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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Today that situation nor the economic environment doesn't exist. Believing that you can simply MIMIC the same actions of a past successful president and achieve the same results is like watching Neil Armstrong walk off the plank in outer space and think you can do the same thing off your 20 story Penthouse Pad! The results will be significantly unfavorable.
This economic cycle is much more like (and probably much worse) the END OF CARTER than it is the middle of Clinton's 8 and will need a change of thought process to bring this current cycle to an end. If not, 4 more years of Keynesian economists will be tough for everyone regardless of your TAX BRACKET!
http://www.motherjones.com/politics/2011/02/reagan-anniversary-david-stockman
"His favorite device: a Tobin tax, named after Nobel Prize-winning economist James Tobin, which would be levied on financial transactions. "We have a massive casino that is doing nothing but churning transactions by the millisecond, robots trading with each other, as a result of the Fed juicing the system continuously with overnight money that's free," Stockman says. "There's no productive value for Main Street or the real US economy." Such a tax could generate $100 billion annually (PDF). Stockman also fancies a version of Europe's value-added tax on consumption. "High taxes aren't good," he says. "But at the end of the day, you have to pay your bills as a government.""
How interesting, given the start of the Great Recession in Jan' '07. There were other contributing factors here, but it is the "true supply-side" strategy that lead to our economic collapse.