When it comes to fad and fashion, business is as fickle as any other sector of society. In the 1960s, conglomerates were all the rage. In the 1970s, direct government ownership of assets was in. Leveraged buyouts were the height of chic in the 1980s. And in the 1990s, a CEO who hasn’t restructured or re-engineered is woefully out of style. With the divorce of Charles and Diana last week, the royal House of Windsor has now downsized, accrued a onetime loss, written down goodwill and refocused on core assets and operations.
Even the arid plains of theoretical economics are not immune.
For example, it’s considered hopelessly frumpy to cling to the frayed vestments of John Maynard Keynes, who preached that demand should be nurtured by direct government intervention in the economy. Just as in the garment industry, everything old is new again: the bold strokes of supply-side economics are back in vogue.
The term “supply-side” has a certain gravitas, a solid ring of credibility. But in fact, it’s just a makeover of 1980s-style voodoo economics—otherwise known as trickle-down theory or Reaganomics. Supply-side advocates—whose ranks include American Republicans and some Canadian Tories—propose using income tax cuts to stimulate the economy. Politicians, they point out, can no longer woo voters with promises of government largesse. And tax cuts provide an expedient, off-the-rack replacement for traditional public works projects and regional handouts.
Critics insist that supply-side theory was discredited in the 1980s under President Ronald Reagan. They argue that the reduction in tax revenue greatly contributed to the accumulation of massive government debts.
Proponents of the theory, however, counter that lower marginal tax rates are a surefire way to encourage people to work harder and to boost productivity. Lower taxes are also touted as a way to increase savings and spur investment.
Sounds like a snap. But there are some subtle flaws in supply-side dogma. For one thing, there is relatively limited scope for prodding people to work harder. While the average hours in Europe’s work week have declined over the past 20 years, North Americans who are still employed are logging more hours than ever before.
That’s the result of several recent developments. Widespread corporate downsizing means that fewer people must do the same volume of work. The trend to link pay to performance is also pushing people to clock more time on the job. And the push to outsource operations has increased the pressure for fast, cheap production.
In reaction to this feverish pace, a recent survey by recruitment firm Robert Half International indicates that two-thirds of Americans would now opt for shorter working hours for less pay. Furthermore, the Generation X workforce has displayed little faith in traditional corporate cant. This group came of age in the era of ruthless restructuring. And it places greater value on interesting or flexible work than on promises of job security and benefits.
There’s little evidence that tax cuts would translate into savings or investment in the near term. North Americans are hobbled by unprecedented levels of personal debt, which will have to be reduced before consumer spending revives. In June alone, more than 6,000 Canadian consumers slid into bankruptcy.
Finally, despite the fact that most supplysiders declare monetary policy is dead, it has got enough life left to bite them. A growth spurt would surely lead central bankers to sound the inflation alarm and to chill the economy with an interest rate hike.
The Progressive Conservatives are the latest to embrace the supply-side and endorse tax cuts. Last week, Finance Minister Paul Martin vowed that the Liberals will resist this latest economic fad. But as a federal election looms and cranky Canadian voters start exerting pressure, fashion may yet claim another victim.
Supply-side economics is back in vogue, but there are some subtle flaws in the dogma
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