StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Supply-Side Economics, R.I.P.

13 Oct 2009
Posted by Bruce Bartlett

Today is the official publication date of my latest book, The New American Economy. In this post I'd like to explain a little bit about why I wrote it and how I arrived at my present state of mind, which seems to be confusing to many of my friends.

The book grew out of an op-ed I had in the New York Times back in 2007. In it I argued that supply-side economics (SSE) should declare victory and then go out of existence. Everything that was true about it had by then been fully incorporated into mainstream economic thinking and all that was left was a caricature. Continuing to maintain a separate identity for SSE only created unnecessary conflict with mainstream economists, I argued.

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.

As all economists now know, these ideas were wrong. All economists today accept the importance of the money supply--perhaps too much; during the recent crisis many asserted that fiscal stimulus was unnecessary because an increase in the money supply was the only thing necessary to restore growth. (How this would have been accomplished when interest rates were close to zero was never explained.) All economists now accept the importance of marginal tax rates to economic decisionmaking, and organizations like the National Bureau of Economic Research publish vast numbers of papers on this topic.

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."

I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it. As a consequence, we now have a tax code riddled with tax credits and other tax schemes of dubious merit, expiring provisions that never expire, and an income tax that fully exempts almost on half of tax filers from paying even a penny to support the general operations of the federal government.

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.

My book is an effort to close Pandora's Box and explain to people why I believe that SSE should go out of business--or declare victory and go home, if that makes the idea easier to accept. To the extent that it has any valid insights left to inform policymaking they should be used to design a tax system capable of raising considerably more revenue at the least possible economic cost. Going forward, I believe that financing an aging society and a permanent welfare state is the biggest economic problem we face. (See my discussion here.) Failure to do so leads straight back to the stagflation that SSE came into existence to cope with.

As I thought about the cycle that SSE had gone through from a response to the failure of Keynesian economics in the 1970s to triumph in the 1980s to caricature in the 2000s, it occurred to me that SSE and Keynesian economics had a lot in common. Each had been developed in response to serious economic problems that the existing orthodoxy was incapable of dealing with, both struggled for acceptance but were ultimately implemented to great success, both were then misapplied in inappropriate circumstances, thus leading to them becoming discredited.

So basically the book is about the rise and fall of Keynesian economics followed by the rise and fall of SSE. Although the Keynesian part of the book was originally intended to flesh out my model of the rise and fall of economic theories, it turned out to have very valuable lessons for today. Indeed, the circle appears to have come around to where Keynesian theories are now the best ones we have for dealing with today's economic crisis.

One thing I did in the Keynesian section that helped me a lot in my thinking was to largely ignore John Maynard Keynes' technical writings. What was much more useful in understanding his thinking were his popular writings. For example, Keynes had what today we would call an op-ed article in the New York Times on New Year's Eve 1933 that may be the single best thing written during the Great Depression on its cause and what to do about it. It's certainly more accessible than The General Theory of Employment, Interest and Money, much of which is incomprehensible even today.

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.

When the economic crisis hit in the fall of last year, I was very grateful for having studied the Great Depression and absorbed the work of great thinkers like Keynes and Fisher because, as Yogi Berra might have said, it was déjà vu all over again.

It seemed obvious to me right from the beginning that there was a close parallel between the causes of the Great Depression and the current crisis. The principal difference is that the former was caused by a collapse of the money supply resulting from the closure of many banks and the disappearance of their deposits, while the latter was caused by a fall in velocity resulting from a sharp decline in consumer spending following bursting of the housing bubble. (Because GDP equals the money supply times velocity, a decline in velocity has exactly the same effect as a decline in the money supply--nominal GDP must shrink, which causes both prices and output to fall.)

