Supply-Side Bush? Hardly. Can we finally stop calling him this?

President Bush is certainly a supply-sider, isn't he? He cuts taxes and is a Republican after all.

Well, those are not quite the requirements. In reality, most of the Reagan-era supply-siders disclaim the President. In searching for the articles I remembered reading by supply-siders, lamenting on cabinet choices, I found plenty of misleading writings not penned by supply-siders about how the new George W. cabinet would be full of them, even naming people such as Treasury Secretary O'Neill and Larry Lindsey. The amount of incorrect information was saddening.

In 2001, the supply-side crowd panned Bush's proposed tax changes. Larry Lindsey, chief economic advisor to President Bush and architect of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA-2001), was a self-described Keynesian, saying he still thought in those terms. When Lindsey was asked about supply-siders in the cabinet, he said that they were all demand-siders. At a conference before Bush was elected, many supply-siders were upset that not a single supply-sider was in the Bush Whitehouse or Treasury. One supply-sider called Lindsey a "totally incompetent, a hard-wired, old-fashioned Harvard Keynesian who has not the slightest idea of what is happening to the economy." There was considerable grumbling coming from the supply-side camp with O'Neill and Lindsey being given top honors, with scathing attacks coming out as early as December 1999.

"The answer is simple," says a supply-side economist. "Lindsey is not really a supply-sider; he has long been considered a sort of conservative Keynesian." Among other things, Lindsey believes that the current economic slowdown is the result of too much investment rather than a falling off of investment, a position not shared by any of the supply-siders [...].

And Lindsey doesn't agree with supply-siders when they argue that the Federal Reserve has been responsible for current economic doldrums by having been too tight with monetary policy for too long. As far as Lindsey is concerned, the tax cuts are needed because demand has to be stimulated, and that's all.

Harvard economist Gregory Mankiw, Lindsey's replacement, was certainly not a supply-sider in the past having called Reagan's economic team "charlatans and cranks" in his Principles of Macroeconomics textbook and equating supply-side economics to a fad diet.

EGTRRA-2001 was filled with demand management "stimulus." One of the keys to supply-side policy is that not all tax cuts are created equally. Looking at Reagan's 1981 legislation that was based on the Kemp-Roth bill that was in turn an attempt to recreate the Kennedy tax cut, there were large across-the-board marginal rate cuts and reductions on the cost of capital. The marginal rate recuctions of Bush were slivers of those past efforts, far less than what supply-siders had wished for, immediately reducing the top 39.6% rate to 39.1% and the middle 28% to 27.5% on their way down to 35% and 25% respectively by 2006. The lowest marginal rate was cut by the addition of a new 10% bracket, but that doesn't affect the tax at the margin for those who earned more than the $6000 cut-off. The child tax credit expansion was on no supply-sider's wish list because it doesn't effect the margin either, exactly where supply-side policies aim and the decision point of all economic activity. The backwards looking rebate checks were a pure attempt to stmulate demand. There were some provisions that supply-siders looked good upon, like IRA and estate tax changes, but those were not really made with them in mind, just straight up Keynesian demand management for the wealthy and what the supply-siders actually call "trickle-down" (trickle-down being their term for conservative Keynesian attempts to boost the investment portion of demand by "putting money in the pockets of investors" so that they can put their dollars to work that will in turn create economic growth).

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA-2003) basically accelerated the phased in 2001 changes, but it did include two nods to supply-siders in cuts to taxes on capital (dividend and capital gains), but even then it wasn't as large as supply-siders has wanted, reducing capital gains taxes to 15% from 20% (and to 5% from 10% for those in the lowest two income brackets and totally eliminating it for them in the 2008 year). However, the Keynesian colors shine though in their temporary nature. Supply-siders tend to not believe in temporary stimulus since their theories rely on behavioral changes, and if somebody thinks that the capital gains rate will be reinstated in five years, that doesn't provide any incentive to invest in capital over a longer term. Stock dividends have a similar story. Instead of being taxed as ordinary income, they will be taxed at 15% (or 5% for those in the two lowest tax brackets and not taxed at all in 2008). In 2009 they too will revert.

An issue that is entirely missed is monetary policy. A supply-side administration would be concerned about not a strong or weak dollar, but a sound and stable dollar. Gold at $425 (or a $1.25 if counting in euros) would clearly have been too low for the dollar to sink. Many supply-siders see Greenspan as partially to blame for the recession by allowing the dollar to grow far too strong, and his favorite policy tool of interest rates is too blunt an instrument. Whereas some saw a demand fall off, they saw a growing deflation. "Putting dollars in the hand of people" from tax cuts or borrowing would do little to fix the situation until the dollar was allowed to return to previous levels (probably a little higher actually). With Greenspan's term up, a supply-side administration would definitely be looking to replace him with somebody less willing to play games with the dollar.

