Supply side economics is the unproven belief that as long as you ensure favourable conditions for producers, demand will somehow follow. By cutting taxes, supply-siders hope to encourage production, and shift the aggregate supply curve to the right as shown below.
In theory, output (NP) increases when aggregate supply shifts from AS1 to AS2, without an increase in prices (inflation); prices will actually fall, employment is up, and we all live happily ever after. Look carefully at this and you will realise it’s a load of bollocks. Firstly, “cutting taxes” is like saying “water the garden” and expecting everything to grow. What if it’s a cactus you’re trying to grow? You’ll drown it. It depends on what is being taxed. If you raise or lower the VAT rate, for example, it matters not one jot to the producer – his output remains exactly the same. But demand will vary, because VAT is a consumption tax.. If you cut corporation tax, it encourages investment in that area where the tax is low, but only if the demand for the product exists in the first place. And there is no causal relationship between such a tax cut and prices. Prices are always demand led. I can’t remember that there has ever been a situation where a booming economy went hand in hand with low prices – can you? If prices are low, it means you’re in recession.
And things are no different in the labour market. Why should they be? Unions forget that wages (the price of labour) are led by demand, not by supply. Unions are forever seeking to steepen the demand curve for labour, as shown here.
If they can successfully make demand for labour inelastic, they get to push up wages without a drop in employment levels. They do this by, among other things, coercion and thuggish tactics.
Econocat believes there is a season for all things. I share some left wing ideology with labour unions, and acknowledge that they were vital in establishing acceptable working conditions in the early days of capitalism. But their season has passed. Labour legislation in civilised society has relegated them to the role of market policeman or vigilante, depending on where your sympathies lie. There may come a time when they once again have relevance. Things are changing all the time, and my views may change too.But I will never withhold criticism just because I share beliefs or values with someone.
I work for a large American multinational firm, and we have recently been awarded a large contract with a de facto semi-state company. In the industry in which we operate, in such a situation where one company takes over an existing contract from another, staff are usually transferred under TUPE (Transfer of Undertakings – Protected Employment), unless the customer says they don’t want this – something a semi-state body will never do. So we have taken on 100 new staff under the exact terms and conditions as they had with their former employer. Because the former contractor, quite understandably, couldn’t be bothered to send out the files of all these people (would you if you’d just lost a €3m contract?), we had to ask each new employee for the relevant personal information required in order to set them up on our system. We sent out a standard application form, as well as an information form that had as its header the words “New Contract – Employee Information”. The “New Contract” bit referred to a new contract for the company, not the employee. This form is clearly not a contract – there are no stated terms and conditions, and nowhere where anyone has to sign anything. The union saw this and peed themselves; the upshot was that we had to phone every one of these people for basic information such as uniform sizes and their bank details so we could pay them, because the union had told them not to send in any forms (bizarrely, the “Application Form” was somehow acceptable, not that we actually got any of these back). These people are merely obstructionist, desperately trying to justify fleecing their own members of €4.70 per week. They stuck a spanner in the works that did nothing but cause me extra work (for which I received no extra compensation), so that they could go back to their members and claim they had done something.
Having said that, there are some union people I respect. Jim Stanford, an economist with the Canadian Autoworkers Union, is one. His book, Economics for Everyone, is a must-read primer. Kieran Allen, a sociologist at UCD and very active in the union movement, is one of the most coherent voices in the campaign against centralisation of EU power in Brussels. I expect him to be at the forefront of the NO campaign leading up to the referendum of the EU fiscal compact treaty.