A Simple Solution to the Economic Crisis

Byron A. Ellis- October 10, 2008

Supply-side economics is the central tenet of Republican political and economic thinking in the United States. The Republican premise is that lowering marginal tax rates increases economic activities. They claim that lower tax rates encourage production and increases income. Others, however, view supply-side economics as production (supply) that underlies consumption and living standards.

As a result, Republicans often target businesses and the wealthy for government income redistribution, claiming that such redistribution trickles down to Joe-Six-Pack on Main Street.

Most Democrats, on the other hand, adhere to the Keynesian economic view. They believe that tax cuts should be used to increase demand because demand creates its own supply.

Hence, Democrats often target the middle class and lower income households for government income redistribution. They believe that the middle class and lower income households are more likely to spend the additional income; thereby increasing demand and hence supply.

The current bailout of Wall Street Fat Cats is a typical Republican supply-side redistribution of taxpayers’ funds to wealthy financial institutions.

However, once again the Democratic Congress allowed fear-mongering tactics by the Bush Administration to lead them to support supply-side economics; a $700 billion income redistribution to the wealthiest among us. They failed to learn from the fear-mongering tactics used by the Bush administration that led them to support a war of choice, the Iraq invasion.

And, it is the invasion of Iraq (Middle East destabilization), not sub-prime lending that caused rising energy prices and constrained consumers’ budgets, which reduced consumers' demand for goods and services, as well as their savings propensities.

Supply-side economics, however, is unlikely to stimulate the economy, particularly if consumers’ incomes remain constrained by rising energy costs.

Demand is contingent and income and prices. If consumers’ incomes are constrained they will demand fewer goods and services, even if credit is available.

Thus, bailing out Wall Street Fat Cats is the wrong approach for stimulating the economy, particularly with traders bidding down crude oil commodities.

The policy should have been to renegotiate housing foreclosures (interest rates and asset values) with financial institutions and provide time-limited mortgage vouchers to homeowners in foreclosures and with mortgage difficulties.

This policy would have compensated for the adverse effect of rising energy prices on the consumers’ budget, while reestablishing flow of funds (mortgage payments and so on) from consumers to financial institutions. Thus, restoring funds and confidence to financial markets.

The second policy component should have been to stabilize trading in crude oil futures market. Crude oil is the lifeblood of modern economies and when traders manipulate energy markets by creating artificially high prices they endanger the economy and the security of the nation.

Therefore, it is essential to implement strict and robust regulations that do not inhibit trade but prevent crude oil commodity manipulation.

Studies by professor James Hamilton have unambiguously demonstrated that upward spikes in crude oil prices preceded the majority of U.S. recessions since World War II.