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The Great Recession was primarily caused
by the collapse in economic demand as 80 million “baby-boomers” born between
1946 and 1964 moved out of their peak spending years in their mid-30s to
mid-50s and into retirement in their late 50s and early 60s. The U.S.
government over the last five years squandered $7.6 trillion on Keynesian
demand-side stimulus trying to resuscitate this demographically shrinking
demand.
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With only 23 million born between 1995 and 2012 that comprise “Generation Z”, this population is just too small for demand-side stimulus to revive the economy. America is now deep in debt, facing 23 million unemployed, and needs to fund the baby-boomer’s retirement. Consequently, politicians are being forced to abandon demand-side stimulus and re-embrace supply-side economics.
The Revolutionary War was sparked by Great Britain’s demand that the American Colonies pay increasingly higher taxes to support England’s expanding national debt. Once independent, Congress adopted the Tenth Amendment to the Constitution that created a “free-trade-zone” between the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay-off any outstanding national debt. These policies created an economic boom that allowed the United States to be debt-free by the 1830s.
The Revolutionary War was sparked by Great Britain’s demand that the American Colonies pay increasingly higher taxes to support England’s expanding national debt. Once independent, Congress adopted the Tenth Amendment to the Constitution that created a “free-trade-zone” between the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay-off any outstanding national debt. These policies created an economic boom that allowed the United States to be debt-free by the 1830s.
This concept of encouraging long-term economic growth by lowering
taxes on income and reducing regulatory burdens that serve as barriers for
people to produce goods and services is referred to as “supply-side economics.”
The Founding Fathers understood that a greater supply of goods and services
produced increases demand by lowering prices for consumers.
But during the Great Depression, Washington politicians abandoned
supply-side and imported Keynesian “demand-side” economics from Great Britain.
Demand-side economics argues that in the “short-run” productive activity is
influenced by aggregate demand (total spending in the economy) and that
aggregate demand may not always equal aggregate supply (the total productive
capacity of the economy), because private-sector decisions often lead to
“inefficient market outcomes”. Therefore, government should create demand
through targeted spending. Armed with this smoke-screen, U.S. short-term spending
has risen every year since 1948 as politicians always found some inadequate
market demand that needed more spending.
President Ronald Reagan revived supply-side economics in the 1980s with Reaganomics. The policy ended the oil windfall profits tax to stimulate oil production, passed the Tax Reform Act of 1986 to cut taxes and eliminate deductions, and instituted a payroll tax to begin a “sinking fund” to reduce the accumulated liability of Social Security and Medicare. Although Reagan was never able to reduce total spending, he did start a huge economic boom that lasted until 2001 and led to huge United States treasury surpluses in the late 1990s.
Most Americans do not realize that Reagan’s biggest ally for his supply-side encouragement of economic growth was the demographics of the baby-boomers. Studies demonstrate that 50% of all durable (cars and houses) and non-durable (food and clothing) expenditures are directly related to household demographics. Spending tends to peak as families grow and people reach their mid-30s to mid-50s. Then spending declines rapidly after the mid-50s.
When Reagan began Reaganomics in August 1981, the first
baby-boomers born in 1946 were just turning 35 years old. By the time those
first baby-boomers hit 55 in 2001, the NASDAQ over-the-counter index of growth
stocks had risen 2600%, from 190 to over 5000. As the boomers hit 55 and
begin to retire through 2019, only 30% as many Generation Z members will
replace them in the work force.
Politicians love demand-side economics, because they get to look
busy spending lots of money creating “demand” for their crony capitalism
friends. On the other hand, a part-time Congress could manage a supply-side
economics, because the policy is set once to encourage long-term economic growth.
But as we have been observing, the United States government will go bankrupt
long before politicians can “create” enough demand to replace the shrinking
consumption spending as the baby-boomers continue to rapidly retire. Having
tripled the national debt since 2001 and recently suffered a credit downgrade,
Congress has no other viable option than supporting a return to supply-side
economics to encourage growth.
I expect Congress to soon update President Reagan’s play-book for
supply-side growth. The United States has the world’s largest oil and gas
reserves and last year those proven reserves rose by the highest amounts ever
recorded. Much of the un-tapped oil is on federal land and Congress will begin
deregulating the energy market to capture huge royalty payments on higher
energy production. Congress will also deregulate the utility industry. This
will encourage up to $6 trillion in private-sector capital spending for new
pipelines and refineries across the nation to connect and distribute new
production. Corporate taxes and crony tax deductions will be slashed and
individual taxes and deductions will be reduced. America is on the verge of a
huge economic expansion. Enjoy the ride!
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