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Issue #1927      August 10, 2020

Supply-side economics

“Not everyone is a Keynesian and thinking about income support. It is important to go to the supply side. Thatcher, Reagan, that’s an inspiration,’’ Treasurer Josh Frydenberg told the media on 24th July.

“Thatcher, Reagan, that’s an inspiration” – Treasurer Josh Frydenberg.

The reaction was one of shock horror amongst some in the Coalition ranks and the media. But it was not necessarily because they had an objection to the economic policies of former US President Ronald Reagan and former British PM Margaret Thatcher.

Frydenberg had let the cat out of the bag, confirming the government was going to adopt the failed, scorched earth polices of the latter years of the 1970s – a return to supply-side economics, also referred to as “trickle down” economics. Trickle down refers to the crumbs that fall to workers and the poor, as profits gush upwards into the pockets of the rich.

At the same time as advocating supply-side economics Frydenberg, speaking out of the other side of his mouth said, “We are rejecting austerity.” Really!

After all, Thatcher and Reagan’s supply-side economics amounted to austerity on steroids, causing considerable pain and suffering. The rich got richer and the poor got poorer. Their policies are so discredited that no politician who wants to be re-elected, openly uses their names when implementing similar policies. Hence the surprise when Frydenberg made his declaration of faith.

The policies were introduced in the second half of the 1970s during a period of stagflation – a stagnant economy alongside high inflation. Prior to that, in the post-World War II period, the expansionary policies of John Maynard Keynes were adopted in the major capitalist countries.

Boosting supply

Governments play a key role in a supply-side approach to economic crises. Supply-side economics is based on the theory that boosting the ability of the private sector to make investments, and supply more goods and services, will stimulate economic growth. In other words give the business sector and rich a helping hand to boost the supply of goods and services. The key features of supply-side economics include:

  • privatisation – provides new sources of profit-making
  • corporate tax cuts – frees up more profits for investment
  • tax cuts for the rich – claim this is will do more to stimulate economy than giving them to people on low incomes
  • deregulation – businesses to reduce costs by ignoring health and safety regulations, and cutting workers’ wages and working conditions
  • “free markets” – no such thing in reality under monopoly capitalism
  • attack on trade unions – facilitate reduction of wages and working conditions
  • cuts to social spending and public sector – “small government”
  • “fiscal discipline” – just another term for budget cuts
  • apply monetarism – use of interest rates to control inflation and money supply.

The above list may have sound familiar. It is. Today it is called “neoliberalism” and in Australia before that it was known as “economic rationalism.” It is hard to see how these policies differ from those of Thatcher and Reagan. Of course different governments go harder and faster than others.

The aim of these policies is to stimulate production, boost profits, to accelerate the centralisation and concentration of the wealth of monopoly capital. This is done on the backs of workers and social security recipients.

It beggars belief that during an economic crisis of over production, lack of demand, and excess capacity in the economy anyone would believe that increasing production and economic capacity would solve the crisis. Even more, so when they pursue wage reductions and cuts to social security and the public sector.

Supply-side economics is contractionary. It delays recovery. Businesses will not invest, unless it is to cut employment (new technology), go offshore, or there is increased demand. The reason governments need to stimulate the economy is the lack of demand.

Surely it is common sense that with less money in people’s pockets, demand for goods and services would decline, not increase.

Companies only invest when they believe they can make good profits. Where there is a glut on the market, or the rate of profit is not very high, they withdraw and look for another avenue of more profitable investment. When people are not spending or cannot spend as during an economic crisis, then giving companies monetary incentives such as tax cuts to invest is a complete waste of time.

On the backs of workers

Capitalist governments and employers always seek to find way out of a crisis at the expense of workers. War is another way out, when destruction of an economy occurs and then is rebuilt. It is no coincidence that US President Donald Trump who is in the midst of economic, health and political crises is beating the war drums against the People’s Republic of China.

While the pandemic has played an important role in the depth and no doubt the expected length of the present economic crisis, it none the less has many of the features of a classic economic crisis with the destruction of capital (businesses closing, downsizing, etc) and massive job losses.

Pandemic stimulatory measures

COVID-19 hit, with businesses being shutdown and several million people being put out of work. The situation was so serious that the government was reluctantly forced to adopt stimulatory measures akin to those of Keynesian economists to prevent a complete collapse of the economy. Big and small businesses were pressuring the Treasurer for assistance. It was a desperate situation.

It ran against the grain for an arch conservative like Frydenberg, but was unavoidable. When Frydenberg says, “It is important to go to the supply side. Thatcher, Reagan, that’s an inspiration,’’ he is referring to his plans for the “recovery” phase. It seems he is determined to return to his previous neoliberal approach as quickly as possible. This is evident from the winding down of JobKeeper and JobSeeker that has begun. The reintroduction of the mutual obligation regime for the unemployed is a step back to the previous harsh, punitive measures inflicted on the unemployed.

Supply-siders to the core, the government can’t wait to return to its budget-slashing, union-bashing ways.

But the government is misleading the public when it describes the recession as solely due to the pandemic. By the end of 2019, the Australian and other similar economies were sliding into recession. The government was still claiming to be in the black, but all the economic indicators were telling another story. Wages were stagnant or in decline, consumer spending was stagnant and the economic growth had slowed considerably. The pandemic has accelerated and deepened the economic crisis.

The pandemic provides the government with a convenient cover to hide behind, without ever admitting to the failure of its economic policies.

Keynesian economics

Keynesians, unlike supply-side economists, focus on increasing demand for goods and services when dealing with a crisis of over-production.

Keynesian economic policy was adopted in various forms by the major economies during the later years of the Great Depression and following World War II.

Keynesian economists believe that governments have an important role to play in the management of the economy, in particular during times of economic crisis. While a firm believer in capitalism and boosting profits, facets of Keynes’ macro-economic policies are progressive, such as job creation, which attracts many on the left who are not communists to him.

He understood the business cycle that Karl Marx had analysed with its boom and bust phases and recognised the need to increase demand during periods of economic crisis. He accepted the existence of these cycles which are inescapable under capitalism and so sought to flatten their extreme highs and lows.

Recessions occur when there is surplus capacity in the economy. That is, there is insufficient demand for the goods and services on the market or what is called a crisis of over production occurs. Economists also referred to it as a “glut.”

This results in cutbacks to production, sacking of workers, even bankruptcies with more workers losing their jobs. Companies cease to make investments in the machinery and services. And so it goes, a downward spiral into recession. What can be done? Companies may try reducing their prices, but there is a limit to that before making a loss.

Keynes is best known for advocating a solution based on stimulating the economy so that there would be an incentive for companies to invest. He identified two principle methods:

  • by reducing interest rates which makes capital cheaper to borrow and increases the chance of investments being profitable. It would make borrowing cheaper for consumers increasing their likelihood of purchasing goods and services. (The Reserve Bank of Australia is responsible for monetary policy.)
  • for the government to play a role by spending on infrastructure and other schemes.

Keynes also proposed that when the cycle was on the way up, tax increases could be introduced to curb inflation and flatten the boom phase. He was not adverse to deficit spending to fund stimulatory measures. In the 1970s inflation was a huge issue, unlike today.

While there is a lot more to Keynesian economics than this simplified description, in essence his approach to economic crises was to use interest rates and government spending (monetary and fiscal policies) to stimulate demand in the economy.

Governments often use a mix of approaches. It is not black and white. Frydenberg resorted to Keynesianism when he reluctantly introduced JobKeeper, JobSeeker and other payments pensioners and concession card holders: reality forced his hand.

Next article – “Our islands, our home” campaign

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