Supply-siders’ plan messed up by need to save

posted May 14, 2015 10:52 a.m. | updated May 17, 2015 12:00 a.m. (CDT)
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Gov. Scott Walker has been described as a disciple of “supply-side” economics who believes high taxes discourage income, output and efficient use of resources.

That is, the more we spend on government, the less we have to grow the private sector, where jobs and tax revenue are generated.

It’s hard to argue with that game plan. However, Wisconsin’s economic growth appears to be lagging, and the state’s recent tax revenue projections for the next two years are disappointing.

Walker, as we all know, has been aggressive in cutting taxes. So is it simply going to take more time to see better results?

Maybe, but there’s another factor looming that may throw a wrench into Walker’s game plan. It isn’t talked about much, but it could possibly be a significant drag on economic growth here and throughout the nation.

That factor was defined clearly in a column in the April 24 Leader-Telegram by Gail Marks Jarvis of the Chicago Tribune, which began: “Americans are far, far behind in saving for retirement, and they know it.”

Jarvis notes that surveys show most workers aren’t confident they’ll have enough money in retirement. As a result, the roughly 78 million baby boomers nearing retirement are responding by “saving more and spending less.” In turn, economic growth continues to be lackluster.

It’s hard to argue that people saving more for retirement is a bad thing, but millions pulling back on spending to build their nest eggs means less demand for goods and services. The supply-side strategy relies on the tax-cut dollars finding their way back into the economy, but if that doesn’t happen because the money is placed in retirement accounts, businesses won’t see higher demand needed to expand and hire more workers.

One alternative for some businesses is to use their tax cuts to expand exports to emerging economies in Asia, Latin America, etc. But not every company can do that, so the potential for foreign consumers to lift our economy is probably somewhat limited. 

In the meantime, the job losses and other reductions in the public sector as a result of tax cuts reduces the purchasing power of those families and causes others in government to pull back their spending out of concern that their jobs could be the next to go.

Does that mean lawmakers should simply raise taxes and public spending irregardless of external economic factors to keep government workers confident and happy? No, but this increased savings by millions of workers is yet another example of why economics is such a complex and unpredictable animal. 

If anything, more money is likely to end up on the sidelines. Jarvis’ column quoted researcher Mathew Greenwald, who said 42 percent of workers older than 45 have saved less than $25,000 toward their retirement.

That’s not a recipe for frantic growth in consumption of goods and services. That’s not Walker’s or anyone else’s fault, but it raises the probability that sustained cutbacks in public spending may not result in the kind of private-sector growth supply-siders might expect.

— Don Huebscher, editor