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Supply side economics is an economics theory built around the idea that by giving the rich enough money, tax breaks and deregulation, they will be freed from the constraints that allegedly prevent them from expanding their businesses and hiring more people. In turn, by expanding their businesses and employee pools, they will expand and fortify the nation's economic strength. According to John Kenneth Galbraith, the theory dates back to the 1890s when it was called horse and sparrow theory -- i.e., if you feed horses enough oats, it will pass through their digestive systems and their droppings will provide enough leftover oats to feed the sparrows.
During the 1980 Presidential campaign, supply side economics — also called "trickle down" economics by its supporters, or "voodoo" economics by its detractors, and sometimes "Reaganomics" by those wishing to deify Lord Ronald the Senile — was reintroduced to the American political debate and, to the great surprise (not to mention horror) of many responsible economists, was actually implemented by the Reagan Administration. This particular incarnation was based on the Laffer curves, and excites fiscal conservatives more than sex.
Reaganomics became a popular term in the United States for supply side economics, due to the fact that Ronald Reagan was the first president in US history to adopt the idea and (try to) put it into action.
The basic idea is that when taxes are too high, people refuse to engage in economic activity. If taxed activity drops too low, then there are fewer transactions to collect tax from. For supply siders, this mechanism constitutes the primary determinant of economic growth. They assume that lower taxes can actually increase government revenues in the long run, because the surplus income from an expanding economy is supposed to make up for the immediate effects of tax cuts.
This theory is sound only if the high point of the arc can be properly found. This curve is referred to as the "Laffer Curve," named for the economist who scrawled it on a napkin. When John F. Kennedy and Ronald Reagan cut taxes, government revenue went up. However, under President George W. Bush taxes were once more cut and revenues dropped throughout Bush's first term, showing that US taxes were not on the far end of the Laffer curve. From 2000 to 2007, revenues from the corporate income tax almost doubled. It could be argued this was due to the cut in both the dividend and capital gains tax rates, but as with many analyses of economic history this claim cannot be conclusively proven or disproven. In the contrary case, President Bill Clinton slightly raised marginal tax rates, the economy boomed, and the budget for the first time in memory showed a surplus.
Description of the scheme
Laffer curves show that, under certain circumstances, a government's tax revenue can actually be increased by reducing tax rates. Often, as taxes increase, they may reduce income-producing activities. For example, high tax on a commodity item may increase its price so that demand drops thereby yielding less tax revenue. Conversely, lowering taxes can actually increase tax revenue in the long term - the taxed goods become more favourable to buy. In the case of income tax, it is assumed that a high tax rate means less money available for purchases or businesses and so the economy suffers - and so a low tax rate frees up more money to drive the economy. An alternative route is that high taxes divert commerce from legitimate (and taxable) endeavours to illegitimate black markets (see below). Part of this falls under tenets called Say's Law.
"Laff" is a cartoonish respelling of "laugh". For example, "As implemented, the Reaganomic twist on Laffer curves left the wealthy laffing all the way to the bank."
Laffer as implemented by Reaganomics
The problem with the Republican implementation of Reaganomics was that it reduced taxes on the wealthy, shifting more of the tax load onto the overburdened middle class, a perversion of the economic theories of the early French economist Jean-Louis Say. One of the main arguments used to justify this upward redistribution of wealth was "When was the last time a poor man gave you a job?"
Trickle-down theory was in fact an economic theory dredged up from the dustbin of history originally called "horse-and-sparrow theory." It was postulated thusly: "If you feed the horse enough oats, some will pass through to the road for the sparrows." Translation: "Eat Shit" Economics. Horse-and-sparrow was in practice during the 1890s, a decade that saw two banking crises. It then made a comeback in the 1920s under Harding and Coolidge under the name "Mellonomics," named after eminent banker and Treasury Secretary Andrew Mellon. As in the 1980s, Mellonomics created a massive wealth disparity, but far worse. Everyone now knows what the Harding/Coolidge policies ultimately resulted in. This makes the trickle-down theory something like the creationism of economics. Dress it up in the cheap tuxedo of Mellonomics and then Reaganomics (much like creationism became "intelligent design") and it becomes a "revolutionary" new theory. William Jennings Bryan remarked in his "Cross of Gold" speech:
“”There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.
It's also interesting to note that when "horse-and-sparrow" and "Mellonomics" were employed, government spending didn't change very much and each decade saw some of the most massive economic crises in history. When "Reaganomics" was employed, government spending shot up dramatically (Reagan had to pay for all those military toys like SDI) and the Fed loosened by dropping interest rates from record highs of 20+%, which it had previously enacted to stave off inflation. This was done in tandem with the tax cuts. In contrast to the earlier fiascoes, the end of the Reagan administration saw the crash of 1987 and the S&L crisis, but these were nothing like the panics in the 1890s or the Crash of '29 (obviously). Reagan-ites don't like to talk about spending or the Fed, though.