A President that didn't lower, but actually raised, tariffs and quota barriers is hard to call a suppy-sider as well. The steel, softwood, and textile walls would never have been a problem, and the export credits that the WTO member nations are promising to retaliate against also wouldn't have been a problem. And the sugar subsidies that tied up the Australian free-trade talks and ultimately caused us to give up opening Australian services markets, something we do export, wouldn't have been an issue either.

•  What the Hell?

  As always, your post is interesting. But it confirms what we already know--Bush's economic policy is a set of ill-conceived demand stimulation methods. He even concedes this by calling his tax cut a "stimulus."

  But here's my question: what the heck is supply side policy anyway? I think of supply side as being based on the idea that lowering marginal income tax rates increases the return to labor, and given the usual labor market assumption of the domination of the substitution effect, that should bring about a greater supply of labor at a constant wage vis-a-vis firms. That enables an expansion of output to the newly-efficient level.

  Taken to the macro level, the expansion of output employs more factors of production, generally bringing about growth. Is that what supply side policy is about? Then there's no question that Bush's tax cuts haven't been supply side--the estate tax, the dividend tax, the marriage penalty, and the child benefits clearly have nothing to do with the supply of labor. The top-rate tax reductions apply to salaried workers, whose wage is least likely to accord with their marginal product of labor (think efficiency wage, times ten).

  So who's saying that this economic policy is supply side? Or do I have a wrong notion about what supply side policy is?

  by Marshall on Mon Feb 16, 2004 at 08:28:53 PM PDT

  •  And why.....

    .... more of the gold shenanigans? Are you okay, man? I understand all of what you write except the gold gold gold gold gold gold gold. Who the hell cares about gold? And furthermore, given that no one cares, the price of gold is unlikely to be a meaningful input into economic policy making. I know you think it's a barometer of exchange rates or whatever, but wouldn't it make more sense to stick to euros? The only part of Bush's economic policy that's likely to affect the price of gold in the short run is the weak dollar bullshit. Looking at that number on a daily basis is like deciding whom to vote for based on their "electability," or worse, "credability."

    by Marshall on Mon Feb 16, 2004 at 08:46:56 PM PDT

    •  gold

      Some like to compare it to the North Star (there is even a little thing written called "The Gold Polaris"). With each currency floating, it can be hard to tell which one is going what direction. If the dollar falls 10% against the euro, that doesn't necessarily mean that the dollar inflated by 10%. The euro could have deflated 10% meaning the dollar remained stable, or the euro could have deflated 20% meaning the dollar actually deflated 10% too, or it could mean the euro inflation 15% meaning the dollar actually inflated 25%.

      Gold is just the best guess we have at a stationary item of value. It has huge above ground supplies, relative little (and constant) growth of supply, and relatively small demand. It also have this huge liquid market that operates all around the globe constantly trading on multiple markets. While gold's value isn't perfectly stable and there can be shocks, when there isn't, it is fairly close. It's sometimes called the most monetary of all commodities and reported along with the euro and yen because gold's price movement tracks the currencies very closely.

      Holding a currency's value stable is what hold domestic prices stable (ignoring supply and demand changes). However sometime exchange rate targets can contradict with inflation targets, so something needs to be looked at that isn't also moving to determine how far the dollar has moved and what me might expect for inflation or deflation.

      This is also why I often include the euro translation, like I did, since some people still don't trust gold. Either looking at gold or the euro, it is clear the US was going though a heavy deflation during the late 1990s.

      by jjayson on Mon Feb 16, 2004 at 09:17:03 PM PDT

      •  Small demand != stable

        In fact, the opposite is true ... what one would consider a "small" fluctuation of demand, compared to a small base, is a huge fluctuation in percentage terms.  And such demand can be easily stimulated by a collapse or loss of confidence of a nation's currency.

        Gold prices have been dropping since the 70s although the US's currency has never been considered "deflationary" over this time (which would be the logical conclusion if one assumed a constant gold value).

        I'd submit that the CPI is a better indicator of inflationary pressure, as an aggregate basket of goods with an inelastic demand it shows better what people are paying "in the real world".

        Gold has had an enormous significance as a "monetary" metal historically; but it is a commodity like any other and to hold it up as a Polaris is a naive extrapolation from the Dark Ages of Economics ...

        by Captain Obvious on Mon Feb 16, 2004 at 10:10:25 PM PDT

        •  small steady demand

          The Gold Council comes out with their demand projects every year. It is about equal to the amount being dug out of the ground and absolutely tiny compared to the amoung of gold above ground. If my demand for air doulbed tomorrow, that would still be inconsequential. With 150,000 tons of gold, a couple ton change is minor. The fluid gold spot markets prevent this from ever being noticed.

