The major pluses of their [the supply-siders’] approach have been three. First, they came up with a way to dramatize the fact that an x percent increase in tax rates–even if it leads to higher tax revenues–will cause less than, and possibly much less than, an x percent increase in tax revenues. This was best illustrated by Arthur Laffer, with his Laffer Curve.
Second, the supply-side economists’ focus on incentives made unprecedentedly prominent the harmful effects of high marginal tax rates. As a result, in the early to mid-1980s, the supply siders’ views caused a fair number of mainstream members of an elitist economics profession to examine the importance of high marginal tax rates. Third, supply siders had a substantial effect on thinking about taxation in the policy world and on actual policy results, the main result being a drop in marginal tax rates in the United States and, subsequently, in many parts of the world.
Unfortunately, there were two minuses. The most prominent followers and adherents of the supply-side school typically gave short shrift, often bordering on outright hostility, to the importance of reining in government spending. Second, and related to the first: because supply-side thinking was centered in the Republican Party, many members of that party–which had long expressed concern about high government spending and high government deficits–downplayed the importance of cutting (or even reducing the growth of) government spending.
This is from David R. Henderson, “The Balance Sheet of Supply Side Economics,” Defining Ideas, September 17, 2019.
If you want to bother to comment, please bother to read the whole thing.
READER COMMENTS
Alan Goldhammer
Sep 18 2019 at 2:37pm
I did read the whole thing!! I believe one of the earliest supporters, Bruce Bartlett has seen the light and moved onto the other side. Binyamin Applebaum, in his excellent book “The Economists Hour” which recently came out goes over a lot of this ground, deftly skewering the premise and the outcome. I’m into the concluding chapter of the book right now and it does not make the profession of economist look very good. Tyler Cowan had a brief note on it over at Marginal Revolution.
David Henderson
Sep 18 2019 at 5:59pm
First, thanks for reading the whole thing before commenting.
Re Bruce Bartlett, I’m pretty sure your statement is false. His 2010 book that I referenced was written well after he was fired from NCPA and well after he turned against “the right.” In it, he advocates tax increases but not increases in marginal tax rates. He gives an immense number of references to studies that find huge incentive effects and huge deadweight loss from high marginal tax rates.
I haven’t read Applebaum’s book, so I don’t know how familiar he is with the literature.
BTW, it’s Tyler Cowen, not Cowan.
Alan Goldhammer
Sep 19 2019 at 8:37am
My fault on the Tyler Cowen typo. Bruce Bartlett was inteviewed by Barry Ritholz on the Masters in Business podcast back in 2018. I was going by some of his statements on that podcast (you can listen to it via Stitcher or Apple podcast).
Applebaum’s book is thoroughly annotated through out. Here is what Tyler had to say in a brief note on Marginal Revolution:
IMO, any economist blogger should read the book and think hard about the conclusions.
David Henderson
Sep 19 2019 at 11:52am
When you say that Applebaum “deftly skewers the premise and the outcome,” what does he say is the premise and what does he say is the outcome?
David Henderson
Sep 19 2019 at 2:02pm
Alan,I went to the Amazon site to check out Applebaum’s book and saw this statement in a description of his book:
“But the Economists’ Hour failed to deliver on its promise of broad prosperity.”
Is that an accurate statement of one of his messages? If so, I can’t agree with Tyler Cowen that there are “no errors of fact” in it.
Alan Goldhammer
Sep 20 2019 at 8:49am
David, as you know I’m not an economist and don’t want to try to argue from that perspective. It’s not at all clear who wrote the blurb on the Amazon cite as there is no attribution.
I don’t know what particular parts of the book that Tyler found problematic as he only offers a general statement. Applebaum and others have noted that inequality has increased over the past 2-3 decades as more income has flowed to those working in finance as opposed to other economic sectors (I think that this is inarguable). Applebaum’s book is thoroughly researched and annotated. I read it on my Kindle App and the footnotes and commentary are about 1/3 of the total text. There is a good review of the book by Sebastian Mallaby in The Atlantic and Liaquat Ahamed in The New Yorker. Both of them are far more conversant with the economic issues than I.
Benjamin Cole
Sep 19 2019 at 7:08am
Okay, I read the whole thing. I tend to believe in lower tax rates, so no feedback from me on the score. I would note that payroll taxes place a high marginal tax rate on people moving into the labor force. On the first penny earned, too.
On the federal deficit issue…this is getting muddy. The Fed just vaporized $200 billion in Treasury debt (in service of overnight bank liquidity) in three days. No howls that this will lead to the Weimar Republic, on steroids.
After 2008, the Fed vaporized a few trillion in federal IOUs.
Okay, “vaporized” is not quite right. The Fed paid off bondholders in digitized cash. Japan is doing the same, on much larger scale.
Japan has no inflation.
I hate to say, “deficits don’t matter.” I believe in the three little pigs and the houses they built. I believe in prudent behavior. I am a frugal person (ask my chronically aggravated wife).
But seeing is believing. Deficits don’t matter. At least not in ranges that Western developed economies operate.
Jon Murphy
Sep 19 2019 at 7:41am
Good article. Your point at the end about supply-siders unfortunately not discussing government spending is a major reason why I’m skeptical (to outright opposing) tax cuts that do not also come with government spending cuts.
Cutting taxes is relatively easy. Cutting spending runs into all kinds of public choice issues: what’s most optimal to cut, how will entrenched interests spend their resources to defend their interests, etc etc.
The implication of public choice on the issue of tax cuts as I see it is sometimes a tax cuts may not be preferable from a liberty-maximizing or an economic-welfare prospective.
Jackson Mejia
Sep 19 2019 at 8:30am
Regarding the excessive spending point:
Feldstein says, “I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living” (emphasis mine). If national income is a goal in itself, wouldn’t it follow that resources should be allocated where the marginal return is highest (or can be expected to be highest) so that national income rises more rapidly? Would some of these supply-siders argue that the government is more “efficient” than the private sector and so the large government spending is justified? There is a better way to ask this question, but I’m not exactly sure how to put it. I imagine you get the drift.
The article calls to mind Alan Blinder’s fervent denunciations of the supply-siders in Heard Heads, Soft Hearts (which I often mistakenly remember as Soft Heads, Heard Hearts), in which he wrote something to the effect that these people could hardly be called economists, but propagandists. Anyway, I really liked the article and I learned a lot. Thanks.
Jon Murphy
Sep 19 2019 at 8:36am
Along certain margins, the government is likely more efficient than the private sector, but that does not in and of itself justify large government spending.
David Henderson
Sep 20 2019 at 10:20am
Question for Alan Goldhammer,
I’m asking it separately because the thread ran out.
I had asked you if the statement on Amazon:
“But the Economists’ Hour failed to deliver on its promise of broad prosperity.”
was an accurate statement of what’s in the book. You answered that you’re not an economist and don’t want to argue as one.
I get that. I’m simply asking if that statement accurately represents what’s in the book. You hardly need to be an economist to answer it. All you need to do is have read the book.
So is the statement an accurate representation of what’s in the book?
Comments are closed.