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Supply and Demand collude or compete to produce Price. Any child fortunate enough to have run a lemonade stand before they were outlawed knows this. Since the Battle Royal between Reagan and Bush Sr we have heard Supply-side economics ever derided as “voodoo” since it was so denounced by W’s dad and that has proven the most durable of his utterances other than “Message: I care”. Supply-side’s competitor is often called Keynesian economics although since the sixties little has been proposed in the name of Keynes that the man would have supported. Tax-and-spend is probably the rough rhetorical equivalent of the disparaging “voodoo” but let’s keep things pleasant for all players and call it Demand-side. The divide between these two combatants is the divide between Right and Left. To a lesser extent it is the divide between Democrat and Republican so it should be well known. Basically the Keynesians assert not that a lack of Demand is the only problem in an economy but that most other problems can be swamped by goosing the economic call for goods and services and that this can be done by pouring greenbacks out the front window. On this premise is built all things called Stimulus. It would be a slander on John Maynard Keynes to say this was his opinion but his heirs have modified the doctrine to their own purposes. Like Keynes, the Voodoo Economists would ask, where does that money come from? Well, today it is printed, borrowed and taxed in descending order. Supply-siders will tell you that what ails the economy is that too much is taxed out of it. But tax rates are historically modest, you might say. Yes, they are but this is one of few areas where public intelligence is a bit superior to the projections. We don’t know how people have figured out that borrowed money must one day be repaid and printed money draws its life-force from their own but gosh darn it, they have. The anticipation of higher taxes or other, more creative means of pocket-picking is what has everyone with any dough in a protective crouch.

What of Price? Is there a Price-side economic model? Why, yes. Yes there is. This was most ably practiced by Richard Nixon. Try the Demand-side and inflation spikes, so what to do? Simple. Price controls. Everything is out of control? We’ll put it under control. You can smell the immediate popularity. Is pork too expensive? Cut pork prices ten percent. Gasoline prices are spiking? Freeze ’em. The ensuing calamities spanning the Nixon, Ford and Carter years are legendary. Let your imagination go wild and still you will not approach their full scale. Hopefully a further indictment of Price-side economics will not be necessary.

What then is the Supply-side solution? Foremost is a permanent (as these things go) slashing of tax rates but that is not all. As any Democrat will be happy to remind you, cut the taxes and you cut the revenues, meaning more borrowing. This was the dubious element to Bush Sr. Everyone should know that the other element of Reaganomics was to cut government spending radically. This never did come to fruition. Reagan’s Democratic Congress saw to that. They were proud obstructionists, those ancients, not like the crabby, foolish Republicans of today. So we were poised for disaster: spiraling debt, inflation and malaise; again any Democrat at the time could tell you. Events were not cooperative though and instead there was a historic boom lasting twenty-five odd years after a couple decades when anyone talking for a living would tell you such a thing was impossible. America was in permanent decline, they would say. Nothing to do about it. Best sit back and enjoy it. But that turned out to be so wrong that it chafes the Squawking Class (Demand-side purists) to this day. What happened with this “boom”? The expression itself should be descriptive. It was an economic explosion! A rush! The rat race became a sprint! All these terms address the not-so-secret fourth element of the economic equation: V. Velocity.

So you have Demand. Recognizing that demand for lemonade or automobiles, business produces a Supply that they exchange at a certain Price. But you don’t just do it once, right? Of course not. Once you have built one Duesenberg and sold it at a profit, it costs you half as much to build another since you built the tools and conceived the construction already. So you find another buyer for your next car, or he finds you more likely. You could sell it at the same price as the first one and reap even more profit and then you can manufacture all the posh, hand-made carriages the world can consume at ten years of a working man’s wages raking in princely sums on each one. This is in fact what Duesenberg did and earned piles from that practice but where is Duesenberg now? Henry Ford didn’t invent the automobile but he invented something far more important once known as Fordism but now simply as industry. Instead of building cars meticulously as orders dripped in, Ford decided to make as many cars as he could possibly make and sell them at as low a price as he profitably could. He made his money on Volume, the other V that is synonymous with Velocity.

Ford and his imitators that include nearly any company you could name were Supply-siders in their way. They increased Supply which of course crushes Price and if Demand stays where it is, the Fordists are crushed. Their capital is expended and their factories shuttered. Like the predicted Reagan Depression, that did not occur because of the fourth element, V. Volume. Velocity. Supply exploded by design. Price collapsed, also by design but Demand went through the roof like a rocket! Velocity. Velocity. Velocity.