          Gold prices have been dropping since the 70s although the US's currency has never been considered "deflationary" over this time (which would be the logical conclusion if one assumed a constant gold value).

          Not really. Gold took off after Nixon delinked. The inflationary policies of Nixon through Carter (with Friedman's help) shoved gold up to all time higher off the $35 peg. However, since inflation takes time to filter though the economy, prices didn't rise by 10 fold immediately. It takes years for currency movement to fully show up in comsumer price changes.

          

          However, now we do hear of deflation, because this is really the first long-term trend we've have in a strengthening currency, and in previous years we were also still feeling the inflation pressures from downward currency movement that only stopped in 1980.

          

          I'd submit that the CPI is a better indicator of inflationary pressure, as an aggregate basket of goods with an inelastic demand it shows better what people are paying "in the real world".

          Besides the CPI's overestimatation shortcommings (an upward bias as high as 160 basis points), it is too slow. Currency movements are quickly reflected in commidity prices. Things like the CRB index will move within a couple months of currency prices. Gold moves even faster, and comsumer prices move slower. The CPI is called backwards looking since it only reflects things that happened maybe years ago. Trying to run monetary policy by using the CPI is like trying to drive forwards by looking in the rear-view mirror. Even equity markets (like the stock market) will move much more quickly than the CPI, so inflation can show up as stock price gains.

          Of course, I'm not trying to say that gold should be used instead of the CPI. The CPI measures currency changes at a different stage (also why we have things like the PPI) than currency or gold that measure it at this point in time.

          by jjayson on Mon Feb 16, 2004 at 10:31:27 PM PDT

    •  Quick example.

      You and I take take two boats out into the middle of the ocean. There is no land, nothing as far as the eye can see. We start off right next to each other, then you take your boat and steer if off away from me for a couple of minutes. How far have you sailed? If I'm moving too, that would be impossible to tell. You can only tell your position relative to mine.

      It would be impossible to navigate in this way, so you need to find a frame of reference. You can look up to the sky, but the stars also move through the night and depending on the season. However, over the years sailors notice that one star has the least movement of them all, the North Star. Gold is this North Star. It has some movement, but it is the most stationary object we know.

      by jjayson on Mon Feb 16, 2004 at 09:43:48 PM PDT

  •  My understanding of supply-side is this ...

    ... "tax cuts targeted towards the wealthy are good, because it encourages investment which leads to higher employment and more jobs.  A rising tide lifts all boats".

    Which is either true or false, depending on which side of the Laffer curve we're on.  My own view is that it would take a far more confiscatory tax policy than we currently have to make this a true claim for the USA.

    Bush's tax cuts have been sold on a number of different premises, but the latest is that we need to put "extra discretionary income" in the hands of "working class families" in order to "stimulate demand".  The reality is of course is that the reality of the tax cuts don't favor "working class families" at all, since they target middle-to-upper class taxes: the income tax, dividend tax, inheritance tax and capital gains tax.  In short, it's a supply-side tax cut disguised as a demand-side tax cut.

    A real "working class family" tax break would be the repeal of FICA taxes and adjusting the income tax upwards to compensate for the lost income, but Bush opposes that since it would "bankrupt Social Security".  (funny how worries about fiscal responsiblity at the most convenient times.  =-)

    by Captain Obvious on Mon Feb 16, 2004 at 08:53:20 PM PDT

    •  Well....

      .... if that's supply side policy, the conservatives need to get on message. For decades they were telling us that public policy (taxes) couldn't accomplish anything, that with intergenerational bequests the result of redistribution would be nothing. If that's true, then ending redistribution must be pointless too.

      On that reading, supply side policy is just a sub-category of Keynesianism: do something to elevate some or all of the components of national income. But that should be wrong on classically conservative assumptions.

      by Marshall on Mon Feb 16, 2004 at 09:00:07 PM PDT

      •  I'm just rambling ...

        Not so.  Conservatives see taxation and government intervention as net evils.  They can't accomplish anything, and they put a drag on investment.  So do away with it.

        As I understand Keynesianism, government is the employer of last resort, and if the private sector stumbles, the public sector must increase spending to cover the downturn.  Supply-siders emphasize the creation of private sector jobs over those of the public sector.  The goal is the same, but the methods differ.

        by Captain Obvious on Mon Feb 16, 2004 at 09:13:47 PM PDT

        •  I would most certainly....

