Supply-Side Economics RIP

[Toro]

As a member of Jack Kemp's congressional staff back in the late 1970s, I had a front-row seat to the creation of SSE. In fact, I was the one who did the early research on the history of tax cuts, such as those proposed by John F. Kennedy and enacted by Lyndon Johnson in 1964, that was extremely important in bolstering the case for tax cuts. I later published this research in my 1981 book, Reaganomics: Supply-Side Economics in Action.

I was the person on Kemp's staff whose job it was to actually draft and promote the Kemp-Roth tax bill, which was adopted by Ronald Reagan during the 1980 campaign and enacted into law in August 1981. It brought the top marginal income tax rate down from 70 percent to 50 percent, among other things. I would note that my colleague Pete Davis actually did a lot of the heavy lifting for me as a staff economist at the Joint Committee on Taxation.

I continue to believe that what the supply-siders did was good for the economy, good for the country and good for the advancement of economic science. The best economists in the country were pretty clueless about our economic problems during the Carter years. It was widely asserted that the money supply had no meaningful effect on inflation, that marginal tax rates had no incentive effects, and that it would take decades or another Great Depression to break the back of inflation. ...

During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut." ...

The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora's Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d'être. In particular, the idea that tax cuts will "starve the beast" and automatically shrink the size of government is extremely pernicious.

Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. As I explained in a recent column, a key reason why deficits restrained spending in the past is because they led to politically unpopular tax increases. But if, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year. ...

Many of my friends believe I have abandoned supply side economics and become a Keynesian. (Among conservatives there are few insults more damning than to be labeled a "Keynesian.") But as I try to explain in my book, my views haven't changed at all; it's circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don't understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it's simply become dogma totally disconnected from reality.

And on Keynes

The General Theory, I think, was really just Keynes' way of making some relatively simple ideas look scientific in order to make them more acceptable to policymakers. The first idea is that deflation was the central economic problem. Second is that it was impractical to cut money wages to reduce unemployment and restore equilibrium. And third is that monetary policy was impotent because the economy was in a liquidity trap. (A liquidity trap results when interest rates are so low that money and bonds are essentially interchangeable such that no additional liquidity is created when the Federal Reserve buys bonds.)

Economist Irving Fisher added an additional component to this analysis by showing that the zero-bound problem is a very serious impediment to monetary policy when the rate of deflation exceeds the interest rate. That is because no one will lend money for a negative nominal rate (except very briefly). Fisher also explained that deflation magnified the real value of debt, which became a crushing burden on both households and businesses that reduced spending and growth.

What both Keynes and Fisher said was that when the economy is in a deflationary depression the collapse of private spending had to be compensated for by public spending, because that was the only way to get money circulating and make monetary policy effective. While monetary policy would drive the recovery it needed fiscal policy in order to work.

Supply-Side Economics, R.I.P. | Capital Gains and Games

 

[PeterS]

As a member of Jack Kemp's congressional staff back in the late 1970s, I had a front-row seat to the creation of SSE. In fact, I was the one who did the early research on the history of tax cuts, such as those proposed by John F. Kennedy and enacted by Lyndon Johnson in 1964, that was extremely important in bolstering the case for tax cuts. I later published this research in my 1981 book, Reaganomics: Supply-Side Economics in Action.

I was the person on Kemp's staff whose job it was to actually draft and promote the Kemp-Roth tax bill, which was adopted by Ronald Reagan during the 1980 campaign and enacted into law in August 1981. It brought the top marginal income tax rate down from 70 percent to 50 percent, among other things. I would note that my colleague Pete Davis actually did a lot of the heavy lifting for me as a staff economist at the Joint Committee on Taxation.

I continue to believe that what the supply-siders did was good for the economy, good for the country and good for the advancement of economic science. The best economists in the country were pretty clueless about our economic problems during the Carter years. It was widely asserted that the money supply had no meaningful effect on inflation, that marginal tax rates had no incentive effects, and that it would take decades or another Great Depression to break the back of inflation. ...

During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut." ...

The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora's Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d'être. In particular, the idea that tax cuts will "starve the beast" and automatically shrink the size of government is extremely pernicious.

Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. As I explained in a recent column, a key reason why deficits restrained spending in the past is because they led to politically unpopular tax increases. But if, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year. ...

Many of my friends believe I have abandoned supply side economics and become a Keynesian. (Among conservatives there are few insults more damning than to be labeled a "Keynesian.") But as I try to explain in my book, my views haven't changed at all; it's circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don't understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it's simply become dogma totally disconnected from reality.

And on Keynes

The General Theory, I think, was really just Keynes' way of making some relatively simple ideas look scientific in order to make them more acceptable to policymakers. The first idea is that deflation was the central economic problem. Second is that it was impractical to cut money wages to reduce unemployment and restore equilibrium. And third is that monetary policy was impotent because the economy was in a liquidity trap. (A liquidity trap results when interest rates are so low that money and bonds are essentially interchangeable such that no additional liquidity is created when the Federal Reserve buys bonds.)

Economist Irving Fisher added an additional component to this analysis by showing that the zero-bound problem is a very serious impediment to monetary policy when the rate of deflation exceeds the interest rate. That is because no one will lend money for a negative nominal rate (except very briefly). Fisher also explained that deflation magnified the real value of debt, which became a crushing burden on both households and businesses that reduced spending and growth.

