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Recessions under “demand side” versus those under “supply side”.

by on February 5, 2015

Which is better for the economy? The golden era of economics practiced more “demand side” theory in the 50’s and 60’s. And in the late 60’s and early 70’s our economy started to shift to “supply side” theory, where neo-liberal policy took hold (neo-liberals consist of democrats and republicans).

Here is a list of recessions in those two eras of differing economic theories.

Demand side era:

1960 a 1.6% drop in GDP and a peak of 7.1 UE. 10 months

1969 1 .9% dip in GDP and a peak of 6.1 UE. 11 months.

Supply Side era:

1973 recession a near 7% decline in GDP and a peak of 9% UE. 2 years, and UE never fully recovered to its pre recession levels until 1997!

1980s recession had a dip in GDP of 4% and a peak UE of over 10%, it lasted 2 years as well.

2008 recession is called the GReat Recession for a reason because only the Great Depression dwarfed it in size. 4.9% dip in GDP and 10% plus in UE, still haven’t recovered 5 years later.

Demand side recessions averaged a 1.75% dip in GDP and a 6.6 UE rate and average of 10.5 months.

Supply side recessions averaged 5% dip in GDP and 9.75% UE average.

And since we entered into the post Keynes era we have never reached the levels of 4% UE (for a brief time in the late 1990’s).

I realize that comparing the two era’s may seem rather specious, but the two eras represent two completely different eras of economic practices.  From the pro-labor era where unions were strong and the middle class heavily bolstered from WW2 era government spending programs, to today’s era of anti-labor with shifting jobs overseas, dismantling unions, and government policy geared towards supply side thinking.


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  1. Norm A permalink

    Except for the fact the golden era of economics in the 50’s and 60’s was really “supply side” — the middle class consumed more on the basis of its productive output, and so demand was rooted in supply. And in the late 60’s and early 70’s our economy started to shift to “demand side” in practice, as demand became increasingly based in credit/debt. Trade deficits grew accordingly, and continued to grow.

    The rhetoric of politicians and pundits is about theory, but has less to do with what is practiced. While Reagan, for example, spewed supply-side nostrums, what did he actually DO? He tripled the national debt in under two terms, effecting more “demand side” growth.

    The notion that we entered into some post-Keynes era is crazy. Look at what happened to total credit market debt in the US: from 1945-1980 it hung around 150% of GDP, but then quickly doubled to over 300% of GDP. That means demand (and GDP growth) became increasingly rooted in ever-higher levels of public and private debt.

    The ongoing “deficits-don’t-matter” attitudes are hardly reflective of a post-Keynes era. Cash for Clunkers? Please. Neocons are the new Keynesians, albeit they prefer warfare (war on terror, war on drugs, etc.) as their chosen form of stimulus.

  2. You are really all over the place here.

    The 50’s and 60’s spend money at the bottom with the programs left over from the GI Bill (guaranteed jobs, health care, and cheap subsidized housing), and the 70’s and 80’s saw a shift to deficit spending at the top, by cutting tax rates at the top and heavy investments into big business, hoping for that trickle down.

    • Norm A permalink

      “the 70’s and 80’s saw a shift to deficit spending at the top”

      Not really… are you suggesting spending on health care, and cheap subsidized housing, food stamps, etc. somehow DECREASED in the 70s? The Great Society programs were only designed and begun in the mid-60s, and did not begin expenditures in earnest for several years.

      Transfer payments have roughly tripled from 15% of spending in the early 50s. Granted, the increase flattened in the 80s before resuming… but it DID resume. Even if it had remained flat, that does not mean true “supply-side” economics took hold; observe the levels of public and private debt increase over that decade. A genuine shift from demand-side to supply-side would mean decreasing credit/debt, rather than the opposite.

      To the degree the 80’s saw a shift to deficit spending at the top, that is a shift from welfare to warfare spending. But in terms of demand-side or supply-side, both are the same: the government borrows and spends. Growth does not come from a market-based increase in productive output (the military-industrial complex is NOT market-based).