          .... disagree with that. On Friedmanite assumptions, the labor market should always clear and there shouldn't be any involuntary unemployment. So bugger all demand policies. The only thing worth doing is controlling inflation.

          Or maybe we're getting stymied by the fact that supply sideism is totally irreconciliable with Friedman. After all, the whole thing is just a litany of ersatz justifications for increasing profits for donors to the Republican National Committee. Trying to tease out anything worthwhile is pointless.

          I wish there were a coherent conservative economist here to explain it all to us. Yeah right.

          by Marshall on Mon Feb 16, 2004 at 09:22:16 PM PDT

          •  More rambling on stuff I know nothing about. =-)

            I don't believe in the Phillips curve, but I don't believe in zero unemployment either.  The labor market's never cleared anywhere in the world and I don't think it ever will, if for the simple fact that people don't get jobs immediately.

            This isn't a rigorously tested theory, but I believe in countries with low unemployment like the US, the major component of unemployment is liquidity in the job market.  In countries such as Colombia which have high unemployment, the problem is a lack of capital -- a supply-side problem.

            "Bugger all demand policies" seems reasonable to me, though ... the hoard-vs-spend decision is a personal one based on consumer confidence, which can't be remedied by simply handing out $300 checks.  As long as demand is voluntary (purchasing goods and services in the marketplace as opposed to being forced to spend on national priorities via taxation) there's not much that can be done in that regards.

            by Captain Obvious on Mon Feb 16, 2004 at 09:51:39 PM PDT

            •  Jean Baptiste Say

              There are a number of dead economists that supply-side tradition follows from. President Reagan even used to quote a 17th century Muslim scholar in some speaches. However, Jean Baptiste Say, famous for Say's Law that demand preceeds supply, had this nugget:

              "The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption."

              People by their nature always want to consume. When people stop consuming it is because the cost of suppling the means to consume becomes too great.

              by jjayson on Mon Feb 16, 2004 at 10:14:20 PM PDT

        •  keynes

          One of Keynes's ideas was that a certain level of aggregate demand was necessary to support a certain level of production. Recession was from a falling of demand. To make up for the lack of private consumption, the government could increase its consumption (usually though running a deficit). The government could literally pay workers to dig and fill up holes for this counter-cyclical policy, as they would then spend their money to increase demand.

          For the most part, Keynes ignored monetary policy and saw inflation has too much demad and not enough supply that is why growth is considered inflationary by those who subscribe to his ideas. From this we also get a lot of other ideas like the Phillips Curve that posits a trade off between inflation and employment and the idea of the natural rate of non-inflationary employment (employment below this natural rate being viewed as inflationary).

          Some have called Keynesian economics "consumerism" instead of "capitalism" because it focuses on buying and consuming not on capital and production.
          

          by jjayson on Mon Feb 16, 2004 at 09:27:47 PM PDT

    •  eek

      "tax cuts targeted towards the wealthy are good, because it encourages investment which leads to higher employment and more jobs.  A rising tide lifts all boats".

      No. no no no. Eek. That is a conservative Keynesian position. Investment is just another type of demand. Keynes wrote about three piece to aggregate demand: investment and public and private consumption. Supply-side has nothing to do with the wealthy. You can have a supply-side policy aimed only as the poor by cutting their maringal tax rates and eliminating the taxes they pay on capital. This would lift the poor, and have little effect on the wealthy.

      by jjayson on Mon Feb 16, 2004 at 09:19:58 PM PDT

      •  Then I am muddled ...

        ... on the difference between supply and demand.

        Why is investment considered "demand-side" when it increases supply (of goods and services) and is the opposite of consumerism (demand for goods and services)?  I have a feeling you're talking about aggregate EXPENDITURES, not DEMAND.  Investment is an expenditure which directly expands supply.

        Supply-side and the wealthy are linked because the poor are not the Investment Class ("never met a poor man who gave me a job").

        by Captain Obvious on Mon Feb 16, 2004 at 09:40:52 PM PDT

        •  investment

          Keynes defined investment as including things like the purchasing of capital, itself a demand. His equation for aggregate demand was essentially "government consumption + private consumption + investment = aggregate demand". Aggregate demand for an entrepeneur was their income inclusive of what they "planned on handing over to other factors of production" (ie, capital expenditures).
          

          by jjayson on Mon Feb 16, 2004 at 10:08:05 PM PDT

  •  The quick overview

    Capital accumulation is kind. Labor is only worth higher pay when it has more capital. The guy moving boxes by hand is worth little. With a dolly, he is worth more. With a forklift, he is worth much more. You can only work so hard without capital, so in order to increase the standard of living for the long-term you need more capital.