I explained my thinking in a Forbes column on December 5 and a New York Times op-ed on Christmas Eve 2008. That analysis led me to support a large fiscal stimulus. Without public spending on goods and services I didn't see any way for monetary policy to be effective, thus prolonging the deflation at the root of the economy's problem. I was disappointed that so little of the February stimulus package went to the purchase of goods and services, which drives spending, and so much into economically ineffective transfers, which don't. But I understood that time was of the essence and that taking the time to design a better package would have required even more effort to overcome the economy's inertia, not to mention the political obstacles.

In researching my book I saw many points early in the Great Depression when a little bit of the right monetary and fiscal stimulus might have turned things around and made it just a run-of-the-mill recession. But as effective action was delayed year after year, more and more effort was needed to get the economy off a dead stop. It was only when all constraints on spending and money growth were cast aside during World War II that the Great Depression really ended.

I believe that relatively modest action early last year could have forestalled the current crisis or at least mitigated it substantially. I think the tax rebate was wrongheaded and a complete waste of money, and that the money would have been better spent cleaning up the housing mess. I argued this case in another New York Times article, but the Bush administration's obsession with tax cuts as the sole cure for every economic problem--even when they involved nothing more than mailing out government checks--blinded it to alternative policies that might have nipped the housing problem in the bud and prevented the banking system from imploding.

By September, it was obvious to me that substantial government funds would be necessary to bail-out the financial system and prevent a systemic collapse that would have cost vastly more and imposed vastly greater economic hardship. I thought this argument was pretty straightforward and been well accepted by economists ever since the time of Walter Bagehot in the late 19th century. I explained my thinking in an article in the New York Post that grew out of out of frustration that the Bush administration seemed incapable of making competent arguments for the Troubled Asset Relief Program that it was on record as supporting.

I remain incredulous that serious economists not only opposed TARP, but also argued that tax cuts were the only fiscal stimulus the government should have engaged in--if it did anything at all. (I explain my opposition to the do-nothing crowd here.) I really don't understand how tax cuts would have done the slightest bit of good when millions of people had no income because they were unemployed, when businesses had no profits to tax, and investors had huge capital losses that will offset all of their gains for years to come. Given such economic conditions--resulting from a lack of demand, not supply--it's nonsensical to think that tax cuts would have helped. Indeed, one can make a case that the tax cuts included in the stimulus bill were its least effective element.

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.

Nor do I understand the conservative antipathy for Keynes, who was in fact deeply conservative. He developed his theories primarily for the purpose of saving capitalism from some form of socialism. Same goes for Franklin D. Roosevelt, whose biggest economic mistake, I believe, was not that he ran big budget deficits, as all conservatives believe, but that he didn't run deficits nearly large enough until the war forced his hand. (I discuss these points in columns here and here.)

People can judge for themselves if I prove my case. But whether they agree or disagree, I think they will learn something useful from reading my book. I learned a lot from writing it.

The New American Economy

I find it interesting how macroeconomic policy has finally come full circle. It needed the yin and yang of the demand and supply to be truly complete. Maybe now we (at least some of us) understand it fully for the first time.

The other reason people

The other reason people disregarded Keynes was that even with deficits, there were still recessions. If you factor in net interest as an offset, you get a very good tool for explaining and even predicting economic growth in the year following the budget year. Additionally, in graphing this relationship, I found that when Republicans cut taxes and run a deficit they get growth (and when they don't run a deficit, the economy stalls), while when Democrats raise taxes they get growth. The reason for this is that when you run deficits or decrease interest payments through progressive taxation and a smaller debt, you shrink the savings sector and increase the consumption sector - a very Keynesian proposition.

SSE is fairy-tale fertilizer

SSE is fairy-tale fertilizer and anyone who believes in that nonsense is an idiot.

Even Mankiw's textbook said as much [in polite language].

Bruce, Kudos on confronting


Kudos on confronting "Starve the beast" as you have many times. This myth -- or more precisely, it's close cousin, "Don't feed the beast", which is more applicable today and going forward, and which I also believe to be invalid -- is the main obstacle from the right to a fiscally-responsible course correction.

