Reagan Supply-Side Economics Did Not Work

The impediment to our economic progress is the dearth in supply of productive assets.Thirty five years after the introduction of supply-side economics by President Reagan, we are in the unenviable position being left with the trickle in a trickle down economy.The reason: low levels of direct investment in the real economy for many decades.

The Reagan revolution ushered in heavy investment in financial assets. From 1950 to 1980, financial assets were four times the entire economy, according to the Federal Reserve. By 2008, they reached an astonishing 10 times, which precipitated the financial and economic collapse.

The creation and trading of these assets manifested relatively little in terms of jobs and income for the masses, as compared with direct investment. Instead, they functioned to transfer wealth and concentrate it by promoting financial speculation and arbitrage, which tends to be a zero sum game.

From 1987 through 2008, U.S. research and development rose a mere 0.3 percent per annum, compared with 4.9 percent annually from 1953 through 1987, according to Information Technology & Innovation Foundation, a non-partisan research and educational institute. From 1980 through 2008, gross private domestic investment as a percentage of GDP fell 40 percent, resulting in a 60 percent decline in the turnover of money (monetary velocity), according to the Federal Reserve.

Diminished levels of investment in labor and capital have led to a dearth in supply and productivity. Since 1999, labor force participation has declined 5 percentage points, and labor productivity is growing at 1.3 percent per year, the lowest rate in nearly 40 years, according to the U.S. Department of Labor.

The labor force will continue to erode as the baby boomers enter retirement, which began in 2008. Since then, new retirees added to the social security system have risen 50 percent to 2.7 million per year, compared with 1.8 million in the prior decade. The labor force is projected to grow at a mere 0.5 percent rate in the coming decades, a third of the 1.5 percent rate since 1950, according to the Congressional Budget Office.

Another critical issue: there are not enough job vacancies to absorb the unemployed.

In 1999, the unemployment and job vacancy rates were both 4 percent. In an ideal setting, this would signal a perfect clearing of the labor supply by employers demanding employees. Today, unemployment is around 6 percent, while the job opening rate is 4 percent: there are not enough jobs to absorb those seeking work.

Moreover, this unemployment figure excludes the additional 5 percent of the labor market that is no longer counted as unemployed since 1999, bringing the possible supply of labor to an astonishing 11 percent.

Many of these individuals do not possess the skills required by business to compete globally. The poor education system over the past three or four decades undermined the cognitive, social and emotional skill acquisition of our population, This is evidenced by our grossly inadequate performance on standardized secondary examinations in math and english, low tertiary graduation rates, and insufficient pragmatic problem solving abilities.

Less labor and lower productivity will result in lower income and tax revenue, greater deficits and higher debt relative to income, making entitlement programs more at risk to cuts in benefits. In addition, the low supply of real goods and services will place upward pressure on prices in the real economy, which will undermine purchasing power, especially for the lower and middle classes.

Inflation has already impacted the financial economy, where stock and bond prices have increased substantially in the low interest rate environment.

Increasing the supply of productive assets is critical.

My tax plan will do this by eliminating and replacing all federal taxes with a 10 percent consumption tax on purchases above the federal poverty level and a 2 percent savings tax, which excludes retirement, educational and charitable entities. This plan would increase investment, employment and income while balancing the budget at current spending levels, providing a strong safety net to those disadvantaged, and sustaining strong purchasing power for the coming generations.

Future generations are depending on us.

© 2015 Newsmax Finance. All rights reserved.

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