    Second, the incentive effect dominates in the long-term. When you tax less of something you get more of it, but since all economic decisions are made at the margin (how much is that extra dollar really worth, how much do we get by selling that extra item, how much to I get for that extra hour, etc) you should focus efforts there. In a macro sense, you get businesses adding that one or two extra workers. In a micro sense you get that worker willing to go that extra little bit to move up.

    What you don't want to do is play the follow the money trail game. I get money, I spend it. That increases demand, so the company makes more, that increases demand for workers, etc... It's a losing efforts since the economy is far too complex and along each individual step there is still a decision being made at the margin that will fail since the value of that extra unit is still not high enough.

    To get to these ends, supply-siders want low marginal tax rates on a broad base. Special exemptions, special tax cuts for certain things, tax expenditures, flat tax breaks, tax credits, etc. do not deal with effects at the margin.

    "Supply-side fiscalists" was a somewhat unfortunate name was was first given by economist Herb Stein in a condescending manner. Jude Wanniski picked it up, called it "supply-side economics" to also include monetary and trade policy, and ran with it because Jude is a guy that tends to do stuff like that. (He's absolutely been tearing Bush up since 1999, especially over Iraq and his early comments on Rove.)

    by jjayson on Mon Feb 16, 2004 at 09:05:01 PM PDT

•  Hey

  Take it up with these guys:

  http://www.nationalreview.com/kudlow/kudlow071503.asp

  http://www.townhall.com/columnists/GuestColumns/Bowyer20031231.shtml

  by johnny rotten on Mon Feb 16, 2004 at 08:38:15 PM PDT

  •  I, err others, have

    I already know people that have taken it up with Kudlow. He says that the 2001 tax cuts was Keynesian stimulus. About three of four months ago he even said on his show (Kudlow & Cramer on CNBC) that the conversative  Keynesians should have been ecstatic with the 2001 package. However, you have to remember that he is also quite the partisan cheerleader. Kudlow seems to have forgotten his stable money lessons too recently, especially when talking to some Fed govs and praising Greenspan's loosey-goosey dollar policy.

    I'll read the Jerry Bowyer piece later.

    by jjayson on Mon Feb 16, 2004 at 08:43:33 PM PDT

•  Put out a tip jar, man ...

  ... this was an excellent diary and deserves mojo.

  My only comment is that to call Bush's economic policies "supply side" lends them even a small measure of undeserved credibility.  There's no more intellectual grounding in Bush's tax plan beyond the ideology of TAXES BAD and DEFICITS DON'T MATTER.

  by Captain Obvious on Mon Feb 16, 2004 at 08:38:29 PM PDT

  •  Intellectual backing

    Somebody else has in the supply-side crowd called his economic policies a "hodgepodge" aimed at electioneering (things like the steel tariff really had some unexpected blowback).

    The recent "Reagan showed us that deficits don't matter" line made some supply-siders cringe and others not really care (niether cringe or cheer since it was kind of a strange thing to say). The point of Reagan wasn't that deficits didn't matter, but that they didn't cause interest rates to rise or cause further inflation which is what current economic theories predicted. The real threat from deficits is the pressure they apply to raise taxes, and if you give tax reductions not at marginal rates but through what they call "tax expenditures" (special reductions given below the general rates), then when pressure causes marginal rates to be hiked, you an actually do considerable damage. Usually when you want to reduce taxes, you want to broaden the tax base and lower rates as the same time. This gives more bang for the buck. However, these tax expenditures cause a narrowing of the tax base.

    by jjayson on Mon Feb 16, 2004 at 08:53:57 PM PDT

•  too much credit

  You guys are all giving the Bush administration too much credit for even thinking about this at all.  They haven't thought about any of it ... it's all just about how to get elected, and package it to make people not realize they're getting boned.

  by AdamW on Mon Feb 16, 2004 at 10:15:41 PM PDT

•  I heard Bush say in a speech that if you cut tax

  rates, tax revenues increase.

  That is a totally discredited claim by supply-side economists. So yes Bush is a supply-sider.

  by katieforeman on Fri Apr 16, 2004 at 06:39:39 PM PDT

  •  The original claim

    The supply-side claim isn't that all tax cuts will increase revenue or that they will do it immediately. That's silly.

    For supply-siders, not all taxes are created equally, so not all tax cuts are created equally. The type of tax high affects what the dynamic effects of the tax cut will be.

    This is all based on the completely misunderstood and often maligned Laffer Curve. At 0% taxation the government takes in $0, and at 100% taxation the government also takes in $0. This happens for various reasons. Commerce will move into the underground or barter economies where the IRS cannot reach. People will work less. Or they find other ways to evade taxes in other ways. Somewhere between 0% and 100% is the optimal rate of taxation that will bring in the most money.