      What really happened in the 80s was a political decision to keep spending like crazy but to not bother funding that spending with taxation. Tax receipts remained at historically normal levels even as outlays skyrocketed. True supply-side policy would have meant MUCH-reduced outlays, as well as substantially reduced receipts. Neither happened.

      And in the private sector, goods and service output became secondary to specualtive and leveraged paper gains. Financialization of an economy is by no means a transition to a “supply-side” economy… it is just the opposite. It means spending power gets created by way of the expansion of credit/debt… it means making loans (creating demand) becomes more important than making and selling goods (= “supplying”).

      • Norm, your error is in the assumption that supply side leads to lower debts and or deficits, and using that metric to determine if supply side theory was used.

        Supply side is using easy monetary policy and lower tax rates in the rich to spur economic growth. It has nothing to do with deficits, as those can be effected by other policies not related to supply side approaches.

  3. “Not really… are you suggesting spending on health care, and cheap subsidized housing, food stamps, etc. somehow DECREASED in the 70s? The Great Society programs were only designed and begun in the mid-60s, and did not begin expenditures in earnest for several years.”

    Yes welfare programs increased in size, as they do when the economy worsens. And guess what? It worsened during the supply side era. And continues to worsen.

    • Norm A permalink

      But transfer payments as a % of spending have risen for the past 60 years, covering both of the periods you attept to differentiate. And while the increase flattened in the 80s before resuming, it also flattened in the 60s before resuming, again covering both of the periods you attept to differentiate.

      If welfare programs increase in size, does that not indicate an increase in demand-side spending? Debt-based transfer payments (or other debt-based spending, public and private) provide for an increase in demand without a corresponsing increase in supply. This fact is clearly reflected in our trade deficit, where our debt-based demand is filled by supply from abroad. That’s the reason our economy keeps worsening: production (=supply) jobs keep getting created OVERSEAS because we can consume on the basis of ever-expanding credit (phony demand) rather than real output (=supply).

      I would love to hear you address how an increase in credit market debt from 150% to 350% of GDP could reflect a transition from a demand-side to supply-side economy. Likewise, doesn’t the increase in consumer spending as a % of GDP over the decades, from the 60% range (50s/60s) to over 70% (80s/present), obviously reflect an increased level of consumption (=demand) rather than investment/production (=supply)?

      • Welfare programs are hardly helpful in getting people to demand more goods. That’s not really a reliable metric. If welfare allowed people to buy more than basic necessities then I could see that argument being valid.

      • “Real output” is not what supply side represents. The real economy is what money is leveraged against. A “supply side deficit”, or “trickle down”, refers to money poured into the top, as with tax cuts for the rich or direct subsidies to the financial sector. Demand-side is directly to the bottom, where money “filters up” through a competitive economy.

      • Norm A permalink

        How could direct subsidies to the financial sector be considered supply-side economics? The supply-side school arues that production/supply is primary over consumption/demand, and that reducing barriers (taxes, regulations) to production will aid economic growth, since that growth is neccessarily rooted in production.

        It is not a school of direct subsidy and bailout. That does not mean politicians who wear the supply-side label are immune to straying from the school… nearly all do, and could rightly be called phonies and liars for doing so. That would apply to all neo-cons.

      • Cheaper credit isn’t a subsidy. You keep changing definitions to form an argument. That won’t work with me 🙂

      • Norm A permalink

        How do I keep changing definitions? My comment on direct subsidies to the financial sector was a reply to Vernon, not you.

        But yes, cheaper credit IS a subsidy… it is a subsidy to the wealthy, to holders of assets, since cheaper credit feeds increase demand for assets and causes assets to inflate in value.

        Simple supply and demand. The cheaper money/credit is, the more the rich leverage it, and the richer they get, in nominal terms. Asset inflation was a feature of the 20s, 90s, 00s, and the present. Suppressed interest rates feed those asset bubbles.

    • Norm A permalink

      “Supply side is using easy monetary policy and lower tax rates in the rich to spur economic growth.”

      Huh? Supply-side economics can’t use easy monetary policy to spur economic growth, because easy-money in and of itself is a demand-side tool. You are basically saying supply-side is using a demand-side tool… and it is, because it’s not really supply-side! An easy-money economy is a demand-side economy.