To apply the theory in the real world, first one must determine if conditions are appropriate. In general, the conditions are appropriate only if a large black market exists, that is funneling off much of what would otherwise be legitimate economic activity. If they are, the next step is to simultaneously reduce tax rates and cut spending so as to keep the overall budget in a similar condition of balance as it was. This brings on a (hopefully) brief period of austerity, since to cut spending, various government programs must be cut sharply. The ensuing economic activity due to the reduced tax rates (spurring both investment and consumer spending) will then in (hopefully) short order return to the government coffers greater revenues than would have been projected under the old tax rates. The populace that survives the austerity phase will then acclaim their leadership to be geniuses.
According to the theories of Jean-Baptiste Say, tax increases result in a short-term bump of tax revenues, but a long-term decline. Since politicians are uneducated in economic theory, they tend to keep increasing taxes, feeding upon the short term bump.
Conversely, if taxes are lowered, revenues will increase over time. Say's "light touch" theory was intended to apply to the full economy, and not simply the wealthiest citizens, a situation that not only widened the disparity between rich and poor, but set in place conditions ripe for revolution.
As a Reagan staffer once described it, tax breaks for the poor reward them for poor financial habits. "If you give tax cuts to the poor, they only spend it on food and shelter."
Instead, according to Reaganomics, if you feed the wealthy increasing amounts, they brush more crumbs off the table, feeding those below them. Hence, the term trickle-down economics.
Attempts to apply scheme and results
In many of the post-Communist regimes, a world drop in oil prices gave the appearance that trickle-down economics worked. Ukraine in particular increased tax revenue when the taxes were lowered, as it brought many economic activities out of the black market and into the legitimate economy.
Attempts to apply half the scheme and results
Ronald Reagan ran for president of the United States in 1980 partly on a folksy version of what is now known as "supply side economics" and partly as your friendly grandfather, and subsequently won the election. He brought to the White House budget director David Stockman, who helped Reagan engineer the part of the scheme he wanted, tax cuts for the wealthy. Reagan then didn't bother to cut spending (and actually increased military spending), partly due to lack of political capital, and partly due to mendacity. Mr. Stockman quit in disgust. Reagan proceeded to run up massive deficits during his two terms: even accounting for the robust economic growth of the 1980s, the gross federal debt as a percentage of GDP increased from 32,5% in 1981 to 53,1% in 1989. In relative terms, this constitutes the largest increase in government debt since World War II, and the second-largest peacetime increase ever, a close second to the years of the Great Depression. Note that Saint Ronnie neither had to wrestle down fascism nor deal with a devastating economic meltdown.
The trickle down in action
The results of the massive tax cuts "trickled down" to the state and local level, as federal funding for many projects dried up. This threw most American state and local governments into fiscal crises cyclically, forcing them to raise local taxes in order to provide services people actually wanted– or needed.
The religion takes root
President George W Bush wanted Americans to read his lips, so help him God.
Bush cut taxes for the rich, eliminated the inheritance tax for wealthy people too stupid to consult with a financial planner, gave away bribes called tax incentive packages, sought and got an $800 billion bailout package (which he called $700 billion bailout), and paid for it all with a Chinese credit card.
During this same period, the dollar slipped against world markets, losing so much ground that some nations chose to no longer peg their currencies to the US dollar. Once at par with the euro, the US dollar lost a third of its value. When Bush junior entered office, the Canadian dollar was worth about 65¢. By January 2008, the Canadian dollar exceeded the value of the US dollar for the first time since 1976, although it has since receded to about 90¢, due in part to governmental intervention, and falling oil prices.
It's also worth noting that N. Gregory Mankiw, who was at one point the chair of the president's Council of Economic Advisers, actually lists supply-siders in his introductory economics textbook under a section entitled "Charlatans and Cranks."
Voodoo economics reloaded
Never ones to be discouraged by being repeatedly and conclusively proven wrong, the Republicans made supply-side economics a centerpiece of their 2010 election manifesto Pledge to America. Once the Republicans work their magic, Americans would again be allowed to have their cake and eat it: all of the Bush tax cuts set to expire at the end of 2010 would be extended, new ones would be enacted, and yet the federal deficit would be reduced through spending cuts. These would, of course, not target defense spending or popular entitlement and welfare programs, because that would be political suicide. Where exactly the necessary reductions in spending should come from is intentionally left vague. Since eliminating the federal deficit while maintaining low taxation levels would necessitate the abolishment of all government functions other than those that should explicitly not be touched, it is much more likely that Republicans will conveniently ignore the deficit once they are in power again.
