Posts Tagged ‘Supply-side economics’

The limited benefit of enriching the rich

October 17, 2014


Hat tip to Avedon’s Sideshow

Taxes, welfare and Alan Greenspan

January 17, 2014


Alan Greenspan, the former chair of the Federal Reserve Board, believed that the key to increasing a nation’s wealth is investment.  Every dollar that was collected in taxes on rich people and corporations and spent on unemployment compensation, food stamps and free health care was, in his view, one less dollar available for investment.  So he favored lower taxes on the rich and less spending on the poor.  We now know how this worked out.

American corporations are stuffed with cash, and the Federal Reserve System has pumped trillions more in cash into the big banks through its “quantitative easing” program.  But the U.S. economy, and to some extent the world economy is stalled, because of the lack of buying power of the American middle class.  That buying power was sustained in earlier eras by rising earnings, and then by rising participation in the work force and rising debt.  But all of these have run their course.  No rational business will increase production unless there is a good market for the product.

Click on Alan Greenspan’s ‘The Map and the Territory’ review by Robert Solow for a more in-depth discussion of this issue.


The starving beast and the Laffer curve

February 16, 2011

David Stockman, who was Ronald Reagan’s budget director, told a reporter that the real purpose of the Reagan administration’s tax reductions was to choke off revenue for the welfare state. Or, in the words of Grover Norquist, the president of Americans for Tax Reform, to “starve the beast.”

This didn’t happen.  Bill Clinton, a tax raiser, did a better job of holding down spending than tax cutters such as Ronald Reagan and George W. Bush.  It’s not hard to see why.  When are you and I most likely to be careful about what we spend – when we’re putting our expenses on a credit card or when we’re paying out of pocket.

Whatever the intent of the intent of the Reagan tax program, its result was to enable Republicans to replace Democrats in the role of Santa Claus.  In earlier eras, Democrats proposed popular spending programs while Republicans grumbled about whether they were affordable.  Since Reagan, Republicans have been proposing tax cuts and leaving the Democrats to grumble about whether they were affordable.

Click on What people forget about Reagan for an CNN Money article about the Reagan administration’s record on taxing and spending, which is the source for the above graph.


The flawed logic of supply-side economics

February 15, 2011

From about 1945 to about 1975, U.S. economic policy was influenced by the ideas of the British economist John Maynard Keynes.  He said the key to economic prosperity was consumer demand for goods and services.  As long as people are willing and able to buy things, it was thought, business owners and managers supposedly would find a way to provide them.  In recessions, the job of government was to keep things on an even keel by providing unemployment compensation, engaging in public works, easing interest rates and whatever else it took to keep money in circulation.

President Reagan

The Reagan administration based its policy on a new and opposing theory which was a radical departure from Keynesianism.  The new theory was that savings and investment, not demand, were the key to prosperity.  The new theory was that it is the “supply side,” not the “demand side,” that matters.  And the key to the demand side is to lower the marginal tax rate – the additional tax you will pay if you increase your income another dollar.

Suppose you are someone who is in the 95 percent tax bracket during the 1950s.  Would you want to risk investing your money, knowing that all you would get back is 5 cents on the dollar?  Would you strive to earn extra income, knowing all you could keep is 5 cents on the dollar?  Or would you just want to sit back, enjoy yourself and spend your money on luxurious living?

Along comes the Kennedy administration, and cuts the top bracket to 70 percent.  The government loses very little in revenue, but it increases your return on investment, or on extra work, sixfold. So you, as a rich person, have six times more incentive to work and invest than you did before.

In 1978, during the Carter administration, the top capital gains tax rate was cut from 70 percent to 28 percent.  In 1981 and 1986, during the Reagan administration, the top personal income tax rate was cut in two steps from 7o percent to 28 percent.  The upper-bracket earner got to keep 72 cents on the extra dollar rather than just 30 cents.  This meant that the person could invest in something only half as profitable or twice as risky as before and still come out ahead.  The logic of the theory said this should result in a surge in investment, and prosperity for all.

This seemed plausible to a lot of people at the time.  I myself thought it was worth a try.  But in fact U.S. economic performance was no better when the top tax rate ranged from 28 to 39 percent than when it ranged from 70 to 95 percent.  But when you stop and think about it, this should not have been surprising.