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Q&A: What supply-side economics is all about

With all the fuss and rhetoric peeled away, what is supply-side economics? It is a web of theory spun from a principle of classical economics called Say's Law.

French economist Jean-Baptiste Say held that the sum of the wages, profits, and rents paid to manufacture a good is sufficient to buy it. A devoted band of conservative Americans have changed this opaquely worded principle into a more eloquent worded principle into a more eloquent phrase: Supply creates its own demand. That is the primary theme of supply-side economics.

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Supply-side proponents do not believe that consumers will be forced to buy goods shoveled at the public by aggressive producers. Instead, they point out that people can't buy things without income, and that income comes from producing goods or services. If production goes up, income will rise -- and people will be tramping the streets with larger paychecks in their pockets, looking for things to buy. Thus the principle: supply creates its own demand.

From a supply-sider's point of view, what is the government's proper economic role?

As small a part as possible.

Since the days of the New Deal, Washington has tried to control the American economy by manipulating demand. Supply-siders point to today's tangled mess and say such "pump-priming" has proved to be an abysmal failure. The key figure in the American economy, they say, is not the consumer, but the producer -- a bold, swashbuckling figure whose work and devotion has created the country's wealth. Therefore, supply-siders believe government policy should provide incentives for producers to produce. This means cutting government regulations, easing taxes, and, in general, making it seem more likely that entrepreneurs will earn a profit on their investments.

Are President Reagan's tax and budget cuts pure supply-side economics?

Not quite. It is true that the package includes massive tax cuts, and its shock value should help convince entrepreneurs the economic future is getting brighter. Supply- siders believe such expectations play a key role in determining which way the economy will turn.

But to a dyed-in-the-wool supply-sider, the tax cuts are pulled punches. The effective date of the personal cuts has been set at July 1, instead of making it retroactive to Jan. 1, because of concern over "revenue losses." A proposal to cut the top tax rate on unearned income (interest and dividends) from 70 percent to 50 percent was dropped.

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The Wall Street Journal commented in an editorial that "from a supply-side perspective, you should always reduce the highest marginal rates first."

Who are the biggest supply-side fans in the new administration?

David A. Stockman, director of the Office of Management and Budget, is the most influential and best-known committed supply- side believer. Treasury Secretary Donald Regan has claimed "I was a supply-sider before I knew what the word meant." norman Ture, undersecretary of the Treasury for tax policy, is another stauch supporter. Supply-side principles are implicit in the new administration's economic policy; but if one were to indulge in ideological litmus tests Mr. Stockman and Mr. Ture would probably prove the "purest" supply-siders.

Who else is important in supply-side circles?

The movement, which took shape during the 1960s, has found shelter and converts on the Wall Street Joural editorial page. Jude Wanniski, author of the seminal supply-side tract, "The Way the World Works," was a writer there. Paul Craig Roberts, another Journal writer, has long been prominent in supply-side circles. Rep. Jack Kamp (R) of new York is the most prominent congressman in the movement, and the Joint Economic Committee has reportedly long been a hotbed of supply-sider thinking.

One of the most visible supply-siders is George Gilder, the poet laureate of conservative economics. Villified by feminists for his statements on the role of women, Mr. Gilder is program director of the International Center for Economic Policy Studies. his new book, "Wealth and Proverty," is considered by some experts closest to a definitive statement of supply-side beliefs.

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