As you and we commenters have discussed on other threads, many on the right believe (1) that if they reject any tax increases long enough, our long-term fiscal imbalance will be solved entirely on the spending side (or darn close to it), and (2) that every dollar of incremental revenue from any tax increases will only lead to an incremental dollar (or more) of spending, leaving us only with higher spending rather than lower deficits, ceteris paribus. Some -- the particularly ignorant -- on the right also cling to a third myth, that tax cuts generally increase revenues (and for amusement, one can get some of them to make BOTH the "starve the beast" argument AND "tax cuts increase revenues" argument, despite their mutual exclusivity).

#1 is, as you've argued, a political pipe dream, impossible now and all the more so as seniors grow as a percentage of the electorate. #2, the strong form of the tax-spend hypothesis (also called the "revenue-expenditure nexus") seems to be invalidated empirically by most analyses, and also would likely be even less applicable in the context of a "grand compromise" (or likely more than one over the next couple of decades) involving substantial sacrifice on both the taxation and spending sides.

Debunking the above myths are critical. There will still be the argument -- with plausible legitimacy -- that holding out will get "better deal" in terms of proportion of sacrifice on the spending side, and I would like to see some hard bargaining with the left to contain spending, but ideologues (and posturing politicians) must be brought to a realistic and reasonable point for some sensible "grand compromise" to be worked out anytime soon.

The missing ingredient is...

In order for your belief (1) to work, we would need politicians who actually do cut spending to match the reduction in tax revenue. They are very thin on the ground, and are likely to remain so, since when it comes down to it, the voters don't want spending cuts - at least, not in their districts. This is completely independent of party affiliation, although the Republicans are now in the somewhat more uncomfortable position when rhetoric and actions are compared. The stimulus package provided more examples of this, if any were needed.


The obvious deal to be made is that Republicans give in on taxes and Democrats agree to cut entitlements. Each side gives cover to the other. Unfortunately, we are nowhere near the point where this is possible. I honestly think the Democrats are closer to the point where they would be willing to talk about serious cuts in entitlements. But as long as Republicans are unwilling to even discuss the possibility of raising revenues, Democrats are not going to do anything. This is why I think that putting revenues on the table is the essential prerequisite for putting a deal together.

How many times will we do this "deal?"

Read your history. We have done this deal at least twice. Check 1982--Reagan raised taxes for budget cuts. Check 1989--Bush broke the "no new taxes" pledge for budget cuts. What did we get? Raised taxes and no budget cuts. The tax increases are always now and the budget cuts are to come later. How about once we do the "other" deal--budget cuts and no increased taxes?

Bruce, Re: I honestly think


Re: I honestly think the Democrats are closer to the point where they would be willing to talk about serious cuts in entitlements.

What is your basis? Do you mean members of Congress, Democratic thought leaders, Democrats among the public, all of the above? Can you cite or link to supporting evidence for your conclusion (statements they have made, actions they have taken, etc.)? And what policy changes suffice for your category of "serious cuts in entitlements"?

Democrats ready to deal?

I think alot of this conclusion can come from the Democrats move to the center of the tent, and while I'm not going to link, I think in general the Democrats have responded consistently with more ideas to the financial crisis than Republicans, who have been blurting tax cuts for awhile now. Your evidence lies in comparing the two ideologies.

And if you need statements, look no further than the current administration, which has published full line-item budgets (including previously hidden expenditures like the Iraq war) and has consistently required that big entitlements be roundly paid for somehow--unlike Medicare Part D, which was a blank check written on the backs of the future.

I think the fiscal policies of restraint, sadly, are now in the hands of Democrats. This is common knowledge until the GOP comes back with something more than cutting taxes.

So your basis for believing

So your basis for believing that the Democrats are open to "serious cuts in entitlements" is that, as they ADD a large new entitlement (the subsidies for expansion of health insurance), they are "offsetting" it on paper with dubious cuts in projected spending plus tax increases? Where are the indications that Democrats are open to serious cuts in entitlements, not just planned cuts in physician fees that either won't happen or won't constitute what I'd call "serious cuts" in the context of our long-term fiscal imbalance?

