FUSsa-talk Mailing List: Fwd: The political genius of supply-side economics | Martin Wolf's Exchange | FT.com

[Robert Tapp (tappx001]

Begin forwarded message:

> From: Robert Tapp <tappx001 [at] umn.edu>
> Date: July 26, 2010 10:24:03 AM CDT
> To: Humanist Institute Discussion Group Discussion Group <hidisc [at] 
> humanistinstitute.org>
> 
> 
> We probably have too few discussions of economics on this list. This analysis 
> of the fallacies of <supply-side> theories by Martin Wolf in Financial TimesI 
> seemed to sharp that I'm posting it. After all, these assumptions have guided 
> Republican strategies since Reagan. And Laffer's solution to the problem of 
> central government (<Starve the beast>) continues to dominate. The neocon 
> exception, of course, was the military!
> 
> Bob
> 
> 
> http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/?om_rid=Ceaxuj&om_mid=_BMTX-XB8PxUPtu&;
> 
> The political genius of supply-side economics
> 
> The future of fiscal policy was intensely debated in the FT last week. In 
> this Exchange, I want to examine what is going on in the US and, in 
> particular, what is going on inside the Republican party. This matters for 
> the US and, because the US remains the world’s most important economy, it 
> also matters greatly for the world.
> 
> My reading of contemporary Republican thinking is that there is no chance of 
> any attempt to arrest adverse long-term fiscal trends should they return to 
> power. Moreover, since the Republicans have no interest in doing anything 
> sensible, the Democrats will gain nothing from trying to do much either. That 
> is the lesson Democrats have to draw from the Clinton era’s successful 
> frugality, which merely gave George W. Bush the opportunity to make massive 
> (irresponsible and unsustainable) tax cuts. In practice, then, nothing will 
> be done.
> 
> Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. 
> According to my friend, Bruce Bartlett, a highly informed, if jaundiced, 
> observer, some “conservatives” (in truth, extreme radicals) think a federal 
> default would be an effective way to bring public spending they detest under 
> control. It should be noted, in passing, that a federal default would surely 
> create the biggest financial crisis in world economic history.
> 
> 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, alas,
> 
> 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).
> 
> Today’s extremely high deficits are also an inheritance from Bush-era 
> tax-and-spending policies and the financial crisis, also, of course, 
> inherited by the present administration. Thus, according to the International 
> Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit 
> amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while 
> the cumulative deficit over these years is forecast at 23.5 per cent of GDP. 
> In any case, the stimulus was certainly too small, not too large.
> 
> The evidence shows, then, that contemporary conservatives (unlike those of 
> old) simply do not think deficits matter, as former vice-president Richard 
> Cheney is reported to have told former treasury secretary Paul O’Neill. But 
> this is not because the supply-side theory of self-financing tax cuts, on 
> which Reagan era tax cuts were justified, has worked, but despite the fact it 
> has not. The faith has outlived its economic (though not its political) 
> rationale.
> 
> So, 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 John 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”
> 
> What conclusions should outsiders draw about the likely future of US fiscal 
> policy?
> 
> First, if Republicans win the mid-terms in November, as seems likely, they 
> are surely going to come up with huge tax cut proposals (probably well beyond 
> extending the already unaffordable Bush-era tax cuts).
> 
> Second, the White House will probably veto these cuts, making itself even 
> more politically unpopular.
> 
> Third, some additional fiscal stimulus is, in fact, what the US needs, in the 
> short term, even though across-the-board tax cuts are an extremely 
> inefficient way of providing it.
> 
> Fourth, the Republican proposals would not, alas, be short term, but 
> dangerously long term, in their impact.
> 
> Finally, 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.
> 
> Where am I wrong, if at all?
> 
> Martin Wolf’s first response:
> 
> Bruce Bartlett writes “I think my friend Martin is a bit too hard on Reagan, 
> who did try to cut spending and signed 11 major tax increases into law to 
> bring down the deficit. And Bush 41 initiated a budget deal in 1990 that 
> eventually led to budget surpluses. It was Bush 43 and his willing 
> accomplices among the Republicans who controlled Congress that deserve the 
> vast bulk of the blame.”
> 
> Martin Wolf on Americans being entitled to make their own choices:
> 
> A number of commentators assume that I am a European socialist (not true) and 
> am attacking the Republicans for this reason (also not true). I believe 
> Americans are entitled to make their own choices. But then make it an honest 
> choice.
> 
> Martin Wolf asks whether the US government can default:
> 
> The answer, in part, depends on what one means by default.
> 
> July 25, 2010 4:18pm in Financial crisis, Supply-side economics | 78 comments
> 
> 
>