Posted: 09/13/2012 1:31 pm
When was the last time supply-side economics worked as a systematic public policy?
By supply-side economics, I am referring to lowering income tax,
capital gains tax, and reducing regulation as an effective means for
economic growth.
It's a great thought that we can pay less in taxes and economic
prosperity would abound, trickling down like manna from heaven. But is
that realistic?
I'm quite certain my question will prompt some to race to their
computers to remind me that President John F. Kennedy cut taxes. Kennedy
did indeed cut taxes, which passed in February 1964, three months after
his death. Moreover, it helped to spur economic growth.
But Arthur Okun, a Kennedy economic adviser, stated in 2004, "The
Revenue Act of 1964 was aimed at the demand, rather than the supply,
side of the economy."
A demand side cut is a Keynesian economic theory that public
consumption spurs growth. Government temporarily places money in the
hands of consumers so that they will spend, thus, spurring the economy.
Conversely, supply-side economics focuses on business investment and
wealthy individuals to invest. This investment would, in theory, spur
economic growth for all Americans.
What about Ronald Reagan? Surely, the Gipper would be the answer to
my question. Reagan eloquently placed supply-side economics into the
mainstream of public discourse.
Reagan cut taxes in 1981. But according to
New York Times
columnist Paul Krugman, "The 1982 tax increase undid about a third of
the 1981 cut; as a share of GDP, the increase was substantially larger
than Mr. (Bill) Clinton's 1993 tax increase."
Despite the contemporary supply-side deification, Reagan raised taxes
several times during his eight years in the Oval Office. He placed
governing over his ideology. Though he may have favored supply-side
economics, Reagan's mixed bag of cutting and raising revenues make it
difficult to classify him as a strict supply-sider, which still leaves
us pondering the last time supply-side economics worked.
In 1988, then presidential candidate George H.W. Bush famously stated
at the Republican Convention, "Read my lips, no new taxes." But Bush,
who in 1980 called supply-side "voodoo economics," raised taxes as a way
to reduce the deficit created in the Reagan years.
Clinton raised taxes, and when he left office in 2001, it marked the last time America enjoyed a budget surplus.
President George W. Bush, who cut taxes in 2001 and 2003, may very
well be the only true supply-side commander-in-chief in the past 50
years. It was the second round of tax cuts passed in 2003 that
then-Treasury Secretary Paul O'Neil vigorously argued against, citing
the growing deficit.
Former Vice President Dick Cheney famously responded with, "You know
Paul, Reagan proved that deficits don't matter. We won the midterm
elections, this is our due."
I've always maintained that Cheney's deficit comment was more political than economic. But deficits matter economically.
The tax cuts enacted by Reagan or Bush did not have corresponding
spending cuts -- a recipe for deficits. But no one can deny that when
Clinton raised marginal tax rates, despite supply-siders' dissent, the
economy boomed.
Well, to quote Yogi Berra, it looks like déjà vu all over again. If
Congress allows the Bush-era tax cuts to expire at year's end,
supply-siders would argue it would be a job killer. But its record of
job creation is outpaced by its contribution to enhancing the deficit.
After more than a decade, any spur to the economy that the Bush-era tax cuts may have offered has long since passed.
Tax cuts as well as raising revenues are tools for governing. An overreliance on either is counterproductive.
So when has supply-side economics worked? The conjecture says it could; the data says it hasn't.
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