There are two types of economists—make that two types of
people—in the world: demand-siders and supply-siders. What’s
interesting about the two is that they think in vastly different
ways about life and human interaction.
This is not a bumper-sticker difference in ideology.
Supply-siders do not walk around saying, “Cut taxes and watch
prosperity trickle down.” And demand-siders do not defend
government spending no matter what. They could say these things,
but their differences are much bigger and deeper than this.
Demand-siders tend to be pessimistic, fret about greed, worry
about leaving people behind, see everything as win-lose, and worry
about running out of resources. They believe government can fix all
of these issues. Supply-siders tend to be optimistic, get excited
about others’ achievements, have faith that people can succeed, and
believe things can always get better. They believe government often
impedes success.
Some of these thought patterns have been subtly shaped by the
ideas of dead economists and philosophers. But much of the
difference in these two types of people derives from human nature.
For example, it doesn’t take an intellectual to stir up fear about
running out of resources. It’s a normal human worry. It’s another
matter, however, when economists and politicians take these ideas
and extrapolate them into all kinds of economic theories and
government policies.
In fact, the economic policy-maker-in-chief, President Barack
Obama, and his economic team are clearly demand-siders. They talk
of catastrophe, and running out of energy or clean air. And they
claim that the only way to save the U.S. economy is for the
government to spend money, because the people who earn it either
can’t or won’t. This is a demand-side response, and is famously
tied to John Maynard Keynes.
Demand-siders look at the world as if it were one giant
treadmill of materialism. No wonder they are often so glum. If
people stop spending, if people hold back, then the economy is in
trouble. It’s all about buying things, getting things, having
things. This is where our nation’s church pastors enter the fray.
They often complain about capitalism because it supposedly
encourages people to take their eyes off God and keep them on
material things. And if you believe in the demand-side view of the
world, it’s easy to believe that materialism makes the world go
round.
What’s interesting here is that no matter how much people
complain about materialism and greed, when the economy gets in
trouble, the first thing demand-siders want to do is stimulate
demand. And in order to do this, they take resources from one group
and increase government spending or turn right around and give that
money to someone they think will spend it.
If people are buying fewer houses, the government thinks
lowering the prices by forcing banks to lower the amount owed or to
lower mortgage rates will boost economic activity. But as Milton
Friedman said, “There is no such thing as a free lunch.” If we need
government to move in with all guns blazing to artificially lower
mortgage rates, then someone will pay. Mortgage holders may pay
less today, but the lenders will pay a price in the future.
While demand-siders think that stimulating demand by taking from
one group and giving to another group is a wise policy, they
paradoxically also have a zero-sum view of the world. They think
that when the rich get richer, the poor get poorer, but also think
that taxing the rich more makes everyone better off. They don’t
believe that when the poor get richer, the rich get poorer.
President Obama’s economic team assumes raising taxes will do
nothing to the overall wealth of the land because it’s all one big
pot that needs to be stirred. Some of President Obama’s advisers
even believe that redistributing wealth will accelerate economic
activity because lower-income people spend more of their income.
And since spending (demand) makes the world go round, we will all
be better off if we spend more in total.
President Obama argues that, “with the private sector so
weakened by this recession, the federal government is the only
entity left with the resources to jolt our economy back to life.”
Unfortunately, the federal government gets those resources from the
private sector in the first place. So where is the “jolt” to come
from?
Zero-sum thinking does not end with money. It is at the root of
the arguments about resource scarcity and renewable energy. What
most people don’t realize is that this argument has been around for
hundreds of years (if not longer). As far back as 1789, Thomas
Malthus fretted that there were too many people in the world and
not enough food. In 1979, President Carter told the world that we
were running out of oil. This makes sense if you only think about
buying things instead of producing things.
Supply-siders do not think this way. In fact, deep down, even
though many of them won’t admit it, supply-siders think about
things the way our pastors should. After all, pastors tell us that
God created human beings in His image. They also tell us that God
is a creator. God is not a consumer. So, in reality, our human
interaction on an economic level is not about the treadmill of
materialism; it’s about the fire of invention, innovation, and
creativity.
In the supply-side world, shortages are a call for innovation.
Malthus was wrong because he did not account for technological
advances in agriculture. Carter was wrong too: the world did not
run out of oil when he thought it would. Nor did the lights go out
when society ran low on whale blubber. And the most powerful
economic force of the past 35 years has been the computer chip,
which in essence is made from sand. In other words, human beings
have created “something out of nothing.”
Supply-siders get excited about the future and remain mostly
optimistic because they believe in human ingenuity. They look for
ways to encourage risk-taking, wonder where the next invention will
come from, and believe that opportunity is endless. What the
Austrian economist Joseph Schumpeter described as “creative
destruction” is the process of economic advancement.
No supply-sider I know enjoys watching people lose their jobs or
witnessing industries wither. However, supply-siders know that it
is inevitable. Moreover, they know that the more government
intervenes in the process, the longer the pain will last. There may
be an argument for spreading the cost of some economic losses
across society as a whole, but the important thing to remember is
that this does not erase the loss; it just shifts cost onto
unsuspecting people who had nothing to do with causing the loss in
the first place.
And this gets to the root of the matter. As demand-siders run
around trying to find ways to support the housing sector, the auto
sector, newspapers, and banks, it is supply-siders who remind them
that all this spending must come from somewhere. Every dollar that
is shifted by government from one sector of the economy to another
has a cost. The true price of that redistribution—a loss of
entrepreneurial zeal—may not be seen for decades, but it will harm
the economy in the long run. One more thing. Demand-siders believe
in central control because they have an “add-’em-up” view of
economic output. What this means is that demand-siders look at the
economy as a combination of spending on all the different things
people buy. Supply-siders don’t look at things this way.
Supply-siders think about all the things people produce and attempt
to measure how new inventions will raise productivity.
In the end, supply-siders have faith in individuals, especially
in times of crisis, while demand-siders have faith in government.
Think about this for a minute. If you wanted to find gold in the
hills of California, would you send out the 101st Airborne to march
around in formation and dig in unison, or would you send out 20,000
scruffy, hard-living, independent, and free-wheeling miners? If you
are a supply-sider you believe in the scruffy guys, if you are a
demand-sider you want the Army. Which side do you want to be on?
Which side is more likely to succeed?
