What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
On the cover of the New York Times Book Review today, an essay by Christopher Caldwell entitled “Conservatism” that includes these two sentences:
Ideological conservatism also meant “supply-side economics”—a misnomer for the doctrine that all tax cuts eventually pay for themselves through economic growth. They don’t.
Well, I’ve been knocking around the conservative movement since Ronald Reagan’s first term, and I have never, ever—not once—heard any conservative, including Art Laffer himself, claim that “all tax cuts eventually pay for themselves.”
Consider the Laffer curve, which I’ve copied here from Wikipedia. (In a drawer someplace, I still have a napkin on which Art sketched his famous curve for me.) Does it suggest that “all tax cuts pay for themselves?” Hardly. It simply shows that, beyond a certain point, raising taxes will actually reduce government revenues. Back during the Seventies, when the top income tax rate was still at some 70 percent, Art argued that tax rates placed the country to the right of the optimal point. That’s all.
Or consider the way Nobel Prize-winning economist Gary Becker defined “supply-side economics” when I interviewed him for my book about President Reagan.
“If you look at the traditional Keynesian model,” says economist Gary Becker, “you’ll see that it pays attention to aggregates—aggregate demand, aggregate income, and things of that type. Supply-side economics, by contrast…came along and asserted that maybe we should worry less about aggregates and pay more attention to the effect of incentives—especially taxes and regulation—on individuals.”
Instead of spending to pump up demand, in other words, the government ought to encourage individuals to form enterprises, take risks, and invest. Becker, you will note, never so much as suggests that “all tax cuts eventually pay for themselves.”
A fine journalist and a brilliant writer, Chris Caldwell knows all this—or certainly should. So does—or should—the Book Review editor, Sam Tannenhaus, the author of a really splendid biography of Whittaker Chambers. But it seems to be the nature of the New York Times that it induces even fine minds to stoop to petty unfairness.
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Aug '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Peter Robinson:
A fine journalist and a brilliant writer, Chris Caldwell knows all this—or certainly should. So does—or should—the Book Review editor, Sam Tannenhaus, the author of a really splendid biography of Whittaker Chambers.
It's not simple ignorance. It's not simple dishonesty. It's willful ignorance -- choosing not to know.
Jun '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Worse still, Midget, knowing and choosing not to write what you know.
May '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
There is perhaps more to it than that. The purpose of taxation is not to maximize government income. It is to fund essential government functions. Since it would be impossible anyway to hit the curve at the exact max point, it is better to be on the left hand side, since overall economic activity is enhanced even at the expense of government revenue. I fear there are those who would gladly pay the price of less revenue to be on the right hand side if only those 'evil rich people' were saddled with the burden.
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Very, very well stated.
Aug '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
If you are looking to increase government power, though, you'll want the taxation rate to be at least as high as where the revenue is maximum:
To the right of the maximum, decreased revenues (money power) are compensated for by increasing confiscatory power (coercive power), while decreased confiscatory power is compensated for by increased revenue.
To the left of the maximum, on the other hand, decreasing confiscatory power corresponds with decreasing revenue.
For a Statist, then, any taxation rate below the maximum revenue rate on the Laffer curve is too low.
Edited on Oct 24, 2010 at 1:57pmOct '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
I am still trying to "unpack" the phrase “all tax cuts eventually pay for themselves.” It seems to have a base assumption that even Conservatives would never approve of a tax cut if it meant permanently smaller revenue to the government. The Laffer curve is really a very simple concept, and only has to do with over-taxation, not, as Chris Caldwell seems to think, under-taxation.
Oct '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Midget Faded Rattlesnake
For a Statist, then, any taxation rate below the maximum revenue rate on the Laffer curve is too low. · Oct 24 at 1:52pm
Edited on Oct 24 at 01:54 pm
That is what I was trying to say when I said "under-taxation". I think that statists simply cannot imagine a smaller budget being a possibility. Our addiction to growth in all areas is a serious problem. Anything that stays the same, or heaven forbid gets smaller, is seen as failure. Deficit spending has really entrenched this addiction. The Bank of Canada sets an inflation target of 2 (well, maybe soon 3) %, which enables them to inflate away debt and always run a deficit.
Sep '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
If you read Jude Wanniski's _The Way the World Works_ its very clear that the major point was to unlock entrepreneurship because that is the ultimate source of supply...hence the name supply-side economics. Taxes are not merely income taxes but all forms of government intervention and hindrance of growth. Inflation is also a hidden tax in that broad sense.
