Are you a demand-sider or a supply-sider?
The BBC reports that the Obama administration has designated $50 billion dollars for infrastructure improvements as part of efforts to jump-start the US economy. The claim that the project will help jump-start the economy is contestable, but difficult to prove either way.
Broadly speaking, there are two influential schools of macroeconomic thought. One is the Keynesian or demand-side school, which blames the collapse of demand for economic malaise. During economic downturns, it is the government’s job to make up for the shortfall by employing people, purchasing things, and inducing private actors to do the same. This is the principle behind public works projects, temporary tax cuts, and programs like “cash-for-clunkers.”
By contrast, the neoclassical or supply-side school argues that prolonged economic problems are the result of the economy’s inability to produce an adequate level of goods and services. The government’s response to economic downturn ought to consist of making it easier for individuals to supply labor and firms to supply goods and services. This is the rationale behind permanent tax cuts for all (including corporations and the rich), deregulation, and a reluctance to extend unemployment benefits.
Though economic in nature, these two claims tend to accompany differing assumptions and values about human nature. Put crudely, the Keynesian approach favors the consumer, in hopes that the producers will follow. The neoclassical one favors the producer, in hopes that the consumers will follow.
Of course, all humans are both consumers and producers. But which role is more important? In a crisis, should we try to induce people to buy things, or to induce them to work? Should workers and consumers be favored over entrepreneurs and companies?
There is of course some middle ground between the two extremes. Maybe the answer lies in a bit of both.
Image by Flickr user Cain and Todd Benson used under a Creative Commons Attribution License