Income Inequality is a Missing Component here Re: Velocity

One thing I think a lot of Conservatives miss, maybe by choice, is that while there is a positive "tournament" effect of high compensation at the top whereby those down the pyramid are motivated to do better, by having excessive compensation (IE more then needed to motivate the workers and more then someone can spend) this positive effect is lost to the many economic negatives of an unequal society.

As an example paying a CEO 1.5 million dollars (or a semi reasonable 50x the average 30k making worker) will motivate his 300k making managers and 40k making workers to try harder in order to advance up the ladder.

This effect will not be greatly improved by paying the CEO 15 million instead (and in turn paying the managers the same 300k and lowering the workers average pay to 30k to maintain the same overall level of compensation and profit). This is for two important reasons.

First there is either no or very little net gain in productivity by greatly increasing compensation at the top. For someone making 30k a year the difference between 1.5 million and 15 million is pretty academic when it comes to tournament motivation.

Additionally increasing the wage at the top (and lowering it for the rest) has a negative effect on productivity (workers take second jobs, have more stress from finances, put off medical treatments due to cost, increase in average weight given the correlation between poor wages and obesity which in turn again decreases workplace performance and health). So if the point of pay is to create an efficient high functioning workforce moving all the pay to the top has the opposite effect.

The most important reason for paying the average worker better instead of moving all the income to the boardroom is that it decreases the velocity of money a great deal, thus decreasing the money supply and causing all sorts of problems. This is because the average worker has a very high propensity to spend, and highly paid hedge funders and executives have an extremely low propensity to spend relative to their income (Bill Gates might have a 100 million dollar house, but what is that in comparison to a 60 billion dollar fortune?).

the 30k worker will take his 1000 dollar paycheck and it will be spent, probably before he receives his next one. It will probably be spent locally and will be much more likely to be spent on American goods or at least in American stores (many more working class people drive Fords, for instance, then wealthy people who tend to buy foreign at a very high rate).

Alternately the CEO making 15 million will be hard pressed to spend his 577k biweekly paycheck fast enough. It is in fact likely he will not spend anywhere near even most of it and will instead hoard. This hoarding mentality amongst the super rich can be seen on the fortune 400 with their combined assets of over 1.6 trillion. That is twice the size of the stimulus and all very low velocity money. By pushing money into the hands of rich people who sit on it everyone suffers, even the rich who usually have their wealth tied to companies that only make money when the middle class is able to buy.

The best argument for disincentives to excessive pay (defined as pay beyond a certain propensity to spend bound, say when people spend less then 80% of their income) is not a moral one, but a practical one. By putting the tax rate on income beyond what people can spend rather high, hoarding can be limited, money can be better distributed and the velocity of money can be increased a great deal through shared prosperity.

I mean do people REALLY think its some strange coincidence that the two biggest recessions in our history both occurred after a massive accumulation of wealth at the top to the detriment of almost all workers. Our two biggest problems, low private spending (and low money velocity, which is related) and high private debt can be traced to this quite destructive tendency of money moving up to the top of the pyramid at ever increasing speed to be hoarded in Forbes list treasure troves.

Market Policy and Tax Policy

This is very helpful perspective on your writing over the past decade or so.

A question on your views on tax policy and the crisis: I get it that tax cuts are pointless when there's no taxable activity going on. But one of my ideas in September 08 was for Treasury to use its authority to define the basis for capital gains to give taxpayers the option of resetting their basis to, say, the July 1 level, effectively allowing purchasers a 0% CG tax on assets purchased after the onset of the crisis. Capital gains taxes would only have been due on gains realized after the crisis had passed to the extent gains exceeded July 1 (or whatever date) market valuations. Taxes on gains on assets over pre-crisis levels would remain fully taxable. (Since CG revenue is small relative to the size of all the stimulus, and because of the crisis -- except for short sellers I guess -- presumably the "cost" of such a policy would have been small.)

