The death of supply-side economics
One of the original supply-siders, Bruce Bartlett, explains in a brilliant op-ed why the ideas that worked so well in the early 1980’s are irrelevant today. Bartlett is promoting a new book, The New American Economy.
I continue to believe that what the supply-siders did was good for the economy, good for the country and good for the advancement of economic science. The best economists in the country were pretty clueless about our economic problems during the Carter years. It was widely asserted that the money supply had no meaningful effect on inflation, that marginal tax rates had no incentive effects, and that it would take decades or another Great Depression to break the back of inflation.
As all economists now know, these ideas were wrong. All economists today accept the importance of the money supply–perhaps too much; during the recent crisis many asserted that fiscal stimulus was unnecessary because an increase in the money supply was the only thing necessary to restore growth. (How this would have been accomplished when interest rates were close to zero was never explained.) All economists now accept the importance of marginal tax rates to economic decisionmaking, and organizations like the National Bureau of Economic Research publish vast numbers of papers on this topic.
During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts–the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.
These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a “tax cut.”
Bartlett exposes the caricature that has taken over conservative economic thinking, the slavish devotion to dogma that makes it impossible to consider the circumstances of our new reality. Think about it. Talk to a conservative about economic policy, and the answer, regardless of the circumstances, is usually the same – spending bad, tax cuts good. I can teach a three-year-old to repeat that.
Bartlett goes on to explain why massive spending was necessary with the economic collapse we faced last year, and the obscenely stupid response of many conservatives who suggested addressing the problem with more tax cuts.
Bartlett was an adviser to Jack Kemp and helped write the Reagan tax cuts. This is a must-read for anyone who wants to understand the history of supply-side economics and why one of its chief architects is arguing that it doesn’t apply today.
I have a host of questions. I ready the entire link.
If, in fact, this issue is a money supply (or lack of money supply) issue, and in this situation (as opposed to the 70’s) what is needed is the spark of monetary spending from the government, is it prudent to be discussing massive health care reform that includes adding 20-40 million people to the system during our current “crisis,” while we’re fighting 2 wars?
Also, is it prudent to be printing and spending money we do not have? Did programs like “cash for clunkers” just cannibalize future car sales and did it hurt industries that depend on car repairs (as one example)?
The statement:
“These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit?”
seems silly. I find it hard to believe if corporations get tax cuts or credits they don’t reinvest in their companies fueling growth of their companies (and value for their share holders) resulting in the hiring more workers and driving the economy.
In Bruce Bartlett’s article he fully admits some economists do not agree with TARP and all this government spending. Bruce is one economists point of view, and in spite of being able to “teach a 3 year old to repeat” anything, it doesn’t diminish the idea that lower taxes are ultimately better than any huge government spending program.
Oh, and I forgot ….
Big government bad, small government good…grunt…
Nick – you bring up a lot of fair questions, and certainly there is plenty of room for debate.
Bartlett’s main point is that everyone, liberals and conservatives, need to think about policy in the context of the times. We may still disagree, but too many conservatives reflexively go back to what worked in 1980 when addressing today’s problems which are very different.
Spending by the government is critical in an environment like today when demand has collapsed. That’s his main point. Long term, your philosophy of low taxes and reduced spending is understandable and that will of course be debated by the parties.
Liberals in the 90’s had to realize that some of their cherished ideas from the 60’s no longer applied to the current situation, or at least had to be adjusted. Bartlett makes a good case that the tax cut argument doesn’t apply today like it did 30 years ago when taxes were much higher and economists didn’t understand the impact of the money supply.
K.I.S.S. Keep it simple stupid. No truer words were spoken than these. Any bureaucracy if it is to succeed needs to recognize that a finite amount of currency should be printed and therefore the ratio of expediture to income must be weighted toward the income side. Once this is adhered to then comes the questions of top down or bottom up, etc. Spending by a government that has engineered a collapse in demand is just as deleterious to success of an economy as out of control rights to big corporations. It really seems to me that the author, the commentator on said article and the responses therein are all engaging in the wrong conversation. They are having a tug of war in the same direction of insanity. The conversation should be about the conditions for which commerce is dictated to evolve in. Having the two players run an economy (big government and big business)is the core of the rotten apple. While we have big government making tough regulations to punish business all the while making it only possible for big corporations to compete is the environment for the people to be left out of the equation and their demand is left unmet and unmeasured. The same government that is playing to the people by rattling the sabres in front of ceos is making incorporating into these behemoths still very advantageous. Enough is enough…I leave you with this thought within the construct of this discussion: When is the last time you asked for money or a job from a poor man?
Solieman – I’m not sure what you’re advocating, but if you’re suggesting the our government is too beholden to big business and large government programs I agree. That wasn’t the subject of the post, but it’s a good point.
