Tuesday, October 14, 2014

Demand-Side Economics

Last time we talked about supply-side economics: its theory, its practice, and its fate. It's a policy with lots of data we can study to measure its effectiveness, and although it's hard to draw real, hard conclusions from policies that are constantly being altered by people who can't come to a consensus, the data suggests that it has not been terribly effective.

So, now I'm going to discuss another theory. To be honest, it's not a theory with a lot of data behind it, so consider this whole thing speculative. That said, I think it's a policy based on reason, and it's designed to leave as little to chance and trust as possible. In short, it's a safer policy than supply-side economics, though I think the results would be more rewarding than anything supply-side economics ever gave us.

Put simply, demand-side economics is designed to increase demand, which will cause supply to rise naturally in response.

So, how do you create demand?

Here's the theory: by taking steps to improve the quality of life for the poor, we will see a rise in demand. Universal health care, subsidized housing, a higher minimum wage, etc, all serve to put more money into the pockets of the poor.

The difference between the spending habits of the rich and the poor is that when the poor have more money, they actually spend it. They have a vested interest in raising their quality of life: they have to buy food and medicine, and they have to pay for their housing. All that money goes back into the economy. There is almost never a time when the non-rich don't know what to do with their money. As they grow accustomed to a higher standard of living, they will look for ways to improve their lives further: a bigger house, better food, a new car, appliances, an education for their children, and so on.

I have first hand experience with this phenomenon. When I was born, my family was living in a trailer in southern Louisiana. When I was young, my parents invested in a house. As a result, they became "house poor": that is, a family that went into debt to purchase a house, and so don't have the money to actually do anything with that house. The house was practically barren for years before my dad's hard work and my mom's budgeting allowed us to start getting decent furniture, TVs, and such. Today the house is filled with more stuff than I could ever have dreamed when I was a kid, and still my parents are improving things.

My parents focused their money on improving our lives, but of course not everyone is focused on things like that. They may use their money on "frivolous" things like spinning rims for their car, lots of alcohol, or drugs. In a demand-side economy, though, it really doesn't matter what people spend their money on. The important thing is that they have money, and that they'll be spending it.

This spending of money will create demand. As more people have money to spend, more people will be needed to provide the goods and services these people will be demanding. Supply will naturally increase due to simple self-preservation: if the existing suppliers can't meet the demand, then other suppliers will rise to handle that demand in their place. Either way, this creates more jobs, which then creates more demand, and so on.

It's difficult for me to see the businesses who are laying off workers "as a result of health care/the rising minimum wage" as anything other than shortsighted, petulant children who are just shooting themselves in the foot. Very soon they will either need to hire more people again as the demand rises, or else their competitors will swoop in and take their business. Either way, the people win, so I don't feel sorry for the businesses who think they're getting shorted.

That said, I don't think this model has truly been tested, at least not in the United States. I kind of assume that some European country has probably done this, but if so I'm woefully ignorant to it. Regardless, it makes a lot of sense to me, and at the very least it sounds more appealing to me than what we have going on.

This approach works with the immigration policy I mentioned a couple of blog posts ago: though not all immigrants to the United States are necessarily poor, the vast majority of the illegal immigrants are. If we can provide a way for them to become citizens and properly enter the work force with the same protections as the rest of the country, then they, too, will contribute to demand, which then contributes to the economy.

Anyway, I did my best to present this theory in a way that's simple and easy to understand. It can be hard reading economic policy due to the language barrier and because the subject can be pretty tedious. For that reason, I tried to keep this subject fairly clear and brief. Regardless, I think economics is a fascinating subject, and one I think more people should become at least somewhat familiar with. The more people who can debate me on this the better.

I think my next post will discuss how macroeconomics should inform tax policies. I'm excited. Are you excited?

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