You may recall the lengthy law review article floating around Bush I arguing that the IRC gives Treasury authority to index capital gains to inflation. With all the emergency actions going on, perhaps that potential authority could have covered the creation of a "normal economy basis." Alternatively, it could have been written into the TARP legislation -- at least it would have been a more typical delegation of authority to the Treasury Secretary!

I wonder if you consider this an exception to your statement that "it's nonsensical to think that tax cuts would have helped." Clearly it would have required strong leadership to implement such policy -- perhaps the same sort of leadership missing from work to control spending. But the simple message that profits investors make until the market regains its pre-crisis levels are tax free might at least have limited the damage to market values of non-financial public companies, don't you think?

I'd also be interested in your thoughts on the economic effects of transparent public company securities vs. opaque asset backed securities -- particularly the mortgage backed securities at the heart of the crisis. Part of the response to the Depression, of course, was to require public companies to disclose U.S. GAAP information in a standard and audited format; MBS disclosure was done in non-standard ASCII text. With all the historical research you did for the book, I wonder if you came across anything that informs the future of the MBS world. See today's WSJ editorial and comments on MBS.

Supply side economics is a

Supply side economics is a fantasy. Propagated by economists who only read the first half of elementary economics sophomore year in college.
As practiced by Regan and Bush it was just government spending more than it took in. Just like FDR and just like the current stimulus.

It was basically a smoke and fog wrapped lie to transfer the wealth of this country. And it worked quite well.

To have "conservatives" decrying deficits and government spending now pretends that the last 8 years and the 80's never happened.

Supply-side Economics R.I.P.

I think that Bruce Bartlett's post is really important. It raises all the issues that the Republican Party is facing as it tries to sort out its present confusion and create an economic identity that is both practical and not just an echo of Obama.

I also agree that there is much in common between Keynesianism and Supply Side. I would actually characterize the latter as a branch or at least a lineal descendant of the former. Chicago style monetarism, Supply Side, and Keynesianism all agree that in times of economic distress, it is appropriate for the Fed to print a lot of new money and to bring interest rates down. This is a critical point of agreement.

The real alternative to all three schools is Austrian economics. I presented an Austrian rebuttal to Keynes ( and indirectly to Bush and Obama) in my new book Where Keynes Went Wrong.

I believe that we have been since the mid 1990's and still are in a debt bubble created by Keynesian ideas. Printing too much money, controlling and holding down interest rates, bail-outs, and stimulus are all features of it.

Two steps back

Hunter, I couldn't agree more. I have your new book and will be reading it after I finish Hutt's 'The Keynesian Episode'.

I like Bartlett's characterization of tax cuts to consumers as no better than Keynesian style direct payment transfers.

It's too bad after Bartlett spent so much time on supply side economics he then ended up taking two steps back into muddled Keynesian ideas instead of moving forward.

A brilliant summary

Bruce I've been active in business since the mid sixties and ultimately ended up running a small group of construction equipment manufacturing and automotive parts companies. Your summation of what has happened since the seventies couldn't be bettered. It was always fairly obvious to me that exceptionally high marginal rates and an out of control money supply were economically toxic and I completely bought these central tenets of what I prefer to call monetarism. It was also equally clear to me that the central tenets of Keynesianism had relevance when demand was collapsing. In other words it's horses for courses. This bit of pragmatic folk wisdom seems to be completely beyond the comprehension of modern conservatism. And this is true of a mass of other issues unfortunately. There's a book to be written about this rigidity of outlook, perhaps you should make it your next effort. In the meantime I'll certainly buy your new book. One side observation. Above you respond to a comment on the inability to cut expenditures with a suggestion of a grand bargain. I think there are limited possibilities in this direction, but they are very limited as you yourself have pointed out elsewhere when you basically recognize it's virtually impossible to make substantive cuts in public expenditures because when it gets down to the wire the public wants it and neither party is willing to bite the bullet when it comes down to decision time.


