THE EVIL OF SUPPLY SIDE ECONOMICS

At the peak of global economic recession in 2008, many inferences could be made about
shortcoming of supply side. Incentives on borrowing for production are at best speculative. Rewarding
risk takers on the supply side in the short run magnify the risk for the consumers. Referring to article by
Lawrence W Reed titled Government is an inflation fighter http://fee.org/freeman/detail/35government-is-an-inflation-fighter government creates inflation as tool to boost consumption in
recession. Government has unlimited ability to acquire liability in any economic course. Take bond yield
as government liability. As bonds mature, the government has to pay up their debts. There are default
risks which are reflected in the ways bond yield varies. Most yields are paid with printed money which
the government has the authority to. Expansionary phase in any economy is faced with competition by
individuals, businesses and government for liquidity. The demand for liquidity plummets and the cost of
cleaning still lies on the government who decides on the most appropriate action.
Substantiating the paradox of supply side can never be leveraged with mathematical proof that
shows how demand creates supply. Economics is a very complex manifold in Producer-Consumer cycles
which are indeterminate. If individuals, businesses and governments are utility maximizing consumers
whose preference remain unchanged for a period of fixed time, say one year then only interest rate
could be co-factored as an invariant. Controlling inflation becomes a guess work for the government if
changing demand cannot be met with changing supply. Basic attributes of high expansionary phase
include unpredictability of production and consumption in random cycles. Secular stagnation occurs
when there are no incentives for the government to lend to the public, hence interest rate falls to zero
and inflation increase default risk with increasing cost of mop up.
The prosperous years of Greenspans irrational exuberance were characterized with policies which
acted as corrective stabilizers. The policy variables had associated effect that created buffers in
multilateral trades. Quantitative easing would have had similar effect but stimulus was administered
downward. It reduces marginal efficiency of working capital which later forces interest rate to drop to
zero. Incentives on borrowing for consumption is always lower than for production but zero lower
bound worsen the scenario in secular stagflation. Both consumers and producers are crippled by
prevailing hard times and the government has to intervene with several actions which might not be
most appropriate. Concerning inflation and government action to curb it to the maximum seems very
contradictory, when same government act to encourage it. The evil of supply side economics comes
from inflationary devices which are used by the government. All over the globe, it is the norm practiced
at financial echelon. Priority should be given to the consumer. They are the king in any economy.
Rubbishing the Keynesian approach of bottom up stimulation by austerity advocates falters on
the supply side because consumers do not have sufficient incentive for consumption (in the case of
lower interest rate and shrinking liquidity) in the economy. A progressive trade-off between taxes,
inflation, interest rate and unemployment is always noticeable in any economy. It is never a zero sum
game, unless effects of two parameters are reduced to zero, which is practically impossible. Optimality
conditions are biased and inflationary cycles are endless with government pretending to have control
when they are often as helpless as the consumer. True economic progressivism seeks to balance the

cycles of inflation, taxation, interest rate and liquidity in the economy. So far, the Keynesians have been
winning and Greenspan is still the man to point in policy prototyping or management blue prints, if
governments have to be good on the supply side.