What You Should Think About Supply-Side Economics

“Superfluous wealth can buy superfluities only.”

–Henry David Thoreau

In addition to his actual accomplishments, Ronald Reagan is often given full credit for events that were the result of his actions to little or no degree. His policy of diplomatic engagement with the Soviet Union was not only sensible, but it also laid the foundation for the Strategic Defense Initiative — a tremendously costly bluff that was one of many influences contributing to the U.S.S.R.’s collapse. Alas, it and other Reagan policies have been transformed into wellsprings of misinformation far beyond bluster about space-based missile defenses.

Perhaps the most devastating long term consequence of Ronald Reagan’s political canonization has been the widespread belief that tax cuts have miraculous powers. No doubt, given fiscally responsible practices, all other things being equal, lighter taxes are good for an economy. Supply-side economics goes far beyond this reasonable proposition. Its most zealous advocates hold that tax cuts are good for virtually any economic situation. How convenient it would be if reality were so simple that effective national economic stewardship was simply a matter of constantly beating the same political drum.

The present administration has been especially effective at convincing supporters, and perhaps even themselves, that reducing tax rates while raising spending still amounts to a tax cut. Milton Friedman, possibly the greatest libertarian economic thinker ever, disputed this view. He was part of an overwhelming consensus of experts able to see that reducing taxes without reducing spending is merely a tax deferment. The obligation to repay borrowed funds can only grow until it is fulfilled (unless the debtor nation invites collapse by defaulting.)

His public statements suggest that the sitting President is so confident in the power of tax cuts to produce growth that he wishes he could have collected even less revenue to fund his enormous spending increases. Income taxes, estate taxes, capital gains taxes, import tariffs, fuel taxes, and even sin taxes are all areas where he has pushed for reductions and/or opposed increases. In his own words from last month, “I think I got a B in Econ 101. I got an A, however, in keeping taxes low.”

In fact, one peculiar practice apparently encouraged by his administration is non-enforcement of energy company obligations to pay royalties on oil or coal extracted from public land. By law, businesses conducting profitable drilling or mining operations on land that is owned by the federal government must compensate the government with a portion of the revenue from sales of those commodities. Behind income taxes, this is the second largest source of funding for the federal government. It has plunged during this century as government auditors, not to mention the Justice Department, have been discouraged from doing their duty to see to it that private operators do not simply take non-renewable resources from federal lands for free.

What possible rationale could any leader have for being so aggressive about cutting back on taxation while simultaneously embarking on gargantuan spending increases? This goes back to the gospel of supply-side economics. Less taxation of businesses and wealthy individuals leads to more availability of funding for new investment. Increased business investment leads to more demand for work. The rich get to keep more of their income even as it rises due to better returns on investment in more productive businesses. As for everyone else, it is thought wealth “trickles down” as the demand for more work increases wages and decreases unemployment along with underemployment.

This sort of thinking has a great deal of appeal to individuals inclined to believe economics is a simple and straightforward discipline. Almost none of those individuals are credible economists. However, many of them are media personalities inclined to pass themselves off as economically astute. Their false credibility couples with the false oversimplification of supply-side doctrines to the point where millions of Americans are certain “tax cuts create growth” is a truism applicable to virtually any economic circumstance.

Personally, I believe there is a little kernel of truth in Reaganomics. At the start of 1980, it was theoretically possible to work in a jurisdiction where federal, state, and local income taxes collectively topped 90% on extraordinarily high incomes. The theory holds that this discouraged economic productivity. Little evidence supports that theory, but it is clear that high marginal rates of the 70s did promote both legal and illegal methods of evading taxation. Perhaps it did this less so than a culture of institutionalized avarice does in the early 21st century, but it is fair to argue that some of Reagan’s tax cuts actually did have a positive effect on the American economy.

To contend that the entire range of those tax cuts were helpful, never mind the additional cuts George W. Bush has made in top marginal rates, one must blindly accept that there are no flaws in supply-side economic thinking. If the United States existed in complete economic isolation, stimulating business investment would indeed be a good thing for American workers at any income level. The United States must exist in the context of a larger world. Stimulating business investment may still make the rich richer, but to today’s Wall Street this chiefly involves exporting jobs to foreign nations. Be it lower standards of living, lax environmental standards, government suppression of labor organization, or a number of other causes; increases in activity by American investors seem fund additional business activity any place but America.

A wise leader would make use of tariffs and even trade sanctions in efforts to level the global playing field. Serious economists would largely agree that import taxes produce economic drag. Yet capital flight is also bad for an economy shedding its own supply of investment funds. Whether it is ignorance or willful denial, it seems the powers that be are unwilling to recognize there is any disadvantage to relentless pushes for free trade. Trade barriers, and much more importantly the threat of raising trade barriers, are genuinely useful methods of motivating trading partners to implement workplace safety standards, lift legal barriers to unionization, practice sound environmental protection, etc. However, this tactic never yields results when an ideological zealot telegraphs to the entire world that no such barriers would be raised for economic purposes.

However, “voodoo economics” is profoundly misguided for reasons that go beyond the fact that the United States has trading partners. It also fits into the warped ideology holding that captains of industry are the only people who actually matter in a national economy. Ordinary working families in the United States today have essentially the same purchasing power as ordinary working families from three decades earlier. By contrast, already wealthy citizens have enjoyed almost all the impressive national growth achieved during this time. Looking purely at the quantities, it would seem that a “trickle down” approach actually discourages the trickling down of wealth.

When it comes to stimulating growth, astute leaders face a challenge not unlike treating human illness. A national economy is composed of many complex systems all in constant interaction. Indicators and studies can shed light on what is actually happening, but even the most comprehensive efforts still involve broad simplifications. The supply-side approach is akin to treating every ailment with bloodletting. A more sophisticated approach makes it possible to craft stimulus that is targeted to strengthen troubled sectors or economic demographics.

In the context of a serious shortage of capital supply — the aftermath of a Wall Street crash, epidemic unemployment, et al. — measures that actually would increase domestic investment could prove helpful. High end tax cuts could be part of that response. However, if rates of taxation on large personal incomes and capital gains are already responding to a protracted binge of cuts, returns on further cuts will be much diminished. So much revenue has been forfeited, and so much debt accumulated, merely to make our nation much less poised to deal with a real capital crisis.

An honest overview of the American economy reveals that the trouble spots are anywhere but mansions and board rooms. As more of the middle class slips away due to causes like excessive consumer debt and runaway medical inflation, our economy will struggle. As more of the working poor fall from productivity due to causes like labor outsourcing and reluctance to deal with the expense of basic health maintenance, our economy will struggle. There are public policy solutions to these and similar problems. To find them, one must first shed ideological blinders like supply-side economics and focus the details of what is real in our national economy.


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