The Failure Of Republican Economic Policy
Republicans are enamored by "supply-side" economics. Frankly, I have to admit it's a very easy sell. Think about it. "Cutting tax rates stimulates the economy to such a high level that tax revenues increase." However, there are several problems with this theory. The first is Republicans have not implemented the other side of "supply-side economics" -- a corresponding cut in government spending. This has ballooned the federal debt to dangerous levels under their economic stewardship. In addition, the projected increase in government revenues really haven't materialized as projected. In other words, supply-side economics is a great marketing concept, but in reality is a poor national policy.
First, let's get some administrative issues out of the way. I will be using data from the Congressional Budget Office's historical data the Bureau of Economic Analysis, the St. Louis Federal Reserve and the National Bureau of Economic Research
Reagan was the first person to implement supply-side economic policy. According to the NBER, the primary expansion under Reagan's leadership occurred between November 1982 (the fourth quarter of 1982) and July 1990 (the third quarter of 1990). According to the BEA, the median quarterly percentage change in GDP over this period was 3.85 percent. That's a very good number.
But let's look deeper into the numbers. First, there was a mammoth explosion of government debt during this expansion. Here's a chart from the St. Louis Federal Reserve of total government debt outstanding.
In other words, this was financed growth; the U.S. borrowed heavily to achieve this growth rate. The primary reason for this explosion in debt is Reagan never balanced a budget; he continued to increase government spending. Here is a chart of federal revenues and expenditures from the St. Louis Federal Reserve. Notice first the scale on the right side of the chart is lower than the left side of the chart. Then notice that federal receipts were always lower than federal expenditures.
Let's now turn to receipts from personal income taxes. According to the Congressional Budget Office's historical budget data, tax receipts from individuals totaled $297 billion in 1982 and $466.9 billion in 1990. That's an increase of 57.20 percent. Over the same period of time the GDP price deflator increased from 63.866 to 82.053, or an increase of 28.476 percent. In other words, the increase of tax revenue from individuals really isn't that impressive after adjusting for inflation.
Let's stop here and make a few observations.
1.) The overall rate of growth was very good. A 3.85 percent median quarterly rate of GDP growth is a very good number.
2.) But the economy was grown on credit. And the rate of growth in total government debt was very high.
3.) The high growth rate in total government debt outstanding was caused by a continuing increase in government spending at a rate higher than government revenues.
4.) After adjusting for inflation, the growth in receipts in personal income taxes isn't that impressive.
Let's fast-forward to Bush II:
According to the National Bureau of Economic Research, the current expansion started in November 2001. Since then, the median rate of quarterly GDP growth in 2.7 percent and the average (mean) is 2.74 percent. While this isn't the most impressive median GDP growth number we could expect, it certainly isn't the worst either. This falls into the "fair" category.
But like Reagan, the expansion has been grown on credit. Reference the total government debt outstanding chart from above and notice the upward trajectory the chart takes. Here is a report from the Department of the Treasury of the total federal debt outstanding at the end of the last six federal fiscal years:
09/30/2006 8,506,973,899,215.23
09/30/2005 7,932,709,661,723.50
09/30/2004 7,379,052,696,330.32
09/30/2003 6,783,231,062,743.62
09/30/2002 6,228,235,965,597.16
09/30/2001 5,807,463,412,200.06
09/30/2000 5,674,178,209,886.86
The main problem is (again) that federal expenditures have far exceeded federal revenues. Here is the chart of federal revenues and receipts from above. Again notice the hard part of "supply-side" economics is cutting spending. While cutting taxes is easy, cutting spending is hard.
Let's look at tax revenues to see how they have responded. First, remember that Bush first cut taxes in 2001 and again in 2003. So let's go back to the first tax cut to see what happened from that point forward. According to the Congressional Budget Office's Historical Budget Data, total revenue from individual taxpayers was $994 billion in 2001 and $1.043 trillion in 2006. Since the fourth quarter of 2001, the GDP price deflator has increased from 103.1221 to 117.003 (this was the price deflator in the third quarter of 2006 when the federal government's fiscal year ends). This is an overall increase of 13.46 percent. In short, after adjusting for inflation, the overall increase in tax revenues from 2001 when the first tax cutting began is nothing to write home about.