Velocity-side economics is adhered to by basically everyone in the game. The Demand-side stimuli of yesterday and tomorrow is conceived to increase spending and therefore increase employment, investment and wealth creation. Likewise Supply-side stimuli, which consists of refraining from confiscating money rather than dumping it out in the street was also intended to increase the Velocity of money turnover in the private (or Real) economy. Price-side economics was also a Velocity play in its own style. As Sam Walton knew, lowered prices mean heightened buying. The reverse is also true so by keeping an iron fist over prices the Price-siders sought to keep Velocity up. The result was the precise opposite.

So how is our Velocity now? Poor and deteriorating. Like a modern airplane, a modern economy requires Velocity to stay aloft. We lost serious altitude in a bump a couple years back as you may recall. The situation has only been stabilized and that only marginally. Everyone wants to increase Velocity but no one can agree on how. You could predict what this old Voodoo Economist would suggest; slash tax rates, slash also government spending and end the bailout mania that has cost us so much and delivered practically nothing beneficial. But this could well be catastrophic in itself. The bulk of government spending is on these things called Entitlements. These are ripe for trimming, certainly, but Velocity-side economics tells us that this will cost us precious forward momentum at least in the short term. We could afford that if we were not already so near to the ground but a full on crash into Terra Firma is no one’s idea of a solution. We know what the Demand-siders’ idea is: print, borrow, tax and then spend, spend, spend! But this has been tried to the tune of trillions (nearing $20t in total fiscal easing and spending) to no good result anyone can identify even if we ignore the poison of burgeoning debt.

There is an inviting proposal out there to entice the trillion or two dollars held overseas by American companies to be brought home by waiving the taxes for this one time. That may well be a Stimulus worthy of the name providing scarce capital to enterprises actually in the business of business, as opposed to more larding of government payrolls, but already there are trillions in idle cash stashed away domestically from apprehension of future taxes and other nasty surprises in store for job creators from an emboldened, maddened and blinded Federal apparatus. While it may be worth doing, this will not be sufficient to boost our thrust significantly or permanently.

There is one course of action that is not only a necessity but may be sufficient alone to get us some airspeed. Call it HotRod-economics. Look under the hood of your car. There is far more than a simple internal combustion engine in there. There are hoses, lines and mysterious boxes, most are there from some sort of government compulsion and do nothing or WORSE than nothing for your quarter-mile time. It is the same with the powerplant of our economic airplane. From decades of do-gooders competing for the title of Employee of the Month business is encumbered by rafts and reams of regulations, many so obsolete that their terms are barely recognizable to us. As with your Taurus, however, you cannot just go in and rip them out. Your car will not run and neither will the economy, at least not in modern fashion. But with care and expertise, radical surgery will make your mild-mannered commuter scooter pull your hair out when you step on the gas. De-regulation of any sort has a bad name with the public but this is undeserved to say the least. Few who complain about it know of which they speak and most who do have some sort of vested interest in the status quo. But in common sense terms we know that every regulation has a cost and often these are cripplingly high; high enough that some enterprise or investment simply never happens. Does every regulation have a benefit? Just your ordinary experiences inform you. No. Personally, I wouldn’t mind experimenting with demolition of nearly ALL Federal regulation in many fields but few are on board for that. Luckily we have a man in the White House who, in part, ran against excessive and archaic regulations. Do you remember that? I sure do and I’ll bet he does as well. So here is the deal and it can be done without any new legislation; advantage Obama! First a moratorium on the promulgation of ALL new Federal regulations. Every one. Next we will have a doubling of the minimum firm size to which every regulation applies, that is to say if a regulation lands on all businesses with 500 or more employees (a common practice), that number is now 1000. This has the added benefit, perhaps merely political, of leaving in place any regulations that apply to every business of any size. These are the most dire industrial standards. Third and most important to the long term, any new regulation will have a ten year shelf life. If it is truly a necessity any policy should be able to be re-issued once every decade while those that prove overburdensome or just anachronistic will die a quiet death. Business will see new flexibility where yesterday was a stone wall. A mere hint of these policies would get our sputtering engine churning again. Weld it to the repatriation of overseas profits and something resembling practical entitlement reform and you will hear a buzzsaw eruption as Growth (the most precious product of Velocity) returns at Reaganesque levels of four-odd percent. And we had best do it quickly as all our plans for the next few years have already assumed that’s what we have.

 

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5 Responses to “V”

  1. Readers, yes I did LIKE this but only as a test since the LIKE button has been grumpy lately. I did like it though.

  2. I’m going to write the two words “Thomas” and “Pynchon” and hope that gets you thousands of page views. (And now I can’t resist a “Benny” and a “Profane.”)

    Good luck, Ken!

  3. Great article. Am forwarding it to a couple friends.

  4. It’s like Obama says, the car is in the ditch, in the mud. And anyone knows if you’re in the mud you beter keep moving.

  5. Thank you, Alex. You are a real mensch.

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