Understanding Supply Side Capitalism

Part #2 of Understanding Capitalism and Socialism (Part 1)
by Joaquin

Now that Republicans are starting to talk about restoring Reaganomics, it is a good time to review Reaganomics; i.e., Supply Side Capitalism. This is number two of my technical essays about how the world works. Today we will explore how supply side economics will save the world. So let's get to it.

Supply side economics became so powerful that it was renamed Reaganomics in honor of the president and WW II movie hero. Reaganomics helped poor Americans understand what rich people have been telling us since the Middle Ages i.e., Robin Hood was doing it wrong.

Some people call Reaganomics "Trickle Down theory". Its kind of like when I went to college; most of the students studied hard to get in to our college and were from middle class families like me, but this one guy got in because his parents bought a new building for the school.

Well, it's not just about trickle down buildings; I remember wondering what it would be like to drive that Lamborghini to school each day. You can see how Reaganomics works in unexpected ways since I never would have thought about Lamborghinis otherwise. I didn't even know that you could fly to Italy before taking delivery of your Lamborghini to have the driver seat custom molded to your body at the factory.

Now this being a scientific paper and all we have to do some tech talk. The first thing to know about Reaganomics is how the Laffer Curve works, shown below, named after the economist Arthur Laffer who is famous for writing it on a napkin. As you can see, the Laffer curve is shaped like a bell.

It is very important to remember that before Reagan, rich people paid a higher tax rate than middle class people who paid higher taxes than working class folk who paid higher taxes than poor people. Reagan fixed this system, which brings up the most important property of Laffer's bell curve: the closer your tax rate is to 100% the less tax revenue the government gets from you because, according to supply side theory, you become unmotivated, stop earning money, and pay no taxes. As mentioned, rich people paid the highest taxes so before Reagan, rich people were sadly unmotivated in those days. Rich people are a fickle lot because even after taxes they are making at least 10 times my gross income but, that is not enough to motivate them. So Reagan lowered the top tax bracket for the rich from 50% to 28%. Wow, the rich people must have been in a sorry state before since middle wage earners were still stuck in the 33% tax bracket; they called it the "middle class tax bubble" back then. Thank's to Reagan and Bush, the rich people are now just as motivated as working and middle class people!

The Laffer curve shows us the carnage related to high taxes. Imagine you are paying 100% taxes and even if the government offers to clothe, house and feed you and your family the curve tells us that you will pick destitution instead. I don't know about you, but I would rather quit working and starve myself and my family to death if I'm not allowed to pay 110% of my wages to insurance companies, my landlord, and Walmart. Now of course no one in the United States pays a 100% tax rate but still we can only imagine the kind of suicidal, unmotivated, depression rich people must have been in to cause Reagan to make such dramatic changes in the tax system; why, that guy in my College class probably only flew first class when he went to Italy to get his Lamborghini's driver seat custom molded. It's too bad there wasn't Prozac for Spring Break at Grand Cayman or St. Bartz islands in those days. At least we tried to get Cuba back for the wealthy to use again; talk about throwing them a bone!

Now that we understand the Laffer curve and how important it is to lower taxes for rich people, we are ready to tackle supply side economics. Supply side economics works like the Laffer curve. In supply side, we reduce or get rid of stuff that might get rich people depressed and unmotivated; stuff like any kind of regulation, environmental rules, etc. Now it is a common fallacy that supply side tries to get rid of all regulations. Supply siders are all over forbidding abortion, making sure our kids say the Pledge of Allegiance, etc..

Here’s a famous saying by a famous supply side economist:

'The United States must overcome the materialistic fallacy the illusion that resources and capital are essentially things which can run out, rather than products of the human will and imagination which in freedom are inexhaustible.' --George Gilder

George Gilder is saying the key part of Supply Side Economics that we need to understand. There will always be enough of anything we want as long as people are free to use their imagination and capital any way they want. Let's look at an example of what George is talking about. People have been mining Gold for thousands of years and we haven't run out. Now of course the price of Gold has quadrupled over the past few years but gold mines are closing and we have reached peak gold so that Gold production is going down even as the price of Gold skyrockets. Yet we know from people like George Gilder that we have nothing to worry about when it comes to Peak Gold or Peak Oil because of supply side economics. Thanks to limitless imagination there is technology to extract as little as 3 parts gold per million from gold ore. No worries there is an almost unlimited amount of Gold dissolved in the Oceans and in common dirt and we know, thanks to George Gilder, that the basic laws of physics have no meaning thanks to supply side economics. Just because it costs more energy than the gold is worth to extract it from low grade ores is not a barrier; not when we have the imagination of Ronald Reagan, Arthur Laffer and George Gilder to guide us!