Republican commentators usually start their analysis from 2003. First, note the tax revenues decreased from $994 billion in 2001 to $793.7 billion in 2003. This is hardly the result the Republicans predicted for the 2001 tax cuts. However tax revenues increased from $793.7 billion in the 2003 to 1.043.9 trillion in 2006. This is an increase of 31.52 percent. The GDP price deflator in the third quarter of 2003 was 106.616 and was 117.003 in the third quarter of 2006, or an increase of 9.74 percent. So using 2003 as the starting point we can see that total tax revenues have increased, but again not as impressively as Republican pundits like to think.
Notice we can draw the same conclusions for Bush II that we can for Reagan:
5.) The overall rate of growth was fair. A 2.7 percent median quarterly rate of GDP growth is decent, but not great..
6.) But the economy was grown on credit. And the rate of growth in total government debt was very high.
7.) The high growth rate in total government debt outstanding was caused by a continuing increase in government spending at a rate higher than government revenues.
8.) After adjusting for inflation, the growth in receipts in personal income taxes isn't that impressive.
First, let's note the growth in tax revenues from individuals after adjusting for inflation is good, but not the result the Republican commentators promised. In addition, look at the CBO historical budget tables for other expansion and you'll see tax revenues grew at similar or higher rates during economic expansions. This leads to the conclusion that growing individual tax revenues is as much a function of overall economic growth as it is of overall tax rates.
Secondly, while I would agree that cutting marginal tax rates from a high level to a lower level is probably going to be stimulate the economy, smaller cuts clearly aren't the amazing panacea the Republicans advertise them to be. As an example, I do think that Kennedy's cuts were clearly a cause for the 1960s economic expansion. But arguing that a small cut from 40 percent to 37 percent is the greatest thing since sliced bread is overselling the idea.
At this point we get into a discussion about the underlying policy about the appropriate use of government debt: when to use it, how much to use when we use it and when to pay it down. The bottom line is economic growth from the last two great supply-side experiments has been financed by using government debt. Neither Reagan nor Bush meaningfully cut government spending, largely because that's the hard part of supply-side economics. Both used government debt to finance the shortfalls between government spending and revenue. None of this debt has been paid-off, and probably won't be in our lifetime.
Regarding government debt, I would argue the following. Government debt should be used sparingly. In times of an economic slowdown deficit spending is warranted to mitigate the negative effect of a slowing economy. But when the economy is doing well, the government should work to pay-off its debt. This will allow the government to engage in deficit spending when the next recession happens. This overall idea is hard politically, which is why it's probably not done.
In essence, the U.S. is faced with a policy decision -- how to finance growth. Do we pay as we go, or pawn off the cost of growth on future generations? I would argue that paying as we go does not propose a radical or anti-growth situation because the 1990s demonstrated that increasing taxes on upper-income taxpayers dies not thwart growth. In addition, we balanced budgets in the 1990s and it did not thwart growth. In short, paying for growth as we go is the sane and sensible answer. And it's one the Democrats need to embrace.
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Governor Mario Cuomo once said that if cutting taxes would indeed generate more and more tax revenue through economic expansion, then why not do away with the entire tax system altogether ? Then, would'nt there be so much revenue and surplus that we wouldn't know what to do with it.
I don't think the supply siders have an answer to that qestion.
It works both ways.
If raising taxes raises more revenue then why not increase the tax rate to ninety-nine percent. The federal government would be rolling in money, right?
Good old Mario. He almost ran for president numerous times.
"If raising taxes raises more revenue then why not increase the tax rate to ninety-nine percent. The federal government would be rolling in money, right?"
If the spending was targeted efficiently, yes it would be.
The logic of less-taxes-more-revenue really breaks down at the point where it's used as an excuse for continuous future cutting, so eventually taxes are logically reduced to zero. It's a sham; I can't believe people ever fell for it, much less year after year, for decades.
It's just another way Republicans have gotten gullible supporters to support funneling our hard earned wealth to the ultrarich.
After World War II the top marginal rate WAS 90% and the economy boomed. It was 90% during the Eisenhower Administration and Ike has not been faulted for poor economic leadership. Kennedy's tax cuts brought the top marginal rate down to 70% and the economy boomed. Clinton and Bush Senior RAISED the top marginal rates from 28% to 39% and the economy boomed. Bush junior lowered the top marginal rate to 35% and 15% (for unearned income) and the economy is busted.
Think Bush is bad? Bush's adventures have damaged our army, our economy, our reputation and our solvency.
Reagan did all of the above plus altered the thinking of every administration that followed and the thinking of just enough Americans to keep his carnival side show of government alive. Reagan got away with it.