One thing that I think concerns some liberal Democrats is that entitlements for the elderly are squeezing programs for the poor. If Congress has a choice of cutting Medicare or Medicaid, what do you think it will choose?

Bruce, Re: If Congress has a


Re: If Congress has a choice of cutting Medicare or Medicaid, what do you think it will choose?

First, I assume a lot more seniors vote than the poor (and more so as the portion of our population 65+ grows substantially with the boomers), and they contribute more to campaigns, and they have the AARP, as well as children and grandchildren of voting age who care about them on a very personal level (and fewer of whom have close relationships with the poor). So would Democrats choose large Medicare cuts (and I'm speaking well beyond means-testing away Warren Buffet's benefits) if the alternative were large Medicaid cuts? Maybe, maybe not.

Second, you're presenting a particular dichotomy that seems false to me: Medicare cuts or Medicaid cuts. That presumes they view their options as limited to those two (kind of like saying conservatives/Republicans are open/willing to accept a VAT because they may prefer it to an income tax increase). Democrats may believe (or may be acting like they believe) that holding out on cuts in projected spending on Medicare and Social Security and social spending generally will result in a solution that is mostly/entirely on the tax side or that plus Defense cuts.

So again, I ask you for some basis and substantiation for your assertion that "Democrats are closer to the point where they would be willing to talk about serious cuts in entitlements" (as well as any clarification of what you consider "serious", and clarification of to whom you are referring, per my comment upthread).

Supply Side Economics Successful?

I'm more than a bit skeptical that "supply side economics" was actually all that successful. There are two big issues that seem to get ignored when discussing Reagan's tax cuts:

1) If you look at spending that occurred under Reagan, an enormous part of the stimulus he provided was through additional government spending. Isn't that pretty much Keynesian?

2) In his later years, Reagan got a big revenue increase from a major hike in the Soc Sec / Medicare taxes which, when coupled with the additional spending, simply created huge "off the books" debt.

Comparing Reagan and Obama, Reagan increased gov't spending, just like Obama's stimulus bill.

A big difference is that Reagan cut taxes mostly at the high income earners and raised taxes (thru the Soc Sec hike) on the middle and lower classes, while Obama cut middle class taxes and is proposing hiking taxes on the highest incomes. Of course, the existing tax rates each of them faced are VERY different, so their actions may not be readily comparable.

Thank you for thinking

Thanks for giving this matter some honest thought. It's a little frightening to see how some old academic theories, packaged and sold effectively, become accepted as truisms. Not even academics take their theories so seriously, especially in economics.

One thing has always bothered me about the bailout of the financial sector: why weren't the shareholders wiped out? The shareholders in financial service companies were responsible for preventing this mess. As soon as their companies became dependent on government aid, they had failed. I understand the need to prevent a collapse of the banking system, but surely that could have been done in a way that acknowledged that the shareholders had mismanaged their way into bankruptcy.

True Values

How could we truly measure SSE success when runaway spending accompanies targeted tax relief? If government spending were held in check while private industries and taxpayers were allowed to keep more of their hard-earned dollars, wouldn't govt. revenues and private expansion solicit higher values?

Good job Bruce. Glad to see

Good job Bruce. Glad to see that some Republicans still believe in managing both sides of the ledger. There are no "popular" answers that will solve our ills - we need higher taxes across the entire income spectrum, reductions in Medicare spending, reductions in the military budget, and increases to ages qualifying for Social Security and Medicare. Not a lot of vote getters there, but sooner or later we need adult supervision. W's infantile abdication to Cheney and fiscal deniers will haunt us for decades.

Money already spent

If Canada's history is any lesson, sometimes there need to be simultaneous tax increases and budget cuts simply to pay for the money spent. I understand it's a tough choice, but likely the only thing that can work is a combination of VAT to tax imports, income tax increases, government layoffs (think about all those lazy DHS goons at the airport, for once) and direct tax credits to the companies.

