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Supply vs Demand (07/24/2011)

by Richard Schneider

Emeritus Professor of Accounting

Winona State University

This argument between Supply Side and Demand Side economics, dominates the political positions of the two parties. The Supply side concentrates on the employers, and of course the people that make the company possible, the investors. The more money and profits they have, the more jobs that will be created; trickle down. The Demand side says if there is a demand for a product or service, a company will provide it, and hire more workers to fulfill the need. Thus, if we stimulate demand; it will create jobs, produce sales and profits for companies and investors. In times of high unemployment both sides want the government to get involved, one side giving the companies and investors more money and on the other, giving middle and lower income classes more money to spend.

I would come down on the Supply side when there is an unmet demand and the capital market is not capable of providing financing or reasonably priced financing for companies to expand, and/or modernize to meet the demand. The government could supply a stimulus by direct payments or tax incentives such as credits, suspension of property taxes, or lowered tax rates for business and investment related income. Make no mistake whether it is direct payments or tax incentives; they are both government-spending issues.

In our current economy, with large corporations sitting on a substantial amount of cash and liquid assets, and not producing more or expanding the companies to hire more people, I come down on the supply side. As best as I can figure out the companies are not hiring and producing more because they donít see the increase in demand for their product or service. If the government wants to stimulate the economy, than providing consumers with more disposable income is the way to go. Lower and middle-income people will spend a greater percentage of the increased income on consumables, rather than on stock, a second home, gold, or land.

There are other issues, such as lowered tax rates to increase overall tax revenue, and increase jobs. Of course, this was tried several times, most recently in the early 2000ís without much success. Some have advocated balancing the budget by spending cuts in Social Security, Medicare, Medicaid, and perhaps defense, without touching the spending issues of tax credits, special deductions, and the Bush-era tax rate cuts. For the first time in this countryís history, we went to war and did not raise the revenue to pay for it. As state and local governments tighten the belts and reduce employees, the unemployment rate will go higher. Unfortunately it would appear that the party out of power has a vested interest in seeing economic failure occur and blaming the party in power. Right now, it is difficult to determine which party is in power, even though the Republicans do not have the White House, they wield great influence given the results of the 2010 elections. It would seem there are those in both parties that would love to see the economic chaos caused by the failure to raise the debt limit, and then lay the blame at the doorstep of the other party, all for power gain.



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