      The use of easy-money means the creation of demand (whether for consumer goods or capital goods or assets) through the creation of artificially cheap credit. It can only be a supply-side tool if there is a mechanism to drive the new credit towards productive investment rather than towards consumption and speculation. Absent such a mechanism, an increase in credit/debt stimulates far more consumption and speculation than productive investment (just look at the debt levels of the public, consumer, financial, and business sectors), and so must be labeled for what it actually is: a stimulator of demand. This remains the case, even if it is erroneously labelled “supply-side.”

      As far as using lower tax rates in the rich to spur economic growth, yes, that is a supply-side tool. But it is a foolish one to apply in a finacialized economy. Why? Because an easy-money, finacialized economy is credit-based; it is a demand-side economy! You cannot hope to use supply-side tools in a demand-side economy with any success. Easy-money policy drives wealth AWAY from supply-creation and into debt-creation, to realize leveraged paper gains. Tax cuts can do the same.

      Just as with easy money, the use of lower tax rates in the rich to spur economic growth can only work if the rich use those savings productively, in a supply-driven (goods-and-services) economy. But that means deploying their wealth as capital, to create the real wealth of goods and services, when they would just as soon grow that money-wealth nominally by the non-productive speculation in assets, since easy-money policies mean rapid asset inflation. (This is of course Piketty’s main error, confusing nominal paper wealth with real capital… they are not the same; capital is only that wealth deployed as capital, just a fraction of all nominal wealth.)

      To deploy supply-side tools effectively would require an end to rampant asset inflation, which in turn would require an end to easy-money, which in turn would probably require an end to the exorbitant privelege of the global fiat dollar standard. So long as USG debt remains in demand as the global store of wealth, the USG will want to borrow as cheaply as possible (who wouldn’t?), which means suppressing interest rates (=easy money) for as long as possible.

      • I’m sorry but you’re misinformed what supply side is. Reagan is often criticized for his tight money policy because it wasn’t consistent with supply side theory.

      • Norm A permalink

        Reagan promised to ease an increase in money supply as part of his supply-side beliefs that adding money to an economy does not cause real growth (but real gowth, ie increasing supply, might require an increase of money to FOLLOW, as the economy grows). It is you who is misinformed what supply side is, or else you have MANY websites and books to correct…

        “… a supply-sider does not think that monetary policy can create economic value, so they advocate a stable monetary policy or a policy of gentle inflation tied to economic growth.This principle is the key to understanding why supply-siders often advocate a return to the gold standard”

  4. Steve permalink

    Preach JP!

  5. Norm A permalink

    Vernon says real output is not what supply side represents.

    Please, tell me what the word “supply” means.

  6. Norm A permalink

    JP says welfare programs are hardly helpful in getting people to demand more goods.

    What do transfer payments represent? Spending power. And what is that? In a word, demand.

    If nearly 50% of government spending is going there, it is not a trivial amount, and it hardly matters if it allows people to buy more than basic necessities. When people need and buy those, do they not “demand” them in the economic sense?

    The point remains: it is demand that has been created without a corresponding supply having been sold into the market to generate income. That spending power arises from whose income? Nobody. The basis of that demand is not supply, it is debt.

    • And that spending power has helped in buying food and in health care, but nothing else, as that is what the majority of transfer payments buy.

      • Norm A permalink

        Fine.. but you are ignoring the issue. What does that food and in health care represent? Consumption that is not rooted in income from prior production.

        I have no problem with throwing massive amounts of “free” food and medicine around. Far better than throwing bombs around. I only have a problem denying what it is: an essential component of a demand-side economy.

        I am not debating the right or wrong of transfer payments, only what they represent: massive purchasing power that was conjured out of nowhere, rather than being derived from the production and supplying of real goods and services to real customers (that would be a supply-side economy, where supply precedes demand and growth in demand is dependent upon growth in supply, rather than the other way around).

      • I never said it wasn’t demand side.

      • My explanation was that increased transfer payments are a result of worsening economies.

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