The U.S. is probably the most friendly nation in the world to small business and entrepreneurship. That’s been our biggest advantage over Europe, and it will serve us well against places like China where they have to ban Facebook and Twitter because the fear their own people. That will hold them back.
That said, there are many things we should be doing to help small business, and our Congress is bought and sold every day by large corporate interests.
I’m curious as to what specific policy proposals you have in mind.
Gerardo, I think what my brother Solieman is trying to convey is simple. Despite so-called paradigmatic shifts in the U.S. socio-political landscape, a singular truth emerges unscathed: a melding of big government and big business is present and relentlessly eroding the value of the consumer’s dollar. More specifically, those suffering from Big and Big’s callous approach to social enigeering via limitless liquidity at the expense of the taxpayers, falls disproportionately upon the already bowed back of the middle-class. While the left and right take their respective turns twisting the valve on the money spigot, the vast in-between of this country foots the bill for their malfeasance. Or at least I think that’s what Solieman was saying.
I’m not sure I follow all this but I would only add one point that might help. There appears to be less balance and reason to America’s economic philosophy than at any other time in her history.
The ultra wealthy control America, and they have an army of politicians who serve only their needs, having crafted a clever message of “less government” in order to ply obedience from the masses, even if the laws they pass go directly counter to the masses interest.
Short term profit rules, even if one of the primary means of driving up short term profits has been outsourcing millions of good jobs and skills to communists in China who enslave their people, and have a long term strategy to enslave us.
Any short term sacrifice by our countries most wealthy is completely unacceptable. That further drives jobs to communist China because the rich won’t accept that the average American makes a decent wage because that means less profits. The rich don’t care that the Chinese communists offer unbelievable low costs because they abuse their workers.
I could go on and on but in America if you try to argue these points, nobody will listen because the only source of legitimacy in the American culture, is our Lord and God, the dollar bill.
Try to legitimise the union of people who seek a certain quality of life as a source of power, and you get laughed out of the room.
We get what we wish for and in the end, what we will get is our grandchildren speaking chinese and working for a bowl of soup every day.
“the vast in-between of this country foots the bill for their malfeasance”
This is EXACTLY true and one of the best nuggets ever posted on NCB. The question is how long can this vast in-between continue to support our system. Seems to me, not very much longer.
I’ll just add, not only is Big Government and Big Business (meaning huge world wide corporations) “bowing the back of the middle class,” our government system of 2 party rule has really become 1 party rule driven by corruption and self interest of the people running the show. The Democrats and Republicans (in their current form) are both taking us to the same place.
Sigh. At times, I can’t help but chuckle when I read through these posts. The irony lays in the inferrence that every single poster is seeking the same result: a prosperous America, with the “how-to” being the rub. Which leads to Nick’s point of, “our government system of 2 party rule has really become 1 party rule driven by corruption and self interest of the people running the show.” Well put, and seemingly consistent with Bartlett’s proposition of “Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending.”
Upon the election of Obama and a strong Democratic majority in the House and Senate, we are witnessing the next generational wave of the above-mentioned propositions forwarded by Nick and Bartlett. See you later Haliburton and welcome to the trough of largesse, Acorn. Just examples of course, but unfortunately for America, I suspect that continuing the same old tried line will ultimately lead to JP’s point: “We get what we wish for and in the end, what we will get is our grandchildren speaking chinese and working for a bowl of soup every day.”
When is the last time you asked yourself what you want in a car. Shouldn’t we be in automatic -drive hover cars by now? It has been over 100 years since the automobile was invented. How far has many other inventions come? Betamax anyone? But subsidized big govcorps just churn out the same shat. We look at what they have available, let them tell us we want, and then just accept it and buy. Yes the infrastructure and jobs and greater good UAW blah blah…How happy are Americans with car companies about now? Who shall they complain to? What choice do they have? Kinda like the discussion we currently are having in regards to this economy. JP is saying the inefficiency of big business sloths need a boost of good government innovation through regulation and governmental growth…Wow haven’t heard that enough since the original think tankers went and marveled at Vlad Lenin and ol’ boy Il dueche! It is a tired argument, that is about 70 years more tired then voodoo economics. It is more complicated then “capitalism failed!” and tax cuts or no tax cuts. We have not seen capitalism since the Wilson administration, yet we are still living with the dumbass nanny state elitist progressive junk that big business loves and we are smothered by. We were blessed with the Federal Reserve among other socioeconomic engineering schemers in this era and we want to reinvent that wheel? Are we retarded? Have we all drank the Kool-Aid? We can’t come up with something better than warmed over Karl Marx and overmarinated Reaganomics? In summation, I am glad we’ve recently changed the law for carseat transportation of children to extend the time children need to be in carseats; my graco stock has been lagging!–just trying to keep fresh folks
Oh shit, I think i just agreed with Nick on his last post. Time to get a drink
JP-
Sounds like you’re wising up– you’re a conservative at heart– you have just been seduced by the lunacy of liberalism