    That optimal rate can change depending on what is going on too. During wartime, people are more willing to give up more of their paycheck to support their soldiers. But when the war ends and tax rates are not brought back down to pre-war levels, collections plummet. This relationship has been shown to happen many times in many countries. Also, the type of the tax can determine the optimal rate. Some taxes are harder to evade, others are less important to people, and some can be delayed.

    Take for example the capital gains tax. In many ways, the capgains tax is voluntary. Unlike income taxes, gains can be realized when the the investor wants or delayed by hedging strategies. When there is a tax on the sale of capital, it causes a lock-in effect. When that tax rate is reduced, people are more willing to sell and buy capital. The optimal rate of capgains taxation has long been considered to be 15%, and when capgains taxes have been lowered when above that rate, it results in an increase in revenue.

    These all rely on bahavioral changes too, so expecting immediate increases from one year to the next isn't appropriate. However, over a little bit longer time, if the rate of taxation was brought close to the optimal rate from too high, you can expect revenues to rise. Renuvues did rise under Reagan's and Kennedy's tax cut proposals, even though the effective rate of taxation went down.

    Some countries have been lowering taxes recently, like Russia, and have had excellent success. For Russia, since their flat tax was imposed lowering the rate of taxation, collections have growtn by 50%.

    So yes Bush is a supply-sider.

    No. You saying it doesn't make it true. He doesn't even use the rhetoric of supply-siders. Mellon, Kennedy, and Reagan all talked about capital accumulation, while Bush talks in Keynesian tones of "putting money in the hands of poeple and investors". Some of the biggest supply-siders, like Wanniski, have always been uneasy with him.

    by jjayson on Sun Apr 18, 2004 at 07:01:22 PM PDT

    •  I teach economics and am almost done with my PhD.

      No need to explain the Laffer curve or supply-side economics to me.

      The argument behind the Laffer curve is that the lower marginal tax rates will increase the return to labor and/or the return to capital depending on the type of tax cut. This greater return stimulates the supply of labor and/or the supply of capital so much that the overall increase in aggregate SUPPLY will cause GDP to increase enough to more than compensate for the lower tax rates. In other words, there is so much more income to tax that even with a lower tax rate, tax revenues increase.

      This is a supply-side argument because it is based on an increase in labor SUPPLY.

      Furthermore, the fact that tax revenues eventually went up after the Reagan and Kennedy tax-cuts does not prove the theory behind the Laffer curve. The labor supply naturally increases without tax-cuts due to population increases. The relevant statistic to test this theory is whether or not per-person tax revenue increased, not whether or not total tax revenues increased. Per person tax revenue did not increase as a result of the Reagan tax cuts.

      I have a whole bunch of text books to back me up on this. I also have worked with economists from all ends of the political spectrum and one of the most Republican economists at the school teaches his students that the labor supply is relatively inelastic and not very responsive to changes in income tax rates. As an empirical matter the US economy is not on the portion of the Laffer curve where a cut in tax rates would increase tax revenue.

      I heard Allen Greenspan's testimony before Congress about a year ago (I'm not sure when exactly.) A Republican asked him whether or not tax revenues would increase as a result of tax cuts obviously hoping for a yes. Greenspan said that he highly doubts there is such a thing as a tax-cut that pays for itself.

      Besides I think this whole argument about whether or not Bush is a supply-sider or not is a red herring. He really is a "starve the beaster" trying to starve the government of funds. His policies are a very effective way to do just that. The real argument is whether or not that is a good idea. I don't think it is.

      One last point, Bush doesn't make that claim about tax revenues increasing as a result of the tax-cuts anymore. Maybe because someone finally told him the theory had been completely discredited. But that raises the question of whether or not Bush was lying when he made that statement or whether or not he was basing his economic policies on a theory that was discredited long ago. Either way it doesn't reflect well on him.

       

      by katieforeman on Sun Apr 18, 2004 at 08:22:47 PM PDT

      •  Only part

        Sorry, I didn't mean to "talk down" to you. It's just that with these boards, you never know who is on the other side, and it seems better to assume less than more knowledge. I'll remember it for the future, though.

        I may only have a lowly undergrad degree, but I used to parot back the standard Keynesian line quite well. It took a lot of convincing and a few years of experience for me to find the classical view. I thought that Marx was in a lot of ways right, and I never did like the consumerism taught in college econ. I was draw to the classical/supply-side crowd because in there I found some others who shared my admiration of Marx, and as an explanatory framework, it was excellent.

