As President Donald Trump and congressional Republicans work towards the first tax reform package of the past three decades, an ideological fight is destined to break out between the two ideological spectrums of “demand side” Keynesian economics and Reagan-esque “supply side” economics.
Keynesian economics focuses on the “demand side” of the economy. Adherents look to jump-start economic growth by spending government money, thus hoping that it “stimulates” the private sector. The fatal flaw in such thinking is that every dollar the government has, it taxed away from the private sector, and every dollar it borrows to spend, it has to pay back (with interest!). Not only that, I don’t need to inform you that the government is notoriously bad at spending money – and you would be too if you were spending other people’s money on other people.
In the case of Obama’s 2009 stimulus, the package had a hefty price-tag that came out to a little under $100,000 per job created (source: page 167).
Focusing stimulative efforts on tax cuts over more government spending is considered the “supply side” alternative to Keynesianism. The difference is that supply siders hope for a similar “multiplier effect” in economic activity, but this expansion comes from incentivizing private firms to expand and invest.
For exhibit A in demand side vs. supply side economics, just take a look at the economic performance of the Reagan Administration against Obama’s.
This probably stands in stark contrast to the “trickle down economics” caricature you’ve heard regarding the Reagan years, where the rich got richer, and the poor got poorer.
Meanwhile, you probably learned in history class that it was the New Deal that ended the Great Depression, in which President Franklin Roosevelt created an alphabet soup of new government agencies, each injecting government money into public works projects throughout the country.
But did it work? Contrary to popular belief, it actually made the depression worse.
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