Bush will go down as the worst president we have ever had, but Reagan is the one who, if his sophomoric economic policies are not soon abandoned, will have destroyed America.
i agree. Reagan proved that Orwellian marketing and grand-standing would fool everyone. Reagan a fiscal conservative? That is as laughable as the myth that his militarism defeated the Soviet Union. The acceptance of those absolutely ridiculous lies by the conservative base make the last 7 years like merely the next logical step and not some great leap.
What a sad commentary on the stupidity of our population. It is also a sad commentary on the devious cynicism of MIC shills like Newt Gingrich. They know these are blatant lies.
That is life here on the corporate Animal Farm.
I CAUGHT ON TO THEIR SCAM ABOUT GROWTH USING BORROWED MONEY WHEN i HEAD THE CITI BANK IT TOO LARGE TO FAIL BECAUSE IT WOULD SEND THE U.S. INTO A DEPRESSION.
I was totally insulted the any company could be allowed to issue so much debt by the REGEAN Adminstration the it could crash our ecomonmy.
I lost all faith in the U.S. Government and the Republican Party. I am now an Independent.
Thanks for the analysis of the GDP to deficit relationship. I had always thought that it was lunacy for the Government to borrow its way to prosperity. I noticed today that with the prospects of a Fed rate cut to prop up the economy the dollar went into a tail spin. With fiscal policy already in high gear and deficits out of control, the prospect of borrowing and spending our way out seems even more remote. The Fed has only a limited number of bullets before they're shooting blanks. And, each shot puts another hole in the dollar. Some of the financial gurus even asked what will happen if the rate cut doesn't work, if it fails to stabilize the credit markets or stimulate the economy? My question is, what happens when it becomes apparent to our Foreign lenders that the United States is bankrupt and its economy is tapped out and out of gas? Who's going to bankroll Bush and his guns and tax cuts economy? What happens if the flight to quality bypasses Treasury Notes and goes elsewhere?
the foreign debt holders have long known. the question is, as Buffet always likes to ask, what are the alternatives. i am sure that they, and our multi-nationals are scrambling to figure that out.
some go to Dubai for tax and legal shields for war profits and war crimes. all are trying to develop china and india rapidly into consumer economies.
in short they are all trying to find a way out. gold. do exactly what they are doing and put all of your savings into gold. if you don't they will be wiped out as the US and the other major currencies undergo a hyper-inflation. oh, and if you can borrow and keep up with inflation, you could find yourself with no debt and a lot of assets paid for with nothing more than bernanke's printing press and helicopter plunge protection squadrons.
good night and good luck.
Like I've said, if you can lift your safety deposit box, you don't have enough gold. Coincidentally, I made a deposit to the box yesterday and the lady in charge of the vault room couldn't pull my box out. She said she was afraid the handle would come off, heh, heh, heh.
Mr. Stewart: Could you write an expose' of the shift in taxes away from corporations, (who paid 54% of the taxes in 1945, a War year) and now pay, I am told, less than 7% of the total taxes. Also, the death tax, which once was known as "inheritance tax" until the "1984" boys got hold of it? And residual income taxes which were once taxed like a luxury tax. Also, just how much of our manufacturing base and accompanying jobs have been lost since the Age of Reagan. GDP increases are based upon quick sand if they aren't derived from human, technological and manufacturing energy. GDP derived from borrowed money and the selling and outsourcing of our technology and manufacturing is a receipe for bankruptcy and national servitude.
Your research into who pay and do not pay taxes and bear the burden of this Republic may bring into question the entire era of supply side economics when our American Organization went from growing and developing to atrophying and declining. Now we face financial and economic collapse. And the interest rate, money supply and happy talk and other sleight of hand tools have all been exhausted. Nothing is left except to face the grim laws of economics.
well said.
High oil prices is also an effect of a weak dollar, costing Americans a lot of green but not affecting other foreign currency-based countries. I's because oil is based in dollars and with a weak dollar we pay more but other countries don't. Who are the beneficiaries? Who are the beneficiaries of a belligerent foreign policy in the Middle East (geopolitical risk)?
Interest on the debt and military expenditures assure that the debt will continue to grow as will inflation.
To momentarily bail out debt-ridden corporations, the Fed is under enormous pressure to lower its prime rate so that more credit can be extended. the Fed knows that by printing more paper money the dollar will fall and inflation will soar.
To give itself cover for this irresponsible action the government and the business community must assert (lie) that the inflation rate is stabile. The middle class knows that inflation has taken a quantum leap in the last year.
If the Fed does yield to that pressure, a system-end inflation will soon follow .
