Three big economic policies

There are three broad rival frameworks for economic policy under contemporary capitalism (which also are relevant under most socialist proposals): monetarist policy, demand-side fiscal policy, and supply-side fiscal policy. In practice all three are pretty much always in play, but different policy programs generally emphasize one over the others.

All three claim to be the best way to manage the economy in two ways:

1. Moderating the impacts of the boom & bust cycles which emerge in markets
2. Ensuring that industry has the capacity to provide valuable goods & services

In service of these things, they try to juggle some tendencies which tend to conflict:

• ensuring that industry provisions enough goods & services that people enjoy prosperity
• keeping people prudent so they do not bid up the prices of things which are in fixed or nearly-fixed supply (like land or raw materials)
• ensuring that industry invests in new capacity (like factories and technological R&D).

Monetarist policy says that the best way to do this is through controlling how much money is in the economy, generally by controlling interest rates charged by a central bank (in the US, the Federal Reserve) to private banks when they need to borrow money. If the central bank’s interest rates are high, then the private banks will be cautious about lending money, leading people in the economy to be cautious and prudent in their decisions; low interest rates make people more free-spending. So policy tries to set interest rates at a level which keeps the economy moving without encouraging mistakes. It tries to push against the booms and busts, raising interest rates during the boom (to curtail a tendency toward bidding up prices and investing in dumb things) while cutting them during the bust (to make money available to keep things moving when times are lean).

Both forms of fiscal policy try to do something similar not through banks but through choices in government taxation & spending, taxing more & spending less during the boom while taxing less & spending more during the bust.

The difference between the two forms of fiscal policy is where in the economy they focus their attention.

Demand-side fiscal policy looks at shaping consumer spending. How much money do ordinary people have in their pockets? If you make sure they have the right amount, then they will buy useful products & services and industry will invest in capacity to provide them. So it favors policies which put money in most people’s pockets.

Supply-side fiscal policy looks at shaping investor’s choices. If you make sure that they have the right amount of resources, then they build the capacity to deliver useful goods & services and hire people to do the necessary work. So it favors policies which put money in the pockets of the rich people who shape investment.

Demand-side fiscal policy dominated the US in the middle of the 20^th century. The movement conservatism which dominated the Republican Party from 1980-2016 favored supply-side fiscal policy ... and the general consensus came to emphasize monetary policy more than it had in the past.

Movement conservatives argued for supply-side policy by saying things like, “Capital gains taxes are dumb and counterproductive. If you own something like a factory and it gains in value, that is because it makes something useful. We should not discourage that by taxing the owners for some of the increase in value! It is good to make factories which make useful things! Yes, cutting the capital gains tax makes rich people who own things like factories richer, which may sound unfair, but it is okay because ordinary people get jobs working in those factories and they make useful stuff, so the wealth ‘trickles down’ to everybody. Indeed, since you are making more stuff, the country is wealthier, so a lower tax rate does not reduce the tax revenue the government gets, since the economy is more productive: a smaller portion of a bigger pie comes out to the same amount for government to spend.”

Supply-side economic policy thus can sound plausible. But the experiment we have conducted thanks to movement conservatives demonstrates conclusively that it is entirely wrong. It just concentrates wealth. Since supply-side policy does not mitigate unemployment during busts in the boom-and-bust cycle, workers fear losing their jobs and do not have the power to force employers to pay them more, even when productivity increases. It is a rationalization for enriching the already-rich who own capital under capitalism. So despite this now well-demonstrated failure, it is still around and still the driving theory for Republican Party policy, since the rich will always find ways to support and reward people who argue for policy which makes them richer.