        > Furthermore, the fact that tax revenues eventually went up after the Reagan and Kennedy tax-cuts does not prove the theory behind the Laffer curve. The labor supply naturally increases without tax-cuts due to population increases. The relevant statistic to test this theory is whether or not per-person tax revenue increased, not whether or not total tax revenues increased. Per person tax revenue did not increase as a result of the Reagan tax cuts.

        The Laffer Curve wasn't entirely just a production argument. As explained to me by one of the original supply-siders himself, when I tried to reduce it to only production, he told me that wasn't it. It was also moving of income around and less attempts at evasion anad avoidance.

        Further, if you want to look at federal revnues per of working age, a quick hack at it shows in 1982 about $3600 per person. After the tax cuts went into effect, it dropped to about $3300 the next year. However, before the end of the decade it was over $4000.

        I think too many people try to take the Laffer Curve not how it is supposed to be. It is a pedagogical tool. There isn't a strict definition that says only income tax receipts will increase, since increases in economic activity can increase other receipts too.

        In the effort to tear it down, people get too picky. I remember the wavy, jumbled line drawn that looked like a knot used to convey the idea that the Laffer Curve is a useless item because in the real world things are complex. Funny, but that same article didn't draw the supply curve that way and indict the that as a pedagogical tool? The same criticism applied, after all.

        I have a whole bunch of text books to back me up on this. I also have worked with economists from all ends of the political spectrum and one of the most Republican economists at the school teaches his students that the labor supply is relatively inelastic and not very responsive to changes in income tax rates. As an empirical matter the US economy is not on the portion of the Laffer curve where a cut in tax rates would increase tax revenue.

        That's nice, but a lot of textbooks still perpetuate the myth that grown and employment are inflationary too. There are some bad ideas out there right now in the field.

        And you are taking too macro of a view. The optimal peak of the laffer curvey isn't dealing with the effective rate of taxation, but at the margins. It is on an individual tax basis, so statements on "the US economy" dont' really make sense. Are there taxes that increase will bring in more revenue? Sure. Are there ones that an increase will not bring in much more revenue? Yep.

        A good example of not all tax cuts being equal is the child rebate. As a taught Keynesian, you probably don't think there is too much of a difference between a $1000 refund and a cut at the margin that relieves somebody of a $1000 in tax burden. However, no supply-sider would ever say that the rebate would increase collections because it doesn't change anything at the margin.

        I got my start in economics with currency issues and trading software before I was even out of school. It was a software development job that grew into something much more. I have since worked in some other financial jobs and now do work on dynamic scoring of tax changes and macro modeling. I work in an entirely nonpartisan capacity, and really have no allegiance to any political side. My first political experience was helping a far left progressive run for Berkeley city council. I'm still an admirer of Marx, and I still think in principle, anarchy is a good idea. But I still think that much of what is pushed today -- like jobs programs, minimum wage increases, and overtaxing capital -- will impovrish more than help.

        Greenspan isn't the end all of fiscal policy opinion. Or is he even for monetary policy. Appeals to authority are not entirely lost on me, but while I am still smarting from Greenspan destroying billions in wealth by pushing us into a painful deflation without even realizing it, I may not be the most receptive to what he has to say for a few more years.

        Besides I think this whole argument about whether or not Bush is a supply-sider or not is a red herring.

        Agreed. And no, starve the beast isn't a good idea. This is gotten too long and rambly now. Sorry.
        

        by jjayson on Sun Apr 18, 2004 at 09:52:45 PM PDT

        •  Thanks for the thoughtful response.

          but not surprisingly I disagree with your analysis.

          GDP per capita increases over time due to technological advances and capital accumulation. I don't know of any evidence that the higher tax revenues by the end of the decade are due to Reagan's tax cuts.

          Increases in the labor supply or a reduction in tax avoidance and/or tax evasion due to reductions in marginal rates would be realized pretty quickly. It doesn't make any sense that someone's marginal tax-rate would decrease in 1982 and they would wait until 1989 to increase their labor supply. The same argument applies to tax avoidance. The fact that per person tax revenue was higher by the end of the decade is not relavant to testing the validity of the Laffer curve.

          I totally agree that not all tax-cuts are the same. The reason I am a Democrat has much more to do with micro-economics. My politics aren't based on Keynes and certainly not on Marx. (I did take a Marxism class in college and found it interesting, but I do not share his vision or his politics.)

          I think public investment in research and development, tax policies that favor r&d, investment in public education, streamlining the tax system to make it more progressive and more economically efficeint are far more important to longterm growth than cuts in marginal income tax rates, especially when these tax cuts increase income inequality.

          To increase tax revenues by reducing tax avoidance and /or tax evasion why not increase the penalty for evasion, and simplify the system to remove some of the economic distortions caused by loop-holes.

