EconomyNation

Non-economists Anonymous, or how to kick the trickle-down habit

Supply-side economics is neither a true theory nor a proven one. But Republicans have grown so addicted to it, they’re practically eating the poor and middle class. It’s time for progressives to do an intervention.


Hi, my name is Craig, and I’m not an economist. I’m a devoted practitioner of the scientific method, pragmatism, and utilitarianism. In most instances, I can exploit principles derived from those practices to gain insight into nearly any subject I choose to tackle. But alas, they are no match for the “theory” of supply-side economics (not to mention Donald Trump’s 2018 budget proposal). Nonetheless, I will share what I’ve learned about the topic in the hope of providing you with some measure of protection against the falsehoods and ignorance that feed it.

A physicist, a chemist, and an economist are stranded on an island, with only one can of soup to eat. The physicist says, “Lets smash the can open with a rock.” The chemist says, “Let’s build a fire and heat the can first.” The economist says, “Let’s assume we have a can-opener….”  (Anonymous)

The supply-side “theory”

Legend has it the supply-side idea entered the political mainstream in 1974, while economist Arthur Laffer was dining with Donald Rumsfeld, chief of staff to then-President Gerald Ford, and Dick Cheney, an assistant to the president. Laffer drew a curve on a cocktail napkin to show the men how tax revenues would decrease as tax rates increased.

Perhaps it was intended as a joke when, in 1974, Arthur Laffer drew his explanation of supply-side economics on a cloth napkin for Dick Cheney and Don Rumsfeld. But Laffer’s premise—that economic growth depends solely on the production of goods and services—wasn’t a joke. Neither was it a true “theory,” because that word is reserved for well-tested concepts that have been shown to describe a phenomenon adequately. And after more than 40 years, we have yet to see proof that the supply-side hypothesis works.

Laffer’s proposition emerged in an attempt to describe the economic conditions (namely, stagflation) that the prevailing Keynesian theory had failed to predict. The key element of the hypothesis is that demand is not the driving factor of an economy; production is. Anything that increases production and reduces the cost of products will increase demand, and the best way to increase production is to motivate producers to produce more. The supply-side approach postulates that this outcome can be achieved through changes in tax, regulatory, and monetary policies.

In terms of taxation, supply-side economics calls for reducing marginal income and capital gains tax rates. The idea is that the lower tax rates will motivate workers to work for the extra dollar, while the lower capital gains tax will incentivize investors to invest more. On top of that, Laffer conjectured that the increase in taxes from the gain in production would make up for the shortfall caused by the lower marginal tax rate.

The supply-side approach…calls for both less government and less consumer involvement.

The supply-side approach also demands that government reduce the number of regulations that impede investment in production. That is, it calls for both less government and less consumer involvement. Additionally, the approach contends that the Federal Reserve should not attempt to manage the economy by changing the supply of money. Supply-siders generally believe that even well-intentioned government efforts to control the fiscal climate are just as likely to cause harm. It is best that government stay out of the way.

Reducing regulation aligned well with Ronald Reagan’s goal of a smaller government, as did the idea of reducing the tax burden on Americans. The two concepts became part of his presidential platform during the 1980 election, leading critics to call his plan “Reaganomics” or “trickle-down economics.” Even his Primary contender and future vice-president, George H.W. Bush, coined the term “voodoo economics.”

Since then, three Republican administrations have included supply-side economics as the foundation of their budget proposals: Reagan, Bush (although he later relented), and George W. Bush. Over the past 20 years, some supply-side principles have seeped into the economic vision of some Democrats.


The result

Whether supply-side economics is considered a viable hypothesis largely depends upon one’s party affiliation or political philosophy. This is unfortunate, because the determination should be based on data. Of course, the challenge is that economics is not an exact science, and you can’t run a macroeconomic experiment on an entire country. Consequently, economists must tease apart the data and attempt to account or correct for other events that affect the economy. That fact alone—that things other than production affect the data that define the status of an economy—suggests that supply-side economics is a failed hypothesis.

Given the diagnostic limitations, the best we can do to prove the viability of supply-side economics is to correlate data. Based on data from the second half of the 20th century, an optimistic view leads to a conclusion of “eh,” while pragmatic scrutiny mandates a “no.” There are aspects of the macroeconomic conundrum that I have not presented, but they are more interesting than insightful and tangential to our mission. In a nutshell, we can state with a relatively high degree of confidence that the supply-side approach is not a valid means for sustaining long-term economic growth. The following is but a small set of available examples:

•  The state of Kansas continues its economic implosion following the governor’s supply-side experiment (which Laffer encourages him to continue).

