The Norman Transcript

Opinion

October 22, 2012

Down with demand economics

NORMAN — Editor, The Transcript:

RE: Donna Brasile’s article, 10/7/12

Since the end of FDR’s reign, the liberal economic bible has been Keynes’ book on economics. Keynes said the depressions could be eliminated by government spending. Subsidies put money into customers’ pockets, they purchased things, demand increased, factories began running again and jobs were created. Demand-side economics.

Historically, demand-side economics has ushered in depressions. Examples: The Tulip craze, Holland the 1800s. Results: Almost drove Holland into bankruptcy. The farm land craze, U.S. the 1920s. Results: Almost drove the U.S. into bankruptcy and started the recession of 1928, which lasted until the start of WWII. Our housing boom has caused another deep depression with no end in sight.

Why did these catastrophes occur? As demand increases, suppliers take two actions. They increase production to meet the demand and they raise prices. Prices are easy to raise. Supply is slower and much harder to ramp up. Increase in prices outpaces the increase in supply. With a populace living off of credit, demand cannot be sustain. Consumption slows drastically and rapidly. Supply is not easily reduced and people are laid off. Depression is close behind.

Demand-side economics has no self-limiting features to keep prices from getting out of hand. It is easy to prey on peoples’ desires and envies. Customer demands can quickly drive up prices. If the items being inflated are essential items — gasoline, housing, tulips — the whole economy is quickly infected.

Supply-side economics has self-limiting features that will drastically reduce the probabilities of such disastrous economic events from occurring.

Politicians, regardless of their ilk, use the demand-side approach when running for office. Suppliers use demand economics to promote their products. To bastardize an old selling slogan, “Promise them anything, but don’t tell them the truth.”

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