The problem with Supply Side Economics.

It is a true statement that the private sector creates most jobs. That being said it would appear, on the surface at least, that what ever is good for business is good for job creation and the economy in general. That is the mantra of the Tea Party and Supply Siders however there is a problem with this equation and that is that business ideology is very different from household ideology.

In my household, if I feel that the economy is getting worse I will cut back. If I feel that the economy is getting better I will be more likely to spend. My decision is based upon emotional perception and not statistical or market data.

Business is not affected by emotional perceptions. A business owner who manufactures and sells a product looks at the economy differently. It’s not a matter of feeling good about the future. It’s a matter of how many product units will the market accept and what is the potential profit in the production of those products. The business owner uses hard data and computer generated trend lines to make his or her business decisions. If the answer is, that the business is likely to sell fewer products at lower price point, the business will contract regardless of the potential future of the economy. The business will only expand, I.E. hire more workers, if the trend line projection is that the market will accept more of the company’s goods at a profitable price point.

Increased tax breaks and reduced regulation will not compensate for retreating trend lines in a weak economy. A business that over produces on speculation will soon find itself out of business, if its inventory is not saleable, regardless of the tax structure or reduced regulation costs.

Supply Siders want to limit government spending by reducing the number of federal employees and cut stimulus and infrastructure spending. They propose an increase in the subsidies and support for business and the reducing of business related regulation and business taxes thus creating more “opportunity” for business to expand.

The problem with this is that reducing the federal budget and federal employment rolls has a negative effect on the trend lines that a business uses to determine how much it can produce. If there are fewer people employed by the government, there are fewer buyers for products and services. Stripping away consumer stimulus packages also has a negative effect on market trends. With less money in the market there is naturally less demand for product at a profitable price point.

It is the responsibility of the Federal Government to “Prime The Pump” when the economy takes a nosedive. Federal job creation and federal infrastructure projects are what brought us out of the great depression and other government initiatives have lifted us out of smaller economic down turns in every historical recession on record as well. There has never been an instance when cutting government spending has cured a slumping economy.

My greatest fear today is that Supply Siders and Tea Party republicans in their zeal to slash the size of government will succeed to the point that will destroy governments ability to create economic incentives and send us into an economic spiral from which we will never recover.