•  Historical data show little to no correlation between the top marginal tax rates and production.

•  Changes in marginal tax rates do not significantly change people’s work behaviors.

•  Historical data show no evidence that the tax reductions are offset by production gains.

It is interesting that Republicans still extol the mythological economic success of the Reagan tax cuts but didn’t suffer any cognitive dissonance when they deviated from the threefold dogmatic supply-side path during the Great Recession.


Ethical shortcomings

Even if one chooses to ignore supply-side’s prima-facia failings, there remains an ethical conundrum. Neil Buchanan, a liberal economist, legal scholar, and law professor, puts it this way:

Demand-side economics means giving people the means with which to buy goods and knowing that businesses will step in to meet that demand, whereas supply-side economics means giving businesses incentives to produce more goods at lower prices in the belief that customers will buy what the companies are selling.

The question from the standpoint of policy is whether the best way to increase growth in the U.S. is to continue to shift the distribution of income and wealth upward, chasing our tails in the faith that someday, somehow, it will all pay off.

The recognition of this morally questionable approach is not a partisan rant. We get a similar description from Irving Kristol, a supply-side advocate:

Supply-side economics naturally gives rise to an emphasis on growth, not redistribution. It aims at improving everyone’s economic circumstances over time, but not necessarily in the same degree or in the same period of time. The aggregate demand created by economic activity, as seen from the supply-side, is indifferent to the issue of equality.

As a young philosopher occasionally reminds me, we must differentiate our first-world problems from our third-world problems so that we address the most pressing issues first. Simply put, not providing for those with critical needs while simultaneously using resources to incentivize the most wealthy to invest in ways that will further enhance their standard of living is morally corrupt.

What’s more, there is empirical evidence that supply-side economics do not work, and income redistribution does. As described by the National Bureau of Economic Research, cash redistributions to low-income families have positive long-term impacts on the economy. Feeding the hungry addresses our third-world problem now and helps with our first-world desires later. As pointed out by Buchanan, if supply-side economics did work, “liberals like me would gladly get on board. After all, if it really turned out that lavishing money on rich people ended up helping everyone else, why would we not want to make that happen? What matters is who is ultimately better off, not where the money starts.”

Supply-side approaches postpone aiding those most in need of assistance with a promise of future prosperity. This is absurd. Hunger and shelter cannot wait to be addressed, solving them now has long-term positive impacts, and the supply-side approach does not fulfill the promise.

In the meantime, supply-side’s insidious grip on the brains of conservatives appears to have emboldened Trump to propose an extreme version of the method. The “Taxpayers First Budget” makes severe cuts to the existing safety net, while also claiming outrageous levels of growth that no other financial institution defends. Or, perhaps Trump knows the budget won’t work and will be rejected, and he’s simply exploiting anyone willing to consume his economic narcotic.


Time to intervene

Economics is a strange and difficult subject that doesn’t lend itself to normal forms of analysis. Assessing the impact of economic decisions on the nation requires understanding human behavior, business strategy, statistics, and a set of rather arcane terms. This—coupled with the convenience of a model that fits conservative views of how the world should be—is probably the primary reason Republicans have become addicted to supply-side economics. And it is an addiction, for how else can we explain their untethered hope of the joy it will bring despite more than 30 years of evidence to the contrary?

This leaves progressives, liberals, Democrats, and moderates with a challenging mission—convincing our supply-sided legislators to give up an elixir to which they do not recognize they are habituated. As I see it, two treatments are available: data and ethical reasoning. For data, we can refer legislators to the aforementioned Kansas catastrophe, as well as the nonpartisan analysis of the Congressional Research Service and Congressional Budget Office.

Depending on the legislators’ predilections, we can use the ethical guidance of the Bible—both Matthew 25:40 and Deuteronomy 15:7-11 address how one should regard and treat the poor—or the ethical philosophy of Peter Singer. He states that ethical principles “cannot be justified in relation to any partial or sectional group….[I]n making ethical decisions we go beyond our own likes and dislikes [and] give the same weight to the interests of others as one gives to one’s own interests.”

It is generally understood that overcoming an addiction takes time, patience, and teamwork. We are the team, and it is time for the intervention to start. Let us begin to patiently and persistently help our national representatives walk away from both the supply-side approach to budgeting and the absurd Trumpian budget. We need to work on our state legislators as well because many predict that North Carolina is on the same path as Kansas.

 

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Great article!! Somehow, we need to find a way to enlighten the masses as well. Trickle down has been tested and failed.

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