David Stockman, one of the architects of Reaganomics, became critical of his own project after the Reagan administration. He recently reappeared to talk about his deconversion from the Church of Tax Cuts and to chastise the current GOP for its support in extending the Bush tax cuts.
During Bill Clinton's two terms in office, taxes were raised slightly, the budget balanced, and the country's longest ever peacetime expansion occurred. The subsequent recession was arguably mild.
Supply side economics is a valid economic theory, and there is a place for it in a modern economy. However, as with any complex matter, it is not the only solution to an economic problem, and its counterpart demand side economics should be employed to deal with short run economic problems.
Problems with terminology
Supply-side is a whipping boy for moonbats in large part due to the loose way in which the term is used. In the broadest sense, supply-side can simply refer to a school of economics that puts more emphasis on supply than demand or a certain area of economics that concentrates on supply. This is a more esoteric and academic use of the term. In a stricter sense, the term applies to the group of politicos surrounding figures like Stockman, Wanniski, Bartlett, etc. (not all of the supply-siders were actual economists) that rose to prominence through their influence on Reagan's economic policies. Finally, the term is used in the strictest sense simply to mean "tax-cuts for the rich," which the "trickle-down" pejorative is often applied to. As conservative economist Thomas Sowell writes:
“”There has never been any school of economists who believed in a trickle down theory. No such theory can be found in even the most voluminous and learned books on the history of economics. It is a straw man.
However, as noted above, "tax cuts for the rich" may be a straw man when it comes to real economics, but the idea has simply translated into "always cut top tax rates" for the modern Republican party. Even Milton Friedman's work did not suggest that simply cutting taxes for the rich would be a panacea. In simple terms, his famous "permanent income hypothesis" states that the average person's consumption was based more on long-term estimates of their income, implying that the rich would be more likely to just squirrel away their new tax breaks rather than immediately spend. There is a good body of evidence supporting the notion that the rich will tend to save more. Thus, the notions of "trickle-down" as a cure-all are far more based in political rhetoric than actual economics.
"Reaganomics worked. This is the crown jewel in Rush’s crown of bullshit. This is the big lie – the one he desperately needs the working-class members of his audience to believe. If Reaganomics worked, Rush is a straight-talking champion of the little guy on a populist crusade to take the country back from those pointy-headed liberals who think they know what’s good for everybody and are drunk with the power of sending out welfare checks. If Reaganomics didn’t work, Rush is the carnival clown hired to distract the crowd while paramedics carry the mangled bodies from a derailed roller coaster. He does a little juggling, pulls some flowers out of his hat, and when the crowd begins to get a little anxious about the rising body count, he starts shrieking hysterically that this never would have happened if it weren’t for those goddam liberal safety inspectors." - Al Franken, Rush Limbaugh Is A Big Fat Idiot (p. 124)
- ↑ As in, "I'll lie here in the gutter, and you'll trickle down on me, right?" — Bill Murray on Saturday Night Live
- ↑ George H. W. Bush, campaigning for the GOP nomination against Ronald Reagan in 1979-80
- ↑ Historical amount of revenue by source
- ↑ Jonathan Chait, a writer for The New Republic, has done a great deal of work recently demolishing the arguments in favor of Reaganomics, again. His book, The Big Con, explains this all in more detail.
- ↑ 
- ↑ Eat shit!
- ↑ Cross of Gold transcript
- ↑ If people are buying bread on the black market, that's a pretty good sign.
- ↑ Whitehouse.gov: Federal Debt at the End of Year 1940-2015 (Excel spreadsheet)
- ↑ Yes, that's what we used to call them before they took over the conservative movement and hid behind the label "neo-conservatives", who were really right-wing and some ex-liberal hawks.
- ↑ Never ones to allow "facts" to confuse them
- ↑ For the record, Canadian Prime Minister Stephen Harper is one of Bush's acolytes
- ↑ Mankiw, Microeconomics, pp. 29-30 
- ↑ GOP.gov: A Pledge to America (PDF)
- ↑ Paul Krugman: Downhill With the G.O.P., NYT
- ↑ Jonathan Chait: The Pledge To America: Deja Vu All Over Again, The New Republic
- ↑ David Stockman on NPR
- ↑ The Trickle Down Straw Man, Sowell in Capitalism Magazine
- ↑ Permanent Income Hypothesis
- ↑ The Dynan Study, commissioned by the Federal Reserve, reviews a good amount of prior research and data.