Rational Action

So last week in Econ my professor (who surely is the most excellent professor in the world) ended the class in this manner:

It was the end of the 1970’s, an election year. With the problem of inflation and stagnation both at once, Professor Mendell approached then-candidate Reagan with a radically different plan for dealing with the economic crisis. Candidate Bush called it “Voodoo Economics”. So what exactly was this plan? We’ll talk about it next class.

At which point I was on the edge of my seat, although it seemed like everyone else wanted to run out. Yesterday he finally explained it to us, and now the whole world makes sense. I could never figure out if Bush was Keynesian or not. Now I know: he’s not. Not in a strict sense at least. Let me explain:

Keynesian economics deals with the demand side of the economy. It proposes that recessions are caused by inadequate consumer spending, and you can counteract that “gap” (It’s only a temporary thing) by:

1. Increasing government spending, so that the government purchases what the consumers don’t
2. Cutting taxes (Increasing disposable income for the consumer), thereby giving them incentive to purchase

So it’s all about increasing demand, whether it comes from the government or the consumer. Supply siders posit that there’s too much focus on demand, and they propose to stimulate the supply end of the system. To counteract a recession, supply siders propose:

1. Putting money into the hands of those who will invest it, since that will give businesses capital to expand
2. Decreasing business taxes on the margin — lowering taxes in order to give businesses the incentive to produce more

Those two reasons have pretty similar effects. Decreasing taxes on the margin means lowering taxes as the bracket gets higher. And the ones who invest are the ones in the higher brackets. (I haven’t been able to find any info online about the business taxes. I think that’s what prof said though…)

Supply side economics explain’s Bush’s tax cuts: cutting taxes on the rich and on capital gains allows for greater investment, which helps businesses, which stimulates the supply side. Tax nods to big business? Same deal.

If you’re interested, check out Supply Side Economics and Keynesian Economics on the Wikipedia.

As for classes: it turns out that next year’s sole Macroeconomics class comes at the same time as next year’s sole Data Structures and Algorithms class, which happens to need as a corequisite another Comp Sci class. Forced to choose between Comp Sci and Macro, I threw Macro out the window and picked the two CS classes and Microeconomics.

Lamenting the situation, my father woefully commented, “Micro sucks.”

This entry was posted on Thursday, April 22nd, 2004 at 1:51 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.