Zombie Economics

The Silent Majority is neither silent nor a majority.

If you make it, they will buy.

"You ain't seen nothin' yet." -- Al Jolson

   The U.S. economy continues to show healthy signs even as other major countries struggle, but America is not strong enough to carry the world, and any attempts to wall off the country from others can only lead to international disaster.

   Domestic economic growth jumped to 3.7 percent in the second quarter of this year, according to the U.S. Department of Commerce, up from an earlier estimate of 2.3 percent. That compares to a first quarter growth in GDP of 0.6 percent.

   Even so, the financial yo-yo on Wall Street and stock markets around the world prompted officials at the Federal Reserve to suggest that the nation's central bank will not raise its base interest rate next month, as many have expected.

   Meanwhile, leading presidential candidates have been making noises reminiscent of the supply-side mavens of the Reagan Era, when the cry was "cut taxes and government revenues will increase." This strategy was also known as trickle-down economics, and voodoo economics. The chant was that if government reduces taxes on the wealthy, more money would be available for investment, which would lead to more production on the supply side, which meant consumers would buy more stuff. Hence the name "supply-side economics." What was forgotten was that with little or no demand for a product, an increase in supply was pointless and wasteful.

   Political opponents of the strategy were fond of saying it would reduce taxes across the board, and the resulting increases in supply and consumption would mean more tax revenue for government. However, as Bruce Bartlett, a government official who help to bring about the emphasis on supply-side economics in the 1970s, pointed out years later, there were several qualifiers. In an Op-Ed piece for the New York Times in April of 2007, "The original supply-siders suggested  that some tax cuts under very special circumstances, might induce an unlocking effect" that would bring more gains and more taxes, "even at a lower rate."

   Note the four qualifiers (italics added): suggested, some, might, very special circumstances. No guarantees there. In any case, the proposal was to be applied to marginal tax rates at upper income levels, not lower taxes at all levels.

   Bartlett also pointed out that many of the supply-side proposals have, in fact, been adopted by mainstream economists.

   

   To some extent, trimming tax rates on high earners will add some additional cash to the investment stream, enabling more production and an increased supply of goods. But if demand does not also increase to absorb that additional supply, the change is pointless.

   "Buy now," is the chant. "With what?" is the reply from the unemployed.

   If the U.S. walls off the rest of the world, as was done by the Smoot-Hawley Tariff Act of the 1930s, and as proposed by a leading GOP presidential candidate today, the result will be a replay of the Great Depression of the 1930s.

   Punitive tariffs and confiscation of remittances that workers in America attempt to send to their needy friends and relatives in Mexico and other countries will only bring retaliation by other governments.

   Halting immigration reduces the labor supply and leads to higher wages, in turn causing higher prices, which cuts down sales, which slows production, which eliminates jobs, which boosts unemployment, which leads to hunger and homelessness, which causes political upheaval.

   People come to America because this is where the jobs are, and those who come often pick up the jobs that nativists do not want and will not take.

   So despite all the metaphorical stakes driven through the heart of a fatally flawed doctrine, extremist supply-side acolytes continue to suck the life blood of a healthy, recovering economy, and threaten a repeat of the 1930s-era disaster.

   Like all the walking dead, the zombie of "voodoo economics" lives on in the minds of those who fear the "Other."

   "Take our country back," is the chant. That, too, is an echo of demagogues who rise to power on the xenophobic fears of a few.

   But this new Silent Majority is neither silent nor a majority.