I don't understand why everyone re-words "tax cuts" into "personal income tax cuts". Is it really the only way, and, most importantly, the most efficient way to cut taxes? I think Business Week had a great article on the lack of American industrial policy and the loss of manufacturing jobs to other countries as a result.

Healthcare reform, if it really manages to reduce the cost of health insurance to businesses, would be great, too. The problem is that it currently has more focus on how to ensure equal access to the insurance pool rather than on how to cut costs; actually, public option was, perhaps, the only meaningful way to do that. Let's wait and see, though, how it works out.

Thanks; For informing me that


For informing me that economists are catching the back edge of the wave.

Before your post it was apparent they were catching the troughs.

The game has changed. People doubt "Capitalism". For good "reason".

I've got a boatload of religious leaders across America who not only doubt the free market but are ready with alternative visions.

I believe they will not succeed because they cannot name them effectively, ..... yet.


Reagan was a Keynesian

Read Barlett's book on Bush being a traitor and agree, but want to point out an inconvenient truth: Reagan's tax cuts and budget deficits were Keynesian. Anytime the government either gives back taxpayer money or prints money and spends it, it is Keynesian.

So the 1980s boom was Keynesian in nature.

This is not good for SSE, nor, long term, for the country.


Thanks for the opening my eyes to the possibility that not all conservatives are crazy. It's refreshing to see that some people understand that different problems need different tools. Unfortunately time is running short as the economy has almost entirely been sold to the banksters using false arguments for far too long. Definitely going to add this blog to my blog roll over at:
In Case You Missed It

Seriously now

I like the article a lot as a piece of economic writing.

When it comes to implied policy preferences...
In the country with the most punctured safety net of the rich world, where losing your job can mean immediate homelessness (if you're low paid to begin with), where already a number of indexes of population welfare are not commensurate with the country's wealth, you seriously believe social benefits should be cut?

If countries much poorer compared to the US can afford to help their weaker citizens, you seriously advocate the US shouldn't? You actually think it's a good thing to have such high numbers of functionally illiterate, homeless, dirt-poor citizens, so many children in poverty, so many people in jail, etc?
Or you don't see the connection between social services and benefits and such indexes?

Laffer Curve

Great piece, and thanks for being willing to say hard things. But as long as folks on the right -- whether congressmen, WSJ editorial writers or tea-party citizens -- continue to buy into the Laffer Curve concept, they will always view tax cuts as effective policy. Somehow we need to break the hold that Laffer's myth continues to have. Cutting marginal rates does not increase revenues.

Real versus political Supply Side & Keynesian economics

It's the law of "supply *and* demand" -- and being that they are inseparable, the never-ending go-round of political arguments claiming that one now is everything and the other is dead is always wrong.

Real supply-side economics is about increasing the productive potential of the economy: reducing transaction costs and other obstacles to economic activity, increasing innovation, developing institutions that better align the interests of individuals (including, and especially, those in government) with those of society, and so on, to increase the capacity of the economy.

Demand-side (Keynesian) economics is about keeping the economy operating at that capacity -- it doesn't do much good to improve capacity and then run below it. Keynes put that together during the Depression, that was his concern, and rightly so.

But demand-side problems tend to straighten themselves out over the long run, and increasing demand beyond a point only creates inflation -- while increasing economic productive capacity by just one percentage point a year can double society's wealth in one lifetime ... and economies can go straight backwards forever when obstacles to productivity are imposed (the A to Z: Argentina to Zimbabwe).

Which caused Nobelist Robert Lucas to opine in his AEA Presidential Address:
"...the potential for welfare gains from better long-run, supply side policies exceeds by far the potential from further improvements in short-run demand management...." [emphasis in original]

"The potential gains from improved stabilization policies are on the order of hundredths of a percent of consumption, perhaps two orders of magnitude smaller than the potential benefits of available 'supply-side' reforms..."

So real supply-side economics is a very long way from dead -- we'd better hope!

The problem is that in politics operatives cherry pick and exploit the one thing that promises to gain them the most votes fastest, never let it go, and ignore everything else.

