“Feeding the Chickens by First Processing the Corn

Through the Cow”

By

Richard W. Crockett

Around 1980, when Ronald Reagan was elected President, something called “supply-side economics” came into vogue. At the time it may have looked to the layman like something new, but it was really merely a difference in emphasis from what had gone before. Until that time government fiscal policy had been under the influence of John Maynard Keynes, the British economist, and was dubbed, “Keynesian economics.” The implied contrast is between the Reagan years in the presidency and the earlier era of the Roosevelt years in the presidency. The two approaches have had a number of monikers—supply side economics, some times pejoratively is called “trickle-down” economics by its detractors, and Keynesian economics is sometimes understood as “demand-side” economics, to reveal the market bias of each.

Under the influence of Keynesian economics, Franklin Roosevelt used the expression of “priming the pump” to describe how he wanted to stimulate the economy. The metaphor of priming the pump comes from the experience familiar to older Americans who may have had the luxury of living without running water. To get water for their bath or other use they depended upon a well, and water was retrieved by means of a hand pump. Sometimes the “leathers,” or leather seal in the pump would dry out and the pump’s suction would be lost, not allowing the retrieval of water by means of the pump. So the solution was to “prime the pump.” This was done by pouring water down an opening in the top of the pump to remoisten the leather seal so it could seal the cylinder in the pump, permitting it to draw water. In the “pump priming” metaphor, it is the demand for water that remedies the dried out seal by flooding the pump’s upper chamber restoring the pumps integrity and allows the water to flow generally, upon demand.

Trickle-down economics, by contrast puts the stimulus at “the top,” in the hands of the producers, or upper stratum of society, hence the term, “supply side,” counting on their public-spirited temperament (or greed) to create jobs through self-motivation and investment. Former head of the meat cutter’s union, Charley Hayes called this “feeding the chickens by first processing the corn through the cow.” He was no supply-sider.

The failure of trickle-down economics has appeared in several places: to use another agrarian metaphor, “the chickens have come home to roost.” The tax breaks for the rich have not produced sufficient investment in this country, but mainly investment overseas, in China and India and perhaps some in Mexico, although I believe that Mexico’s good fortune has been overstated, considering the number of illegal Mexican immigrants who have come to this country to escape economic hardship. They seem to be finding more jobs in our troubled economy than theirs.

The two approaches to economic management are also relevant to the crisis in the sub-prime mortgage market. The supply-side or “trickle down” approach would argue for a solution that bails out the banks or other lenders who hold troubled mortgages. This way the banking system does not collapse and it has an appearance for the investment class as staving off financial disaster and of preserving the “system.” Along with tax cuts for the well-to-do, this is done mainly through government efforts at “printing money” and distributing it through the Federal Reserve, through open market operations of buying securities in the “open market,” through lowering the “rediscount rate,” the interest rate at which banks sell commercial paper to the Fed, and through managing the required reserve ratio, the ratio of banks funds that must be maintained for safety to the amount that can be loaned out. This is called “monetary policy,” in other words using the Federal Reserve System to increase the money supply. The strategy makes it easier for banks like Bank of America to “buy out” Countrywide, the troubled mortgage company because credit markets in their world are somewhat easier. The problem with this approach is that it cuts the consumer off at the knees. He remains on the hook for a mortgage that he may not be able to afford, and when he fails, he is taken out of the market place, no longer able to get financing for much of anything, adding to the net loss in the number of potential consumers. The lenders, if bailed out may remain in play. This is a supply side approach favoring the upper stratum of society.

An alternative to this approach would be to fashion a solution that helps the borrowers as well as the lenders and doesn’t let anyone off the hook. Let the federal government through a Housing and Urban Development program refinance many of the problem mortgages at lower, more favorable fixed market rates, rates that would allow consumers to keep their homes and pay their mortgages. No disqualifying preconditions would prevent borrowers who are in mortgage trouble from participation, as some of the recent “supply side” proposals would do. Some of these would still fail, but this approach would benefit lenders and consumers as well as protecting the larger banking system. HUD would recover much of this money through mortgage payments, mitigating the costs to taxpayers, and it would have the moral claim to solving a problem in society by catering to people rather that to corporate interests. However there is no doubt opposition to such a proposal from the lending community, which would see this as government encroachment into their turf and their marketplace.