s too tight to mentionOh money money money moneyMoney’s too tight to mentionI can’t even qualify for my pension

We’re talking ’bout ReaganomicsOh lord down in the congress

Money’s

Too

Tight

To

Mention

by

Simply

Red

They’re passing all kinds of billsFrom up there on capitol hill, we’ve tried it

Money’s too tight to mentionOh money money money moneyMoney’s too tight to mentionCutbacks!

We’re talking ’bout the dollar billAnd that old man who’s over the hillNow what are we all to doWhen money’s got a hold on you

Money’s too tight etc.

We’re talking ’bout money moneyWe’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.

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 Danced with them slow And we're living here in Allentown But the restlessness was handed down And it's getting very hard to stay 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

Allentown by

Billy Joel

“rust-belt”

Off-shore production

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 firstI'm bout to come through your stereoShould my rhyme start with the hookStart with the hook

To my people who don't wanna go to work Thank God it's FridayCover me she bout to put up her skirtThank God it's FridayDo Your mom know you act so berserkThank God it's FridayWhat's the track, what's the track girl?She don't wanna, she don't wanna work on Monday(I wanna thank my hood)

Next Friday By WyclefJean

For makin me a star before I had fast carsAnd couldn't tell the difference between Whoppers and caviar Before the fameWay before things changedAll I wanted to do was freestyle and get a nameI used to work at the fast food restaurantFor minimum wageDreamin I'm on stageAt 17 I left the house Cause my father was a ministerAnd I didn't want the Marvin routeWhat's goin on?Today to sell a song you need a video with soft pornMC's in the industryYou wanna tip? Don't let them pimp you like GoldyAnd tell Sony they better have my moneyCause I play wit the Comodores and be like Lionel RichieLow Income, I stay so hungry that if 50 Cent came to rob meHe'd be part of my charity(I wanna thank my hood)

To my people cuttin here in the shopsThank God it's FridayTo the thugs sweatin up in the chop shopsYo, it's FridayTo my people that don't got no jobEveryday it's FridayWhat's the track, what's the track yo?She don't wanna, she don't wanna work on MondayAll the Ladies sing

[Ladies:]I don't feel Like cookin you no breakfastThis mornin(Wyclef: All my hoodlums say)

[Guys:]You don't haveTo cook me breakfastCause your girlfriend willAfter you leave(I wanna thank my hood)

For the love of moneyI know kids who'll slit your throatFriday the 13thJason wit a trench coatBut you can't scare Suzie Cause her man got so many uzi's you'd think he was CadiviMeanwhile, she's getting her nails doneCrystal clear so they could shine like wit diamondsIt's such a shame what happened last weekMan they found her under the sheets with a letter from the Son of SamIt said to tell New York I ain't sleepinYou want to be clubbin then you better pack your heat inAnd to my man G Swar Rest in PieceI still poor liquor 1 draw on the cocoa leafInhale, exhale smoke grassesPolices in the area, but ain't no need to panicYou wit Wyclef you getting inIf not, then we gonna make CNN(I wanna thank my hood)

To my people who don't wanna go to workThank God it's FridayCover me she bout to put up her skirtThank God it's FridayDo your mom know you act so berserk?Thank God it's FridayWhat's the track, what's the track girl?She don't wanna she don't wanna work on MondayYo, to my people cuttin here in the shopsThank God it's FridayTo the thugs sweatin up in the chop shopsYo, it's FridayTo my people who don't got no job Everyday it's FirdayWhat's the track, what's the track yo?She don't wanna she don't wanna work on MondayAll the Ladies sing

[Ladies:]I don't feel Like cookin you no breakfastThis mornin[Wyclef:] All my hoodlums say

[Guys:]You don't haveTo cook me breakfastCause your girlfriend willAfter 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.