What both Keynes and Fisher said was that when the economy is in a deflationary depression the collapse of private spending had to be compensated for by public spending, because that was the only way to get money circulating and make monetary policy effective. While monetary policy would drive the recovery it needed fiscal policy in order to work.

Supply-Side Economics, R.I.P. | Capital Gains and Games

Interesting article. Of course there are those that would argue that Supply Side never existed to begin with. Central to Supply Side Theory was the reduction in government spending else you are simply replacing tax and spend with borrow and spend and the same Keynesian spending multiplier in effect.

Even so it is refreshing to see a conservative breaking rank with dogma. That takes balls-something cons lost long ago...

 

[CrusaderFrank]

When is Tax Freedom Day this year?

 

[Old Rocks]

When is freedom from good roads, clean water, and an adaquete military defense day this year?

 

[Fatality]

When is freedom from good roads, clean water, and an adaquete military defense day this year?

when is freedom from welfare, abortion, and bloated government beaurocracy day this year?

 

[jreeves]

When is freedom from good roads, clean water, and an adaquete military defense day this year?

When is freedom from government that spends nearly 2 trillion more than they take in day?

 

[Bern80]

When is freedom from good roads, clean water, and an adaquete military defense day this year?

That would be a rather simplistic view of the event and disingenuous to boot. It isn't a group of people advocating no taxes. We would simply like government to know it's role where taxes are concerned and be less wasteful with them.

 

[PubliusInfinitum]

When is freedom from good roads, clean water, and an adaquete military defense day this year?

ROFLMNAO...

Now right now, the whole of the ideological left is CONSUMED with passing a law which frees the individual of the reponsibility for the care of their health...

This law will set upon the nation; perpetual, exponentially increasing costs; from which there is no means to escape; because these idiots will have tied the means of production, our very economy, into an abyss of subjective need... and this they're doing to solve the last problem they created; which stemmed from the catastrophe they created and demanded they be allowed to repair the time before that and so on.

The US has spent tens of trillions of dollars from our economy, on their obsessions... and not a single one of them has been solved... there's not one which is even percentile better off. The poor..., 'well dey stihl po'... ' and the old... most of those that they sought to fix are dead... .

But isn't it amazing, that without fail... when ever the debate turns to their incessant attack on the American economy... they don't turn to ANY OF THOSE PROGRAMS... No sir.

They turn to Highways and bridges, Cops and Firemen... Airmen, sailors Soldiers and Marines.., infrastructure and defense.

And why is that?

Well it's because necessary infrastructure is... necessary. So we levy taxes to pay for such things... and they need to hold that necessity up as the basis for legitmate governance... legitimate taxation; its says: "We can tax! And fulfills a need and it's the right thing to do..."

Soaking in the delusion that a those legitimate reasons provide a blanket to cover every need which can be conjured... for funding to fill any need... and it is through that, that they conclude that taxation is therefore the instrument which fulfills all needs.

They're idiots... sub-intellects... they are, the ever more common fools... and allowing them to particpate in government, has brought our nation through chaos; through calamity, to where we stand today... they've brought our nation to the precipice of catastrophe.

Infrastructure? ROFLMNAO... Indeed...

 

[Valerie]

When is Tax Freedom Day this year?

Tax Freedom Day® will arrive on April 13 this year, the 103rd day of 2009. That means Americans will work about three and a half months of the year, from January 1 to April 13, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels. Tax Freedom Day falls a full two weeks earlier in 2009 than it did in 2007. In fact, not since 1967 has Tax Freedom Day come earlier than this year's April 13 date.

This shift has been driven by two factors: the recession has reduced tax collections even faster than it has reduced income; and the stimulus package, a.k.a. HR 1, the American Recovery and Reinvestment Act of 2009, includes large temporary tax cuts for 2009 and 2010. Nevertheless, in 2009, Americans will pay more in taxes than they will spend on food, clothing and housing combined.

While tax revenues are falling, government expenditures are expected to explode in 2009, also driven in significant part by HR 1. Tax Freedom Day, like almost all tax burden measures, ignores the current year's deficits. If the projected deficit for 2009 were counted as a tax, Tax Freedom Day would arrive on May 29 instead of April 13-the latest date ever for this deficit-inclusive measure.The Tax Foundation - America Celebrates Tax Freedom Day

The Tax Foundation - America Celebrates Tax Freedom Day®

Taxes and Federal Deficit

Tax Freedom Day moves somewhat independently from an alternative calculation that adds the federal budget deficit to total taxes collected. In 2009, an unprecedented budget deficit over $1.5 trillion produces a date of May 29. This is the latest date in the year this deficit-inclusive measure has ever fallen. The only previous years when taxes and deficit spending comprised a similarly large share of national income were 1944 and 1945, at the peak of World War II. In the postwar era, this date had never fallen later than May 9 (in 1992). Figure 1 below shows Tax Freedom Day as traditionally presented and with the inclusion of the federal budget deficit, since 1967 (click to enlarge). http://www.taxfoundation.org/UserFiles/Image/Tax-Freedom-Day/TFD-graph-large.jpg