"In short, paying for growth as we go is the sane and sensible answer."
It's called Clintonomics.
Well, at least those days of peace, prosperity, and a budget surplus are behind us.
Just imagine: Gore would be finishing his second term had he not tried so hard to distance himself from Mr. Bill. And, oh yes, we wouldn't be shipping Americans home from Iraq in coffins 3/day.
Don't let Clinton completely off the hook economically.
NAFTA and GATT are nothing to be proud of.
NAFTA and GATT were REGEANS things and with a Republican Congress what else was Clinton to do?
Spending cuts aren't in the GOP vocabulary anymore, and certainly not on the menu at Chez Georges, either. The populi is going to have to vox a little louder to push for reform in that area, I think...
read the charts above. When he cut taxes he increased spending at the same time.
Supply side works for those that say it does.
1. Cut taxes on rich folks
2. Borrow to pay the bills
3. Increase gov't spending, directing it to rich folks.
4. Let the working class pay the interest on the debt, receive no benefit, and wonder why milk is $5.00/gallon.
Remember REGEAN buying up a lot of the old dairy cattle from Dairy Producers who were just getting by and wanted to close thier business.
Regean authorized the payment of TOP DOLLAR $1.89 PER POUND for old cows which at market normally sold for 0.39 to 0.49 cents a pound.
Farmers all over were thinning out there herds of old cows and trading young heifer for old with friend and neighbors.
Regean got a $ 5 Million Dollar home in L A for FREE after he left office.
No mystery why conservatives favor supply-side
economics: It's their side that's being supplied. "Screw 'em. We got ours!"
You analysis is demonstrates one reason why Reagan is among the five worst presidents of all time.
Before Reagan, conservatives believed in lower taxes, but they also understood that it was irresponsible to cut taxes without also cutting spending. They knew it was politically painful to cut spending, but they were responsible enough to do so in exchange for tax cuts. Honorable and fair.
Similarly, the Democrats were responsible enough to take the political heat for raising taxes to pay for spending programs they believed in. Again honorable and fair.
That gave Americans a fair choice between two fiscally responsible positions.
Then came Reagan and the "free lunch" pseudo-conservatism. Reagan shattered the established fiscal responsibility. He cheated--the Republican party became the RepubliCON party. They conned Americans into believing they could get tax cuts with no pain and only gain. The RepubliCONs have been riding this lie to the present. Bush the Lesser is the latest abuser.
What Americans will find out is that the pain is only delayed and when it hits it will be far worse than they could have imagined. That's one of the many reasons Reagan was one of the five worst presidents in US history.
Reagan was clearly the worst, the most damaging to our collective ability to reason. Without him, there never would have been W.
Cut taxes! Huzzah! Cut taxes! But woah there... I still want my services, you better not take those away! Don't tell me to take care of myself. Cradle to grave, please! And find the money SOMEWHERE!
Supply-side is, and has always been, an outright lie. If there was any chance it was true, we'd all be living in the lap of luxury right now. Instead, we've been supply-sided almost out of existence.
The test? Look at all the idle "productive capacity" out there. If supply-side worked, it wouldn't be idle, would it?
Thank you for a great article!
It seems to me though (understand I am not an economist) that the results were significantly less than "nothing to write home about" Especially if you compare the TRUER 2001 figure of $994 Billion to the 1,043.9 Trillion in 2006 - as my calculations show that this is only a .0502% increase in revenue from taxes. I personally call this abyssmal. And in my mind shows that most of the $ put in the pockets of the well to do+ portion of the population went abroad!
Abroad indeed. You don't honestly plan on remaining here do you?
This is not news. We know the GOP has been lying from the get go. To late to do anything about it anyway now.
Says Law: supply creates its own demand.
ergo the baseball movie in the corn field. It's the same thinking that provides you democracy in Iraq. Have a vote and a freely functioning, infrastructure complete, free economy for capitalist ventures to indebt the proletariat.
Supply side voo doo economics brought to you by the Hoover Institute. wow
President Bush (41) got it right when he called it voodoo economics. Growing the economy by continually increasing debt is as absurd as continuing to increase your household budget by refinancing your home every year. At some point the 'call' is made and thebooks have to be balanced.
When we were borrowing our own money (primarily Social Security) in house adjustments (lowering SS benefits) could be employed. But now our national debt is being carried by outsiders (primarily China).
Our choses may be narrowed down to devaluing the dollar (adjusting the yan) or recalling more barbies.
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