Snippets:

(1) Marxist economics:

One of the best-known anti-supply-side economists in history was Karl Marx (1818-83).

But first, let's find out what the supply side means. Generally speaking, all those who provide goods and services to consumers belong to the supply side, since they are the suppliers of goods and services. Thus, under market capitalism, the supply side includes all kinds of businesses and investors, large or small.

A supply-side economist may very well be a pro-business "spin doctor trash" writer like myself -- if you please -- who calls for lower tax rates, lower interest rates, business-friendly regulations, and a business-friendly political environment. Understandably, supply-side economists without exception feel comfortable when pro-business politicians are elected into office.

They like Sen. Zell Miller, not because he is a Democrat, but because he is a true friend to business. They may not like Sen. John McCain, Sen. Lincoln Chafee and Sen. Olympia Snowe, not because they are Republicans, but because they have shown utter ignorance about how the economy works when they tried to block tax cuts in the face of economic weakness.

Back to Marxist economics, in 1848, Karl Marx and his friend, Friedrich Engels, published the Communist Manifesto, which called on the proletariat to launch "class struggle" (i.e. class warfare) to seize control of government from the industrial-capitalist bourgeoisie (i.e. the supply side).

Karl Marx believed the capitalist system enriched only the industrial-capitalist bourgeoisie at the expense of the poor. He said that free enterprise would lead to inflation and exploitation of the proletariat by the bourgeoisie and advocated a system of government where all property and means of production would be owned by society.

A close look at such terms as "class struggle", "seize control of government", "all property owned by society" etc. should leave one with no doubt that Karl Marx was trying to justify robbery and to convince the public "class struggle and Socialist revolution" (i.e. robbery) would lead to "economic prosperity".

History has proven Karl Marx's anti-supply-side, class warfare economic theory an absolute guarantee of economic disaster. It ruined the Russian economy. It ruined the Chinese economy (until China's Deng Xiaoping took over and started his capitalistic market-oriented reforms in the late 1970s). It ruined the economies of the former Soviet satellite countries in Eastern Europe. It has ruined the economies in North Korea, Cuba, Venezuela and Zimbabwe.

But America's left-wing Democrats must keep recycling Karl Marx's anti-supply-side, class warfare economics from the dustbin of history, because their voter base is crowded with folks who read neither history nor economics and who cannot realize that the left-wing Democrats are nothing but demagogues trying to play on ignorant folks' emotions.

(2) The Warren Buffett enigma:

Recently, America's best-known billionaire investor, Warren Buffett, appeared on Night Line (ABC) and expressed his disappointment in the Bush administration's economic growth and job creation tax relief package which includes dividend tax relief. "It's not good social policy," said he.

According to Warren Buffett, if the government gives poor families one thousand dollars each, they will consume, thereby "stimulating the economy". Dividend tax relief would increase his dividend income by hundreds of millions of dollars, but Mr. Buffett said, "I wouldn't consume. I would invest it."

So, here's the Warren Buffett enigma: What makes him think that investing hundreds of millions of dollars won't "stimulate the economy"? And if he really believes that giving poor families one thousand dollars each would "stimulate the economy", why does he choose to invest his extra dividend income, instead of "giving poor families one thousand dollars each"?

Nobody would stop Mr. Warren Buffett giving away his billions of dollars to poor families to "stimulate the economy". Apparently, it's human nature that stops him doing so. Human nature, however, also dictates that Mr. Warren Buffett's much poorer fellow investors would like to have some dividend tax relief after more than three years of stock market losses. Why should Warren Buffett grudge them what they need?

"Not good social policy"? In fact, the Bush tax relief package includes child credits for many families. That's good social policy, but may not be as stimulative as the dividend tax relief, which would immediately cause the market to revalue the stocks of companies that pay dividends, since it allows share owners to receive more dividend income.

Higher share prices are sure to boost Consumer Sentiment, Consumer Confidence and Consumer Spending. But according to Warren Buffett, that won't stimulate the economy because the money goes "to the wrong party". Well, if a rising stock market is "the wrong party", why does it almost always help the incumbent get re-elected?