Let me give you another easy example of how supply side economics can solve the energy crisis. As you know, money is made out of paper and ink. Let's give everyone the freedom to print money. Think about it, it's the ideal supply side scenario, turning paper and ink directly into money. We know from Gilder that the supply of paper and ink would be inexhaustible due to "human will and imagination" and so capital would be too; after all we are printing the capital! Everyone could print money as fast as they wanted and we would never run out of materials or the capital to buy it with. Then, when we have enough paper money we can burn it for limitless energy.

Thanks to George Gilder we know the materialistic fallacy of conservation; we know conservation is an illusion. What are people thinking when they say that conservation of natural resources is important? Don't they understand Reaganomics? Conservationists just can't appreciate the supply side miracle of strip mining and clear-cutting; of digging up entire states for coal and oil shale. Freedom of the imagination! James Watt was a hero. Those people who think that building up the economy means a prosperous environment for working class and middle class people and providing opportunities for the poor are no better than Robin Hood. Let's face it, Robin Hood was a commie.

Link to Part 1

First published in The Agonist



I'll never understand the idolization of Reagan

It's the start of "blame the workers", the start of the stealing from the poor and give to the rich, which are still experiencing the fruits of "deregulation" and one thing not covered much is the continual drug ads which have side effects as long as your arm and that can kill you (under the guise of patents and thus no focus on things that won't kill you because they are not patentable).

That said, how does one bust through to people to make them realize it plain does not work. I think the wikipedia is a good place to start.

Another thing to do might be revisit the 70's, Carter, what is stagflation and what really caused it all.

Con job

Reagan's "charm" faded shortly after the election. At the time of the shooting, he was not at all popular.  The transformation was remarkable and the financial manipulations became a major factor.  He was the beginning of the end, imho, for our fiscal sanity.  Less taxes equal more revenue, trickle down, etc., haunt us to this day. 

You have an excellent point on drug ads.  How lame is that?  The manufacturers are allowed to create both self-diagnosis for ailments that only MD's are qualified to assess and demand for drugs, new releases, that are much more expensive than reasonable alternatives.  They can't lose and the costs soar because of this.  What a system!

Supply side didn't do us in the first time around but it will certainly do so the second, if it gets a shot.


(PS What was the cause of stagflation?)

honestly I don't know

The accepted or pat answer is wage-price spirals and too much money supply. But is it really? We had oil dramatically rise in price plus the embargo plus the end of Bretton Woods. I haven't studied the 1970's enough to really get a solid handle on it (unlike the 1930's, 1950's).

The pat answer on solutions was Volcker raising interest rates, but unemployment also soars, the economy hit a deep recession so, then you have less demand, an economy not operating at full capacity, so what does that mean?

Sure, there were problems

Sure, there were problems with Reagan.

But check out the conditions he started with (double digit inflation and interest rates, double digit unemployment), check out how those ended up (and Volker was a big part, yes), check out his inflation adjusted economic growth, then compare that data to some other presidents. I think you will find that at a minimum those economic policies are worthy of some serious thought.

They'd be worthy of thought if they weren't based on bogus


The trick was lowering the Federal income tax rate. Enough deductions were retained to make sure that deficits soared. We got the growth from the infusion of all that spending. Then it all petered out a few years later. A rising tide was to lift all boats, one of the bogus nostrums.

But what really happened was an open assault on wages for working people and layoffs for the middle class. Then there was the off shore movement and decline of the industrial base. Somehow, Germany can maintain an industrial base and compete while we were told we couldn't do that.

Soaring deficits, gutting unions, bloated military budgets (for what). Here's a nice summary of the Reagan era: "Supply-siders boast about the 18 million jobs created in the 80s, but they grow unusually mum over the 24 million jobs created during the 70s. The 80s put 2.6 percent more of the population to work, but the 70s outdid them at 3.4 percent. The increasing percentage of the population joining the workforce during these two decades can be attributed to two factors: baby-boomers coming of age, and women joining the workforce in record numbers." The Reagan Years  (main link)

Reagan was never able to wander into the fog of superstition and strangeness that Bush claimed as home.  And Reagan had his moment of brilliance when he and Gorby came up with the plan to get rid of nuclear weapons in their entirety.  That was one of those rare moments that could have changed history.  At least he had the thought and tried to accomplish it.