          I'll agree that at some point an increase in marginal tax rates would lower tax revenues, but the empirical evidence does not support the fact that we are anywhere near that point in this country.

          I'm not talking about just one textbook either. Not one of my many macro texts says that the predictions of the Laffer curve were realized. The texts use phrases like "fringe group of economists" and "history proved them wrong" in their assessment of the laffer curve.

          The fact that the predictions of the Laffer-curve regarding the Reagan tax-cuts weren't realized is one of those areas where there really is a consensus among most economists. The "fringe" group of economists that still cling to that belief are about as credible as the tobacco company scientists who insissted for a long time that smoking didn't cause cancer.

          by katieforeman on Mon Apr 19, 2004 at 08:26:12 PM PDT

          •  capital, Marx,and stuff

            GDP per capita increases over time due to technological advances and capital accumulation.

            Considering that supply-side policies aimed at fostering capital formation, it would seem contradictory to discount that out of the growth numbers.

            (I did take a Marxism class in college and found it interesting, but I do not share his vision or his politics.)

            I think that might be why I was drawn away from the standard Keynesian teachings of college economics. I started off with an appreciation of Marx, and a number of the supply-siders did to. Three of the first few articles I read by supply-siders all invoked Marx in some way. There was a editorial by Jack Kemp that quoted him, an essay by Jude Wanniski that invoked Marx' view of how present capitalists will try to block the path for future capitalists, and a paper by Robery Mundell that invoked Marx' on gold as a proxy for the dollar. That is probably because the classical supply-siders and Marx had a common belief that capital is the controlling factor of the political economy. They also all shared the the common idea that capital needs to get into the hands of the people.

            Blah.

            I had some more detailed stuff written, but I just realized how exhausting writting comments can be sometimes.

            However, one thing. I am curious what textbooks you talking about? Being on a ugrad (but hopefully getting back to school soon for a grad degree), I obviously don't have as much classroom experience. The only two books that made any explicit mention of Reagan era policies have been Delong and Mankiw.

            by jjayson on Mon Apr 19, 2004 at 08:56:40 PM PDT

            •  Again thanks for the thoughtful reply.

              Sorry it took me a while to get back with you, but I wanted to wait until I had time to answer your questions.

              1.) In response to your point about capital. Yes, I agree that a cut in the capital gains tax could be one of many different factors that increased the capital stock and contributed to economic growth. But we were debating the predictions of Laffer curve. My argument was that, the increase in per/person tax revenues observed at the end of the decade does not prove the predictions of the Laffer curve for reasons I stated in my last post.

              Furthermore,the capital stock will grow as long as the rate of investment is greater than the rate of depreciation. The capital stock most likely would have increased over the decade even without Reagan's tax cuts. The state of technology would have improved by the end of the decade with or without Reagans tax-cuts.

              Yes, Reagan's tax cuts may have contributed to economic growth. However, that does not mean his tax cuts are the reason that per/capita tax revenue had increased by the end of the decade. It could very well be that per person tax revenues would have increased even more if Reagan's tax cuts were never enacted.

              2.)I have a total of 5 undergrad macro texts. Here's what they have to say about the predictions of the Laffer curve:

              Mankew:
              "Subsequent history failed to confirm Laffer's conjecture that lower tax rates would raise tax revenue."

              Abel/Bernake
              "However, contrary to the predictions of the supply-siders the actual changes in labor supply were quite small."

              Buamol and Blinder
              "Supply-side tax cuts are almost certain to lead to bigger, not smaller, budget deficits."

              Case and Fair
              "President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This clearly was not the case."

              Blanchard
              "Whatever the merits of the argument appeared to be then, it proved wrong after the fact."

              My graduate macro text never even mentioned the Laffer-curve.

              There really is a strong consensus, that there is no such thing as a tax-cut that pays for itself, at least in the US with our current tax structure.

              Economists who continue to argue that a cut in marginal tax-rates increases tax revenue are about as credible as the tobacco company scientists who used to maintain that smoking didn't cause cancer.

              by katieforeman on Wed Apr 21, 2004 at 04:22:29 PM PDT

              •  Thanks

                That was so unnecessary, though. I didn't mean for you to find what each had to say about the Laffer Curve, I was just curious what macro books you had used, more for random curiosity's sake and not for anything specific.

                Thanks anyways.
                

                by jjayson on Wed Apr 21, 2004 at 05:19:17 PM PDT

                •  Thanks for the interesting discussion

                  I wanted to look up the quotes anyway. My brother still believes that Bush's tax cuts will increase tax revenue. He takes a lot of convincing.

                  by katieforeman on Wed Apr 21, 2004 at 05:26:17 PM PDT