Just Another Little-Bitty Slap at Supply-Side Economics

September 5th, 2012 at 3:28 pm

As much as I’m sick of talking points—clever phrases designed to land blows in debates or tweak the synapses of your audience towards your positions—some TPs are actually true.  Like the anti-supply-side one that says “the folks that drove the car into the ditch now want the keys back.  Worse, they’re planning to use the exact same road map that got us so lost in the first place.”

This is, of course, a reference to the supply-side tax cuts and deregulation of the GW Bush years.  Instead of delivering the goods re growth and jobs, that agenda is now associated with very poor job creation, higher after-tax income inequality, higher poverty rates, large budget deficits, and a Great Recession born partly of the belief that financial firms would self regulate.

Now, the classic R response to this is that the GWB years don’t count because he was such a big spender.  And Rom/Ry really do call for historical large spending cuts.

But let’s look a bit more closely at this claim.  First, while federal spending as a share of GDP reversed trend under GWB—it was falling in the Clinton years—it stayed well within the historical average.   What’s striking about those years in this regard was not the increase in spending; it was the loss of revenue resulting from the Bush tax cuts. 

Source: OMB

Second, and I know I’m giving the supply-siders story here too much credit, but what are the actual economics of their story?  If it were the case that Bush overspent, what set of economic relations does that set off to blow away the fairy dust of supply-side growth?

The usual story is interest rates and investment, as public spending puts upward pressure on interest rates and crowds out private investment.  But corporate interest rates trended down in those years, and investment as a share of GDP followed its usual cyclical pattern.  (And no, these trends are not evidence that supply side worked—I included the non-supply-side Clinton years in there to make that point—investment did a lot better in those years, as did, of course, jobs and incomes.)

Sources: Inv/GDP, NIPA; Corp bond rate is Moody’s AAA corp rate.

OK, well then maybe GWB doesn’t prove supply side but what about Reagan?  Um…he raised taxes 11 times.  Moreover, as the first figure above shows, he was also a hefty spender, well above GWB (there was a lot of military Keynesianism in those years).

There really is just no evidence to support trickle-down, supply-side economics, yet that apparently will never stop one particular party from not just touting its success, but counting on the rest of us to ignore the facts and believe them.

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One comment in reply to "Just Another Little-Bitty Slap at Supply-Side Economics"

  1. rationalrevolution says:

    Actually, the case for “supply-side” is much worse, because we’ve never actually tried it because it hasn’t even been possible to try and do.

    You touched on the excess spending of Reagan and Bush, but seemed to have missed the bigger picture.

    The true claim of supply-siders is that cutting taxes AND SPENDING, will result in economic improvements. This has NEVER been done in America at least any time since the Great Depression, and possibly not even before that (I think Hoover actually increased spending as well, just not enough).

    The point is, in order to actually evaluate the effects of “supply-side economics”, federal, state, and local taxation would have to go down, and federal, state, and local governing spending would have to go down to the point that net government spending was on-par with net government receipts, i.e. no deficit spending.

    Deficit spending is essentially always Keynesian, it doesn’t matter if you are deficit spending due to revenue reduction or increased spending, the net effect is the same.

    It’s really only “supply-side” if you don’t do any deficit spending, and you are cutting taxes and services.

    The claim of the supply-siders after all is that people will be better off and the system more efficient if people spend their own money, instead of the government spending it for them. If the government is simply borrowing money to provide all of the same services, then these conditions aren’t really being tested.

    What we had during the Reagan years was much better than what the supply-siders proposed. We had decreasing taxes (even with Reagan’s “tax increases” the overall tax rates remained lower than prior to his entering office), decreasing interest rates, decreasing energy costs, decreasing inflation, INCREASING government spending and INCREASING deficits.

    It would be virtually impossible not to have an economic recovery under those conditions, but they tell us nothing about “supply-side”. Basically most people could borrow more, had to spend less on food and fuel, paid lower taxes, but still received all the same benefits from government, just without having to pay for them.

    Of course giving government services away for free (what Reagan essentially did via borrow) would be beneficial. In that case the government continued to stimulate the economy, but nobody had to pay for it, NOT EVEN VIA INTEREST RATES!

    There is no doubt that if Reagan had actually brought government spending below revenues and started paying down the national debt (as he claimed he would do), that it would have devastated the economy. The Reagan economy, and indeed the whole post-Reagan economy of the US, has been built on debt. Without the deficit spending our economy would have stagnated long ago. For the past 30 years our economy has been a farce.

    In addition, the idea of lowering taxes and paying down the debt made little sense.

    If what the supply-siders said had been true, that by reducing the debt interest rates would go down (they went down anyway due to the Fed’s monetary policy and energy prices), then it would again make no sense to keep paying down the debt!

    Think about it, when interest rates go down it makes more sense to borrow, so falling interest rates would always inevitably lead to more borrowing, by everyone, including the government! In fact, not borrowing when interest rates are low is bad policy!