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Supply-side economics

Suppose that the US presidential election of 1932 had, in fact, taken place in 1930, at an early stage in the Great Depression.
Suppose, too, that Franklin Delano Roosevelt had won then, though not by the landslide of 1932. How different subsequent events might have been. The president might have watched helplessly as output and employment collapsed. The decades of Democratic dominance might not have happened.
On such chances the wheel of history turns.
Martin Wolf, FT, August 31 2010

I (among others) then argued that policy needed to be hugely aggressive. Alas, it was not. I noted on February 4 2009, at the beginning of the new presidency: “Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused.”

The direction of policy was not wrong: policymakers – though not all economists – had learnt a great deal from the 1930s. Sensible people knew that aggressive monetary and fiscal expansion was needed, together with reconstruction of the financial sector.

But, as Larry Summers, Mr Obama’s chief economic adviser, had said: “When markets overshoot, policymakers must overshoot too”. Unfortunately, the administration failed to follow his excellent advice. This has allowed opponents to claim that policy has been ineffective when it has merely been inadequate.

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Martin Wolf

Alternate history

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To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”.
Martin Wolf July 25, 2010

Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

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Jon Kyl of Arizona, the second-ranking Republican in the Senate, was asked the obvious question:
if deficits are so worrisome, what about the budgetary cost of extending the Bush tax cuts for the wealthy, which the Obama administration wants to let expire but Republicans want to make permanent? What should replace $650 billion or more in lost revenue over the next decade?
His answer was breathtaking:
Paul Krugman, New York Times July 15, 2010

“You do need to offset the cost of increased spending. And that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.”

So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count.

Now there are many things one could call the Bush economy, an economy that, even before recession struck, was characterized by sluggish job growth and stagnant family incomes; “vibrant” isn’t one of them.

But the real news here is the confirmation that Republicans remain committed to deep voodoo, the claim that cutting taxes actually increases revenues.

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If ever there have been federal tax cuts tailored to produce supply-side economic behavior, they were implemented during President George W. Bush’s administration starting in 2001.
The data suggest that any extraordinary investment that has occurred in the wake of the George W. Bush tax cuts has been in residential real estate and consumer durable goods.
Paul L. Kasriel, May 25, 2007

The idea of supply-side economics was born when a guy called Arthur Laffer sketched a curve on a cocktail napkin in 1974, and the debate over its merits has been raging ever since.
The Law of Supply and Demand
Emily Messner, Washington Post, December 18 2005

Why would the ruling party cut taxes for the wealthy instead of, say, providing childcare for the poor, or making sure the District of Columbia has enough money for every student to get his own textbooks?

The answer lies in trickle down economics.

Fans of the theory don't like to use that term because it astutely describes the phenomenon - the economic benefit flows downstream until it's just a trickle.

My skepticism should not be construed as a blanket condemnation of the Reagan tax cuts. Surely we can agree that a top tax bracket of 70 percent is outlandish and it was a good move to get that figure down significantly.

In his Friday column, a triumphant E.J. Dionne heralded the end of this era, declaring supply side economics solidly debunked. Dionne believes Republicans are finally starting to see that "the help-the-wealthy, damn-the-deficits approach doesn't hold together, either as policy or politics."

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The fact is that supply-side economics was a partial con job from the get-go. Granted, from the 80% marginal tax rate that existed in the US and the UK into the late 60s and 70s, lower taxes do incentivise productive investment and entrepreneurial risk-taking.
But below 40% or so, it just pads the pockets of the rich and destabilises the country’s financial balance sheet.
Bill Gross June 2009

Bill Clinton’s magical surpluses were really due to ephemeral taxes on leverage-based capital gains that in turn were due to the secular decline of inflation and interest rates that at some point had to bottom