Simple version of Keynesian's Supply Side Economy updated.
We should stay away from Keynesian’s Supply Side Economy since dilution is occurring.
As Peter Drucker also mentioned in his book, managing a time of great change, Keynesian economics is not working well these days
and I will try to explain it as follows:
1. Basic Assumptions have been changed:
Due mainly to globalization, basic assumptions of almost all economic theories have been already violated.
Almost all economic theory is based on the assumption of closed environment, or very simplified nutshell environment such as one nation or a pond but not for globally connected economies of many nations such as nowadays.
In other words, Keynesian’s supply side economy is suitable for a global government, which is non-existent yet, but not suitable for any supposed to be a subsidiary government or one nation in my opinion.
For example, when one nation or U.S. government uses Keynesian’s supply side economy independently, it will not work well since it is ending up dealing with demands of all nations on earth or whole global economy.
Therefore, we should expect dilution of effect when using Keynesian’s supply side economy under the current circumstances.
A. Keynesian's supply side economy:
Keynesian’s supply side economy works well as long as the basic assumptions are secured such as a nutshell environment or a pond environment.
I have no doubt that in theory or at Keynes' era, Supply by U.S. government stimulates Demand in U.S. by 100%.
This is not true anymore because of globalization of economic activities nowadays.
In my opinion, supply of U.S. government not only stimulates demand in U.S. but also eventually and inevitably stimulates demand of China because of the following reasons:
a. The U.S.'s number one importer is China, $299 billion in Jan. – Oct., 2010 and has lost $227 billion in balance in the same period ( import 299 – export 72 = 227.) (FTD statistics) (This is a big hole or leakage and it must be fixed ASAP.)
b. China's Exchange Rate Manipulation: (violation of fundamental economic premises)(China is cheating in a sense of free market.)
Money eventually goes into a lucrative pond, where exchange rate is lucrative, which is China.
c. China's manipulation or controlling of free money flow: (violation of fundamental economic premises) (China is cheating in a sense of free market.)
Put it simply, it is almost the same as we are pouring water into a bucket which has many big holes when we are using Keynesian’s supply side economy now.
Therefore, I would say that Keynesian’s supply side economy needs to be updated.
II. Keynesian's supply side economy updated.
Actually Keynesian’s supply side economy indirectly stimulates demand through supply.
Since this indirect way of economic stimulation has become less and less effective, only effective way left is more direct stimulation of demand, which I call it demand side economy.
In other words, U.S. government needs to more directly stimulate demands in the U.S.
My recommendation is to stay away from Keynesian's supply side economy since it is not as effective as it used to be.
Example of direct way of stimulating demands are as follows, although these are not always recommended:
a. Tax reduction.
b. Purpose specific governmental support for job re-training, computer-training, language-training, etc.
c. Food stamps or cash-back coupons for targeted product purchases, etc.
Instead, we should more strictly stick with economic theory; for example, such as follows:
a. Secure free flow of labor force:
b. Avoid monopolistic market conditions through tightening anti-trust or anti-monopoly laws globally.
a. Secure free flow of labor force:
It is nice if the U.S. government establishes an institution for providing services for global job placements to those who are out of jobs in the U.S., I guess.
Facilitating global job placement should be a government job in my opinion.
b. Avoid monopolistic market conditions :
The U.S. government may need to initiate establishing global anti-monopoly laws and place on it globally; otherwise, nobody will do it.
I am very sure that everybody knows what I am saying here since these are basics but still I have to remind you of it just in case you forgot about it.
Please refer to the following page for more details.
Updated on December 30th, 2010. Hiroshi Morita
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