(3) Economic dogmatism:

In 1995, the GOP-controlled Congress demanded a balanced budget. So, critics now ask, "What makes them (i.e. the Republicans) think budget deficits don't matter now?" Such criticism fails to examine the differences in circumstance between 1995 and today, smelling of economic dogmatism.

1995 was a year of strong economic growth when Fed Chairman Alan Greenspan was on the lookout for signs of inflationary pressures -- he had just raised the target Fed Funds rate four times in 1994. With a growing economy and a rising stock market, federal tax revenues were on the increase.

The choice before the government was to either increase spending or reduce budget deficits. The GOP-controlled Congress chose the latter, demanding a balanced budget and forcing the Clinton administration to control spending. That was a sensible thing to do in 1995 since the other option (i.e. to increase spending) would have given extra stimulus to an already heated economy.

Today, it's a completely different story. On Wednesday (May 21, 2003) Fed Chairman Greenspan told Congress that the Federal Reserve was ready to fight deflation (not inflation) and would not run out of ammunition to do so. GDP grew by only 1.6% in the first quarter of 2003. Joblessness stands at 6%. U.S. factories operate at 74.4% of capacity, way below the average capacity utilization rate of 81%.

As a rule, economic sluggishness is characterized by weak aggregate demand, disinflation or even deflation, leading to lower interest rates. Whereas, as a rule, strong economic growth is accompanied by strong aggregate demand and inflationary pressures, leading to higher interest rates.

Right now, in order to fight economic weakness and deflation, the government needs to stimulate economic growth through steady and robust money supply increases, tax incentives for businesses, individuals and investors, and higher deficit financing (i.e. government contracts) to enable companies to hire more workers. Higher deficit spending is not only necessary, but desirable to the economy at this moment.

Critics say higher deficit spending would lead to "serious consequences in the long run", such as higher interest rates. The problem with this argument is that it is foolish to see higher interest rates as "serious consequences in the long run", because interest rate hikes only happen when unemployment decreases and aggregate demand increases -- a sign of strong GDP growth. What a blessing that would be!

Only an economic ignoramus would see future interest rate hikes as "serious consequences in the long run". At this moment, aggregate demand is so weak that the Federal Reserve, worried about America's ever falling inflation rate, is unlikely to raise interest rates at all in the foreseeable long run.

Those left-wing Democratic demagogues on Capitol Hill should spend time reading economics textbooks and use their own brains, rather than "take advice" from the Brookings Institution's "academics" whose expertise is to create convenient "theoretical grounds" for the political left in exchange for their livelihood.

(4) The national debt:

At CNN, Lou Dob's Money Line shows the figure on America's national debt almost every day: US$6.46 trillion. It is a big number but not a big problem to America. About half of that amount is intra-governmental holdings, such as the Treasury securities in the inventory of the Federal Reserve. The government need not pay down such debt. If it ever does, it would cause severe deflation.

The public holds more than US$3 trillion in Treasury securities, accounting for less than 40% of GDP -- not a high debt ratio among industrialized countries. After all, paper money is a commodity which the Federal Reserve (i.e. a division of the U.S. government) can create with a stroke of the pen.

China sells large quantities of goods to the U.S. and receives large amounts of U.S. dollars. This so-called "Communist country" does business under a Marxist brand name but trusts American capitalism and the U.S. government more than anybody else.

Instead of converting its U.S. dollar sales proceeds into its own currency (the Renminbi) or other Western currencies, China has purchased large quantities of U.S. Treasury securities. Even if China sells U.S. Treasury securities, the Federal Reserve can buy them with money it can create at any time.

So, the question is very simple: If you can create money, why worry about debt?

The argument against this is: If you create too much money, its purchasing power will diminish and that would mean inflation which in turn would cause the Fed to raise interest rates.

Fair enough, but that's beside the point, because the problem we are facing at present is not inflationary pressures forcing the Fed to raise interest rates, but disinflation leading toward deflation, which worries the Fed and all sensible economists. That means the U.S. government is creating too little, not too much, money.

And the quickest way to transfuse more blood into the economy is to cut tax rates and interest rates and increase deficit financing. This is not 1995, the 20th century, but 2003, the 21st century. Times have changed. Economic conditions have changed. What was appropriate in 1995 is not appropriate in 2003. The political left just doesn't want to be reasonable.

Sincerely,

Robert M. Liu