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Supply side economics
| The dismal science|
“”The "trickle-down" theory: The principle that the poor, who must subsist on table scraps dropped by the rich, can best be served by giving the rich bigger meals.
Supply side economics or Reaganomics 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. In other words, if you feed the wealthy increasing amounts, they brush more crumbs off the table, feeding those below them.
During the 1980 Presidential campaign, supply side economics 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 called "trickle-down" economics" (sometimes called "tinkle-down economics" by detractors), or "Reaganomics" since Ronald Reagan was the first president in US history to fully embrace the idea.
Trickle-down economics is a "success" in that it assists the wealthy but doesn't help the middle-class or the poor. The natural order of business is Bottom-Up economics: Giving money to big business, as opposed to the consumer, to invest in the business. But the fact that they aren't increasing sales (due to lower consumer purchasing power) is no incentive to expand the business. History shows that they hoard the money.
Supply-side economics as a theory has virtually no support from professional economists. It's worth noting that N. Gregory Mankiw, who was at one point the chair of the Bush's Council of Economic Advisers, actually lists supply-siders in his introductory economics textbook under a section entitled "Charlatans and Cranks."
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. (*cough cough*)
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 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.
“”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.
|—William Jennings Bryan, "Cross of Gold" speech|
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. The fact that supply side in practice does just about the opposite of what is claimed is studiously ignored, showing that the folks supporting the idea are true believers (or just looking out for Numero Uno).
Trickle-down theory was in fact an economic theory dredged up from the dustbin of history originally called "horse-and-sparrow theory." According to John Kenneth Galbraith, 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. Translation: "Eat Shit" Economics.
Horse-and-sparrow was in practice during the 1890s, a decade that saw two banking crises. It made a comeback in the 1920s under Harding and Coolidge under the name "Mellonomics," named for cutthroat 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.
The term "trickle down" was first coined by comedian Will Rogers in reference to Hoover giving out money to the wealthy, hoping it would somehow snake its way down to the poor. John F Kennedy used the less wrong macroeconomic idiom that "a rising tide lifts all boats”. Jesse Jackson shot back in the 1984 democratic national convention that "Rising tides don't lift all boats, particularly those stuck at the bottom. For the boats stuck at the bottom there's a misery index."
This makes the trickle-down theory something like the creationism of economics. Dress it up in the cheap tuxedo of Mellonomics, Reaganomics, and now "austerity" (much like creationism became "intelligent design") and it becomes a "revolutionary" new theory.
Laffing all the way to the bank
“”It’s not about perversely protecting the rich, it’s about returning this country to the way your Founding Fathers designed it… It’s about getting back to when America had but two classes: land-owning gentry, and rabble.
Ronald Reagan brought to the White House budget director David Stockman to devise a new economic plan. Reagan didn't bother to cut spending (and actually increased military spending), partly due to lack of political capital, and partly due to mendacity. Stockman, realizing that Reagan's "plan" was a fig leaf on a massive tax swindle for the wealthy, quit in disgust. Reagan brought in a toady named Art Laffer, originator of the so-called "Laffer Curve", and 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.
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) endeavors to illegitimate black markets.
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. 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.
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-Baptiste 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?" In simpler terms, If you give tax cuts to the poor, they only spend it on food and shelter! (And consumer goods, and other things that stimulate the economy!)
As a result of this tremendous success (in terms of re-election), American far-right conservatives trumpeted a mantra of "cut taxes" as often as fundamentalist Christians go to Church or Muslims pray. David Stockman, one of the architects of Reaganomics, became critical of his own project after the Reagan administration. He reappeared in 2010 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.
The true results of the 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 needed.
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. Clinton did, however, cut the capital gains tax which led to investments in the information boom that fed the aforementioned expansion.
In 2000, President George W. Bush admonished 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.
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. Either way it wasn't close to enough to balance the books. 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 95¢, due in part to governmental intervention (former Canadian Prime Minister Stephen Harper is one of Bush's acolytes) and falling oil prices.
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.
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. The end of the Reagan administration saw the crash of 1987 and the S&L crisis but, thanks to the stimulus, these were nothing like the panics in the 1890s or the Crash of '29. Reaganites don't like to talk about the spending or the Fed, though.
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. Part of this falls under tenets known as "Say's Law."
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.
“”Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.
|—Pope Francis, firing every member of the Vatican bank|
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.
Simply put, "Give the rich more money and they'll create more jobs," which is the whole point of lowering taxes on the rich, simply doesn't work anymore, and hasn't for decades. The economics of the world has shifted from Reagan's time. Thanks to the incredible ease and speed of investment, our economy is very supply-heavy; we have trillions of dollars concentrated at the very top. So what really stimulates our economy today is demand, not supply. Not just what people want, but what people can afford. No businessman is going to hire people to create things that people aren't buying: more money for the rich just means ever-higher CEO bonuses, tucked away in off-shore accounts. The myth that "rich money" stimulates the economy even in a bank is simply that: a myth. Maybe some of it does, but if the majority is stimulating an economy, it's not ours.
Problems with terminology
“”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.
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. For the modern Republican party, the theory has always translated into "cut tax rates for the wealthy".
- The Gospel of Supply-Side Jesus
- Excerpt from John Quiggin's Zombie Economics on supply-side economics
- Attributed to William Blum, Jewish-American writer and critic of US foreign policy
- Paul Krugman, "The GOP's Original Sin," NYT 7/18/2016
- Mankiw, Microeconomics, pp. 29-30
- Cross of Gold transcript
- Giangreco, D. M.; Kathryn Moore (1999). Dear Harry: Truman's Mailroom, 1945-1953. Rogers: "Money was all appropriated for the top in hopes that it would trickle down to the needy."
- Whitehouse.gov: Federal Debt at the End of Year 1940-2015 (Excel spreadsheet)
- Historical amount of revenue by source
- David Stockman on NPR
- 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
- Permanent Income Hypothesis
- The Dynan Study, commissioned by the Federal Reserve, reviews a good amount of prior research and data.
- The Trickle Down Straw Man, Sowell in Capitalism Magazine