"I guess I'll never understand supply-side economics," the cabbie said.
"Perhaps I could be of assistance," I told him.
"Okay," he said. "Administration officials have been telling us for months now that all we had to do was wait for the new 10 percent tax cut to go into effect, and then the economy would really take off.
That was correct, I told him.
"Well, my brother-in-law--the one who still has a job--got his tax cut this week. You know how much it was? Two-and-a-quarter, that's what, and he was making something like $300 a week take-home. You know what his tax cut amounts to? I'll tell you. It comes to one Big Mac and a large french fries at McDonald's, that's what. Tell me, Mr. Supply Side, how in hell is that going to boost the economy?"
I saw the problem immediately. "You are looking at your brother-in- law as an individual," I told him. "In order to understand economics, you have to think in aggregate terms. You put together all the workers who will have an extra $2 or whatever to spend, and you are talking a major economic infusion. On a national scale, you are talking billions of dollars, and surely you can see that that's a lot of TV sets and cars and houses."
"I still don't see it," he said. "Is my brother-in-law supposed to go in with 100 other people to buy a TV? Is his whole community supposed to pitch in to buy a car? If not, there won't be any new TVs and cars. All you'll get is a lot of people buying Big Macs and large fries. And if that happens, I'll bet you this cab they'll raise the price of burgers and fries."
I explained to him that some people will gain considerably more than $2.25 a week as a result of the president's tax cut. For instance, a married man with three dependents will take home an additional $13.40 a week on an income of $1,000 a week. Surely, he could manage a new TV set on that.
"You've just made my point," he said. "This whole supply-side scheme is for rich people. Not only that, you've changed the whole argument. When you first started pushing supply-side tax cuts, you told me the idea was for people to save the extra money or invest it in stocks so that business would have extra money for expansion. Now you and the Reagan people are telling us we should spend the extra money to help pull the economy out of the recession."
"Don't you want the economy to pull out of the recession?" I said.
"Well, of course," the cabbie said. "But didn't you also tell me that if there's more money in circulation it leads to inflation?"
"I was talking about the aggregate money supply," I reminded him. "If the Federal Reserve Board increases the money supply, that certainly will lead to greater inflation. Moreover, the increased inflation will drive up interest rates, because lenders will have to cover the inflation. That's why it's so important that the Fed get on the team."
"And what happens if the Fed reduces the money supply?" he said.
"Naturally, if there is less money available to lend, the price of money will rise. That's simple supply-and-demand economics."
"If the Fed increases the money supply, interest rates go up?"
Of course, I told him.
"And if it decreases the money supply, interest rates go up?"
"I just explained why," I said.
"Then why are you people blaming the Fed for interest rates?"
I sensed his inability to understand money supply, so I tried another tack. "The true inflationary problem is government spending," I told him. "Private spending is good for the economy because it deals in products that people want and need."
"Let me see if I understand," he said. "If you have a product that people need--say you've got a cement plant--the tax cut will boost consumer spending and you'll sell more cement, which means that you will need more trucks and tires and gasoline and also maybe you'll buy a boat and a couple of TV sets."
"Beautiful," I said. "And in addition, you'll need more workers who will also be making additional purchases. I think you finally understand why private-sector spending is such a good thing for the economy."
"Because people actually need cement, right?"
"Well, people on the other side of the Potomac need bridges to get to work. People on both sides of the Potomac need schools for their children. If the government runs schools and builds bridges, they have to hire teachers and engineers and buy books and cement, which means that a lot of money will be pumped into the economy. Why isn't that a good thing?"
Too bad I didn't have time to explain it to him..