In the late 1970s Jack Kemp and others started an idea that Ronald
Reagan made famous. They called it "Supply-Side Economics", and the
general idea is that reducing costs to businesses (i.e. the supply side of the
demand/supply equation) would stimulate the economy and result in economic
growth. Tax rates were reduced, the economy grew, and Supply-Side Economics was
credited for the growth. Since then it was believed that government policies
aimed at stimulating the economy in this manner would result in more and more
economic growth.
Some who identify themselves as Supply-Side Economists claim that the demand side of the equation doesn't even matter. There will always be demand, they say. Arthur Laffer, one of the most famous of the Supply-Side Economists, says that demand is not a problem. He includes this in a recent book "The End of Prosperity".
Convenient for people like Laffer, another phenomenon that is less often discussed that took place during the same period is the demand side of the equation (i.e. consumer demand). Consumer demand was seemingly insatiable for much of the past three decades. Consumers consumed. They used their savings. They borrowed. When they couldn't borrow anymore, interest rates were lowered, and new ways of borrowing more money were invented. Credit cards were offered to college students and others with little or no credit and even to people with bad credit, and limits were increased. People were permitted to borrow from retirement accounts. Home equity loans were nearly synonymous with ATMs.
This consumer spending by Americans was the root of much of the economic growth over the past several decades not just in the United States but in many other countries as well. In the 80s Japan's economy took off with much of the growth a result of sales to American consumers. In the 90s the Asian Tiger economies took off and in the aughts China's economy grew at double-digit pace every year.
By 2008 American consumers were tapped out. Housing prices had declined so home equity loans could no longer provide a source of funds for consumers. Consumers were also up to their necks in auto loans and credit card balances. When consumer spending declined, businesses stopped selling, and when businesses stopped selling they stopped making profits.
When you talk about economics, a lot of people automatically think of supply and demand. And they'd be right. There is the supply side, and there is the demand side. Both sides are equally important in the equation.
