Question: Can you explain for a lay person, in words of one syllable, what the president's fiscal experts mean by "supply-side" economics?
Answer: As I'm sure you know, there are two sides to the economic equation: supply and demand. Since the New Deal days of the 1930s, the government has attempted to manipulate the course of the national economy primarily by actions which affected the demand side.
There were two main weapons in the federal arsenal. Cutting personal income taxes gave the average working person more money to spend. And expanded government programs -- both transfer payments such as Social Security, food stamps, etc., and job programs such as federal construction projects and CETA -- provided spending power for more people.
The generally accepted idea was that increased demand for good and services would induce industry to build or modernize plants and equipment to increase production.
The new production facilities would create expanded employment opportunities, a happy event that would work to place a ceiling on the need for continuing government training programs.
By generating a more competitive climate, the increased productivity would effectively put a lid on any incipient price inflation.
And finally, with a larger work force employed to meet increasing demand -- and paying taxes on their earnings -- the federal budget could be kept within manageable bounds.
The demand theory was frequently referred to as "Keynesian economics," after John Maynard Keynes, the British economist who was its leading proponent, if not the original architect. And sometimes the theory worked in practice.
But there were dislocations and time lags. Many of the people being helped by the government programs -- presumably on a temporary basis -- never were absorbed by industry, for one reason or another.
Most of the federal aid programs had broad societal as well as economic implications; after a while they became ends in themselves rather than means to a greater end.
The growing cost of these programs created massive federal deficits, adding pressures to an inflation already exacerbated by giant leaps in the cost of energy.
The promise of a constantly improving life style, inherent in demand economics, fueled a massive growth in consumer credit as people borrowed to meet their expectations.
Then industry borrowed to expand production facilities to meet increasing demands, and the government borrowed to pay for the growing programs of the Great Society.
Add to this the fact that inflation is itself a factor in the cost of money, and interest rates hit record highs.
The supply-siders think this is backwards. They recommend tax incentives to business to encourage plant expansion and modernization and tax incentives to people to encourage them to work harder and earn more.
From these increased earnings, it is hoped that people will invest or save more, which will provide the capital needed by industry for that expansion and modernization.
The increased competitive atmosphere resulting from expanded production is counted on to keep prices from rising as rapidly as they have. And reductions in the size and scope of various government programs are expected to cut into the federal deficit substantially, thus removing another inflationary pressure.
Cash flow from tax savings should reduce the borrowing needs of industry. And if individuals are encouraged to save a little more, there should be reduced demand for consumer credit.
Reduced loan demand by all three users of funds -- government, industry and individuals -- should bring about a significant easing of interest rates, a necessary ingredient for reducing inflation.
Will supply-side economics work better than Keynesian or demand economics? I certainly don't know. What's more, even the most ardent advocates of the theory don't know, either.
Come back next week and we'll take a look at some of the ramifications of this change in our national economic thinking -- some things that bother me -- and a couple of bright spots, too.