Republican Supply-Siders - Keynsians in Drag

[Toro]

...

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”. 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?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state. In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman). Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans.

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities). ...

when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. Indeed, this is precisely what Jon Kyl (Arizona), a senior Republican senator, has just said: “[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. 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" ...

with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act. This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic. In sum, a great deal of trouble lies ahead, for the US and the world.

...

The political genius of supply-side economics | Martin Wolf's Exchange | FT.com

 

[elvis]

I thought John and Yoko were the Keynesians in drag. or was that gurus?

 

[asterism]

All this talk about taxation and revenue into the government, little talk about spending and revenue from the government.

Yup, the Keynesians lost this one. Krugman was wrong.

 

[elvis]

All this talk about taxation and revenue into the government, little talk about spending and revenue from the government.

Yup, the Keynesians lost this one. Krugman was wrong.

Krugman is far worse than Keynes. He's like Keynes on steroids.

 

[asterism]

All this talk about taxation and revenue into the government, little talk about spending and revenue from the government.

Yup, the Keynesians lost this one. Krugman was wrong.

Krugman is far worse than Keynes. He's like Keynes on steroids.

True, but that's how I think Keynes wanted things. He wanted his ideals to expand and evolve into this bastard set of "intellect" we now know. He was a huckster - a very smart huckster.

 

[The Rabbi]

Actually history supports the Supply Side argument. The deficit under Reagan fell to its lowest point as a percentage of GDP since WW2. Reagan could barely rein in spending from the Democratic Congress and the deficit proceeded to explode.
So other than being wrong historically and theoretically the article is correct.

 

[topspin]

Supply side is sooo wrong Obama decided to go with tax cuts for 95% and faux promises of budget cuts. OK gotcha

 

[Truthmatters]

These people will never accept the facts.

Their minds are made up.

 

[william the wie]

this is garbage. The argument is about optimal tax levels to maximize growth, monetary stability and/or tax revenues in the shortrun vs. the longrun so there are a minimum of six different tax rate optima. So three things have to be determined:

what needs to be optimized

Is the goal shortrun or longrun

What data exists on the best way to get there?

 

[Toro]

Actually history supports the Supply Side argument. The deficit under Reagan fell to its lowest point as a percentage of GDP since WW2. Reagan could barely rein in spending from the Democratic Congress and the deficit proceeded to explode.
So other than being wrong historically and theoretically the article is correct.

What history is that, history on acid? Where do you get your "facts" from?

Reagan presided over the biggest budget deficits since WWII up until that time.

 

[Oddball]

All Reagan did was trade 20+% interest rates and 12+% inflation for those deficits, supposedly with the hope that we'd grow our way out of the problem.

What he failed to recognize is that politicians in the District of Criminals can't let increasing revenues -no matter their source- come in without using that money to buy votes.

 

[Paulie]

All Reagan did was trade 20+% interest rates and 12+% inflation for those deficits, supposedly with the hope that we'd grow our way out of the problem.

What he failed to recognize is that politicians in the District of Criminals can't let increasing revenues -no matter their source- come in without using that money to buy votes.

Congressional term limits. I think it's about time.

I used to be against it, but fuck it...the president has a limit, why not congress?

At this point I can't see any harm in trying.

 

[Oddball]

I've been against them, as anti-market, too.

But seeing as the demopublicraticans have created a political closed shop, there's no real free political market in the first place.

Screw it...I'm now officially on the side of term limits.

 

[Paulie]

Without the pressure to empty the treasury to buy votes to further your political career, maybe fiscal sanity will be restored.

All the sudden cutting spending isn't considered 'politically unfavorable' anymore.

The worst part about it is advocating a law to remedy stupidity. The very thing us libertarians otherwise hate the most.