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Deconstructing Supply Side Economics


Keeping up with this week's theme of supply side economics, I thought it would be good to post a quote by Noam Chomsky encapsulating the hypocrisy of the grand theory espoused, but not practiced by western economic thinkers:

Take Indonesia again. Indonesia had a huge financial crisis about ten years ago, and the instructions were the standard ones: "Here is what you have to do. First, pay off your debts to us. Second, privatize, so that we can then pick up your assets on the cheap. Third, raise interest rates to slow down the economy and force the population to suffer, you know, to pay us back." Those are the regular instructions the IMF is still giving them.

What do we do? Exactly the opposite. We forget about the debt, let it explode. We reduce interest rates to zero to stimulate the economy. We pour money into the economy to get even bigger debts. We don't privatize; we nationalize, except we don't call it nationalization. We give it some other name, like "bailout" or something. It's essentially nationalization without control. So we pour money into the institutions. We lectured the third world that they must accept free trade, though we accept protectionism.

I'm always debating this issue with my conservative friends and am amazed at their ability to twist facts to fit reality. According to them, the gigantic collapse of the free market didn't actually happen - it was in fact the fault of the government lending money to poor people, and the only way to fix the economy is to enact the very same policies that led to the crisis. Those in power are well aware that supply side economics doesn't work (the Bush administration and the entire GOP was on board for the initial bailout) and wouldn't dare practice what they preached. I'm waiting for the day the conservative government in the UK understands that only the government can stimulate the economy into being productive again after a giant recession - right now it is enforcing giant cuts across the board, but when it fails to pull the country out of its slump, it will do as Pinochet did in Chile and Thatcher did in the 1980's and inject cash into the economy to boost industry, creat jobs and stimulate consumer spending.

It's just a pity we have to watch history repeat itself, and all at the expense of an economic theory that so clearly doesn't work.