The Supply Side Debunks Supply Side Economics

I began working as a business consultant about a year back and the first thing to attract attention was the logic behind investment decisions.

Investment decisions are taken after making revenue projections; if the expected revenue does not justify the investment, why would someone invest? Markets are studied, consumer preferences are looked into, the competition the company will face is identified, the merits and demerits of the business idea, expansion opportunities, all are looked into.

If the study, called a business plan, finds that expected revenue is low and/or identified a source of weakness in the business model then the decision to not invest can be taken. In this economic climate, it is likely that more business ideas will be shot down or investment plans will be shelved.

That leads to the issue of companies like Apple hoarding their cash and not making large investments. Arguments that Apple is parking cash to avoid getting taxed are weak arguments, most of the investments would, or even could, happen elsewhere thus making the tax argument a moot point. That’s the producer side of things.

What about banks? They are sitting on gigantic heaps of cash and lending very little of it out to businesses. Same reason. The business environment is very shaky and it seems unlikely that big loans will be paid back by a business. So seeing a weak business climate the banks then hike up the interest rate on the loans to cover the risk, which then dissuades the loan applicant.

In the current economic recession, giving money to the banks with the expectation that they will then lend it all out to the people or businesses was a very myopic analysis. The expectation probably was – give the money to the banks and they will then lend it out because they have too much of it. Actually, seeing the prices of assets held by the banks fall through the basement (not the floor) is driving the banks to hold on to all the money to cover any eventuality. The weak business climate is added reason to not lend out the money to anyone asking for it.

This explains the current economic climate, the irony being that the attempts to use the supply side of the economy to spur on economic activity is doomed by the logic used by the supply side!

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