An economic plan for supply economy?

After reading Econoclasts, the Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity, by Brian Domitrovic (ISI Books, Wilmington, 2009) and the account of the successful presidency of Ronald Reagan, promoter of the “supply-side economy”, ” or supply-side economy, it is good to consider, given the stagflation of the Mexican economy, whether a similar model would be applicable to Mexico.

As its name indicates, the supply economy seeks to stimulate supply instead of demand, more in line with Say’s proposal (supply generates its own demand) than Keynes’s (which through public spending seeks to stimulate the economy and aggregate demand). The supply side economics pursues especially through the containment of public spending (less deficit) and tax cuts. The lower government spending is offset by the stimulus to the economy derived from the money from lower taxes. By cutting taxes, private activity is stimulated, which generates greater economic activity and, therefore, greater collection. This is correlated with the Laffer curve, which in a few words indicates that the optimal collection of taxes must be found, that they should not rise beyond what is necessary so as not to discourage the economy.

Would the supply economy succeed in Mexico? Taxes have not risen under López Obrador, but the collection has increased due to the persecution of large taxpayers, which has allowed the fiscal deficit to be lower. What would happen if there was a big tax cut? On the one hand, that the public deficit would increase at rates that the market does not tolerate (Mexico has little tax collection capacity) and something similar to what just happened in the United Kingdom could happen: the deficit must be covered either with higher income or with a spending cut; if the economy is not done it can explode. On the other hand, the piece of cake that the government would stop eating should translate into more private activity and more employment. It is the trickle down theory, which economists such as Stiglitz and Krugman have taken it upon themselves to refute, particularly the latter in his book Selling Prosperity, in which he analyzes the false economic growth that was generated in the Reagan and Thatcher presidencies. The United States and the United Kingdom headed for a chain of privatizations and decreases in public spending (especially social spending), together with an increase in defense spending. Defense spending is necessary -we do not agree with pacifists a la Carlos Díaz, who propose the disappearance of national armies-, which the war in Ukraine has just confirmed. But it is also true that defense spending does not usually lead to greater competitiveness in the economy, highlighted by economists such as Michael Porter.

Moving public monopolies to private monopolies -as Thatcher did- only generates a change of ownership, but it does not translate into better services to consumers and more employment. Economic deregulation is positive if it is directed especially in favor of Mypymes, as Gabriel Zaid points out, but deregulating for the sake of deregulating does not make sense; an optimum must be reached.

From all of the above we can venture the conclusions for Mexico: in our country it is necessary to promote business activity, which López Obrador is destroying with forced marches; it is necessary to increase investment from indexes of 18% to at least 25% of GDP (in Asian countries investment reaches levels of 40%); government spending should increase by eight percentage points (at least, as Alicia Puyana proposes): tax cuts do not seem to be the way. But entrepreneurship can be fostered in many other ways. And in that the government of López Obrador has been left to us.