May '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
The Laffer Curve, from my understanding, is grounded on the following two conditional propositions:
1. If the government levied a 100% tax, then no one would be willing to pay such a tax and government revenue would remain at $0.00.
2. If the government refused or failed to levy any taxes of any kind, then the government would receive no financing and its revenue would remain at $0.00.
"All taxes" and "no taxes" are contrary terms, not contradictory terms, thus allowing for a middle ground.
Sep '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
An issue on which we wish to be on the left --- side of the curve that is.
Oct '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Peter Robinson
Very, very well stated. · Oct 24 at 1:41pm
So this is a situation where the left is on the right and the right is on the left?
Sep '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
“the government ought to encourage individuals to form enterprises, to take risks, and invest.” Statements such as this explain why GOP conservatism will fail just as certainly as Democratic liberalism. Government should supply a legal framework that allows for open and fair competition. It should neither encourage nor discourage the taking of risk etc.. This legal framework will make it more likely that individuals will do what you suggested, but that is far different from a government encouraging it. The government cannot even spend money efficiently. Why anyone would think government could encourage risk taking, by use of the tax code or by any other means without screwing it up is beyond me. Once you accept the premise that the government should be encouraging anything, but legal behavior, you have stepped onto the slippery slope. Certainly this is one lesson that should have been learned from the latest financial fiasco,
Jun '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Coincidentally, that graph also works if you put beer consumption on the X axis and golf performance on the Y axis.
Aug '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
I think what was meant by "encourage" in this context was "stop discouraging so much" -- a kind of passive encouragement that consists in simply getting out of the way.
You're right, though, that the government should not be in the business of tempting folks to take risks they otherwise wouldn't take.
Jun '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
That caricature of "supply side" was beneath Christopher Caldwell. Despite that worrying sign of going-native, what a difference in intellectual heft between his essay on the state of conservatism and Jonathan Alter's boilerplate: Liberalism is, as all thinking beings know, a harder brand to sell because it is so much more complex and nuanced -- illustrated, with no sign irony, by a quote from Al Franken.
Jun '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
That caricature of "supply side" was beneath Christopher Caldwell. Despite that worrying sign of going-native, what a difference in intellectual heft between his essay on the state of conservatism and Jonathan Alter's boilerplate: Liberalism is, as all thinking beings know, a harder brand to sell because it is so much more complex and nuanced -- illustrated, with no sign of irony, by a quote from Al Franken.
Oct '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Agree. I understand what Peter is saying, but I think we are better off taking the position that the government should neither encourage or discourage risk taking. The amount of risk that should be financed in our economy is something that should get settled in the capital markets. Remember, the primary way the government encourages risk taking is by putting taxpayers on the hook for any losses, either explicitly with loan guarantee programs, deposit insurance, etc. or implicitly with policies such as too big to fail. These policies distort the process by which the market prices risk, which leads to malinvestment, bubbles, and ultimately, taxpayer bailouts. Exhibit A is the housing and financial crisis.
Oct '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
To say that the Laffer curve is a myth, is like saying gravity is a myth. The Laffer curve is irrefutable. One of the things that we can argue about is where the optimal point is. Another thing we can argue about is do we care where that optimal point is. I don't necessarily care, because I don't want the government to maximize revenue. The President doesn't care either, to him it's about "fairness".
Oct '10
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Sorry to get off topic, but I want to second what Peter said about this book. I read this book a long time ago. I remember that I couldn't put it down. I think it will be especially interesting for those who've journey from the secular left to the non-secular right. This book along with Chambers' Witness and David Horowitz's Radical Son are some of my favorite left-to-right political conversion books.
Re: What Supply-Side Economics Isn't, or, The Grey Lady, Wrong Again
Peter: This is a great post. I've believed for some time (and often written) that many, many people, including many on the right, have a misunderstanding of supplyside economics. Even one of the best practitioners of it, George W. Bush, seemed to talk about it in terms of putting more money in people's pockets so they could spend it. Sorry, that's demand side and it doesn't work, as witnessed by these absurd gimmicks to rebate people taxes they shouldn't have paid in the first place -- and as further witnessed by the repeated failure of Keynesian schemes to artificially bolster demand through government spending -- which, by the way doesn't even necessarily increase demand that much because the money the government spends is "stolen" dollar for dollar from the private sector.
It is called supplyside for a reason: reducing rates at the margin to encourage production (supply). How many times have we heard our own guys misstate this? It's not just Dubyah. Many GOP politicians and conservative commentators misapprehend the concept as well, so this may actually be one case where the NYT is innocent of malice. Oh how that hurts me to say it.