So for the political right, supply-side economics is "tax cuts! tax cuts! tax cuts!" and the other 95% of it (which is a lot more difficult to implement) doesn't exist.

But don't forget the political left does the exact same thing with "deficits! deficits! deficits!"

Keynes himself, it is rather interesting to note, never once in his life, ever, advocated deficit spending. (If one can believe the Palgrave). He openly opposed deficit spending as a stabilization measure on multiple occasions. (In the "General Theory" and elsewhere he talked a lot about government spending -- but not deficit spending). Keynes was pretty conservative fiscally, well aware of the cost of repaying debt and the risks of fiscal instability, and that deficits that made spending "free" could eliminate cost-benefit discipline and lead to large-scale waste.

Keynes' first generation of adherents, like Abba Lerner, read his logic as indicating the budget should be balanced over the business cycle, which could be several years, annual balancing being arbitrary and self-defeating.

Later political adherents have taken that "cycle" as not ending until economic Nirvana arrives.

So today we are projecting trillion-dollar deficits after the recession ends forever -- or at least until the $60 trillion of implicit debt for entitlements and the rest starts converting to explicit debt and we get real deficits.

In the meantime we are adding another whole new major entitlement ... and while we wait for that, handing out $250 more each to every senior we see, because as Obama said when pushing the idea, every $14 billion more of debt we dish out is good for the economy.

Which is all heading us to a result a long way from Keynes.

So Keynesian economics, Supply-Side economics, left, right, once they get into politics their political versions are the exact same thing: bogus. Call it "the law of diminishing disciples".

Jim, you're missing the

Jim, you're missing the point. Supply-Side economics are about increasing productivity, Keynesian (or Demand-Side) is about creating demand for that increased productivity.

We have greatly increased productivity during the last decades, but the gains have mostly accumulated at the top layer of society. Since the rich already consume as much as they want (more or less), there is no corresponding increase in demand for that increased productive capacity. Since we produce more with less people, there is less demand for workers. Thus higher unemployment; thus more competition for jobs; thus lower wages; thus even more wealth transferred to the rich; thus less demand; thus more layoffs; thus ...

Bruce is correct, in the late 70s, the Demand-Side had run amok. Today, the Supply-Side has run amok.

Starting with Reagan, most productivity gains has been captured by the rich. The middle class has tried to keep up by reducing savings and going into debt. But you can only borrow so much before the inevitable day of reckoning arrives. It took 25 years for it to show up, bit it's here, and we have to deal with it.

More Supply-Side tax-cuts will just make things worse. We can balance the federal budget next year AND turn around the economy next year. It's easy: tax the rich, cut taxes for the middle class, and massive infrastructure spending. We know what's required, but, for reasons I don't understand, the political will is lacking.

It's real simple, double the productivity, allow the top 1% to horde all the gains, then because only half the workers are needed, there is massive unemployment. Why is this so difficult to understand?

Supply-side v Keynesian economics

All that increased economic productivity leads to, in a dedicated capitalist economic system, is less competition because capitalists are never satisfied with sharing their profits with anyone, even another capitalist, overproduction, unemployment, and crises in the system.

It's been this way since the capitalist appeared on the scene and it will stay this way no matter how technical the language employed becomes.

Capitalists don't play nice, they never have and they never will. They are, however, really good at getting all the other kids in the sandbox to fight with each other over scarce toys (resources) so that no one notices how the capitalist is hoarding everything for himself.

Am Heartened by Your Comments

I am heartened by your comments in that it shows there might still be a Moderate Republican out there.

What bothers me has been the growth of a new type of earmark--a tax cut earmark--a narrowly focused change to the tax code that benefits one constituent or one business. Tax earmarks, unlike a regular earmark, is a gift that keeps on giving. And, it is corrupting. I hope you could write about this. Perhaps requiring Congresspersons to identify any known recipient of a tax earmark when a tax earmark is introduced is the first place to begin.

Keynesian policies have done

Keynesian policies have done




to get us out of this mess

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