Supply Side vs. Demand Side

This Sunday on CNN's Fareed Zakaria GPS, Fareed interviewed Paul Krugman (Princeton University Department of Economics) and Raghuram Rajan (University of Chicago School of Business). It was as clear an exposition as I've heard of supply-side vs. demand-side economics and worth watching (here and for more Rajan, here, more Krugman, here, and more Zakaria on this topic, here).

Rajan argued for supply-side measures to return US competitiveness (increased business confidence, improved labor force skill levels, tax cuts to stimulate investment, etc.) while Krugman made the Keynesian argument (the subprime mortgage crisis has reduced consumer demand, business have excess capacity and won't invest or expand until there is more demand, and therefore government has to step in with economic stimulus).

It's hard not to agree with both positions since each is right, in theory. As a practical matter, however, the supply-side solutions only work in the long-term (how long will it take to retrain the US workforce?) and the demand-side solutions may not work at all (the US political system is unable to act quickly enough and with enough unity of purpose to enact a stimulus that would be large enough to have any impact).

Eventually, the economy will heal itself or at least find a new equilibrium. There's just no guarantee that the new equilibrium will be at a high level of either growth or employment.