Too good to be true?? Surely that is what you would think - that I was trying to sell you snake oil - that I was a charlatan (don't you love that word) - that I shouldn't be trusted.
Martin Wolf has a fascinating article in the Financial Times about supply side economics and how we have all been sold a bag of goods.
Wikipedia defines Supply-side economics as a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices (supply -side economics is often conflated with the politically rhetorical term "trickle-down economics".) Our gift from Ronald Regan.
From his article, Martin Wolf argues:
Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.
The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
Who wouldn't want lower taxes, lower deficits and a higher standard of living? The true genius of this was that it transformed Republicans from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage - Republicans were for low taxes and Democrats for higher taxes.
Somewhere in that rhetoric we lost sight of what really matters - higher productive and a better standard of living. What is worse, and where this really becomes a scam - is that the theory that cuts would pay for themselves is just wrong and borders on a lie. As Martin Wolf points out:
True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).
The chart Martin refers to is the real federal revenue, in 2005 dollars, from 1970 to 1990. Paul Krugman plotted the log, because it’s easier to look at trends:
Krugman then points out that:
First, the Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high.
Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.
This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.Krugman is not alone in his position. Some contemporary economists do not consider supply-side economics a tenable economic theory, with Alan Blinder calling it an "ill-fated" and perhaps "silly" school on the pages of a 2006 textbook. Greg Mankiw, former chairman of President George W. Bush's Council of Economic Advisors, offered similarly sharp criticism of the school in the early editions of his introductory economics textbook. In a 1992 article for the Harvard International Review, James Tobin wrote, "[The] idea that tax cuts would actually increase revenues turned out to deserve the ridicule…" While few modern economists claim that tax cuts will completely pay for themselves, some empirical and theoretical research suggests that tax cuts do help to pay for themselves through increased economic growth, though the end result, even conservative economists contend, will be a significant reduction in revenues. The Reagan administration was the first to implement supply-side policies and call them that. Some maintain that they failed to deliver the promised benefits.
“ The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts.
- Karl Case & Ray Fair, Principles of Economics (2007), p. 695.Snake Oil.
From the article: Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,
The paradox of all of this is raised by Martin Wolf as:
So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.
Are we better off under the Bush supply-side tax cuts or not? That is the paramount question, because if the answer is not, then we have been sold snake oil.
As Business Week pointed out in a 2004 article:
Ronald Reagan struck a nerve during his 1980 Presidential campaign against Jimmy Carter when he asked Americans: "Are you better off now than you were four years ago?" The economy had gone through a recession earlier that year, so the answer for many was a resounding no.So where are we today? According to Business Week:
But at the same time, the data show an apparent contradiction: that despite the wage gains of the past four years, family incomes have nonetheless declined after inflation. Why? Because employment is down and so are hours worked, outweighing the pay gains. Even the affluent haven't been spared. To compensate, Americans have refinanced mortgages, piling on the debt and lowering their average net worth. Soaring medical costs, which employers have been shifting onto workers, have further depleted the family purse. Those at the bottom of the ladder have fared the worst: Poverty climbed steadily throughout the Bush years.
Add it all up, and the average U.S. household is somewhat worse off today than in 2000 -- several years of pain followed by not enough gain to make up the difference. "Americans barely held their own in the past four years, with bottom-half families clearly losing ground and some top-half ones maybe a little better off, mostly from the tax cuts," says Economy.com Inc. Chief Economist Mark M. Zandi.It sounds great to say let's lower taxes. But you have to ask what are you willing to give up in exchange. Should the elderly loose medicare? Should the poor be thrown on the streets? Should the Wars In Iraq and Afghanistan be ended (the question no one seems to ask)?
So next time you hear a Republican say he wants to lower taxes, ask what are you willing to give up. Also ask if it will really make all of us better off. The answer seems to be a resounding no.