POLL: Do you believe that supply-side economics is legitimate economic theory?

I am not assuming anything. I made a statement, not an assumption.

 

The expansion of the eighties and nineties occurred because defense spending went up too much.

 

Compare the unemployment rate behavior from 80 to 92, 92 to 2000, and then from 2000-2008 and you will have your answer.


http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

 

Fine. You made a statement. I made a statement.

 

Really?

http://rationalrevolution0.tripod.com/war/trickle_down.htm

I may well be mistaken but, for all intents and purposes, I don't think Galbraith would have agreed:

On the supply-side nostrum that top-end tax cuts would trickle down to produce unparalleled growth, Galbraith the farm boy was colorfully clear: "After feeding oats to the horses, one should not gaze too closely at what trickles down to the sparrows."

http://www.johnkennethgalbraith.com/index.php?page=articles&display=176&from=12

 

Take a Walk on the Supply Side
Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth

by Michael Ettlinger and John Irons




The first supply-side era in modern economic history began in earnest in 1981 with huge tax cuts for the wealthy and corporations. Although there were modest steps back from these tax cuts in the ensuing years in response to fiscal deficits and tax-sheltering, this first supply-side era didn’t end until the tax hikes of 1993. This respite from supply-side policies ended in 2001, however, when a new set of supply-side tax measures were enacted. Today, as budget shortfalls mount and the economy weakens, the supply-side approach to economic policy is once again up for debate. This paper reviews the theory underlying supply-side tax cuts and examines their results.

The term “supply-side” comes from the idea that economic policy, and tax policy in particular, can influence private-sector production decisions by changing the incentives to work or to invest. Like many ideologies pushed to an extreme, supply-side theory does contain a kernel of truth: In certain circumstances lower tax rates can lead to additional economic activity and can lead to additional government revenue. This is a standard incite in public economic theory. But, it is equally true that in other circumstances lower tax rates do not lead to additional economic activity or government revenue.

The chain of logic for supply-side policies to work requires the following. Lower tax rates on savings (or on those who save more) leads to higher saving rates. Higher saving leads to more economic investments and greater capital accumulation. Finally, more capital leads to greater economic growth. At each of these steps, however, there is reason to doubt the theory—there are other possible outcomes and conflicting theories.

The efficacy of supply-side policies thus becomes an empirical question: Do they work? As importantly, do they work better than alternative approaches of greater public investment to stimulate our economy? The two supply-side eras that sandwich the period from 1993 to 2001 offer us an opportunity to assess the impact of supply-side policies. The claims for these policies have been great, yet the results have been meager. Specifically:

* Real investment growth after the tax increases of 1993 was much higher than after the tax cuts of 1981 and 2001. The yearly growth rate after 1993 was 10.2 percent versus 2.8 percent for the first supply-side era beginning in 1981, and 2.7 percent in the period of the second supply-side era beginning in 2001. Without better investment growth being associated with supply-side policies, a critical link in the theory of supply-side economics is broken—and it is difficult to draw any plausible connection between supply-side tax cuts and any observed positive economic performance.
* Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras. Over the seven-year periods after each legislative action, average annual growth was 3.9 percent following 1993, 3.5 percent following 1981, and 2.5 percent following 2001.
* Average annual real median household income growth was greatest after the 1993 tax increases, at 2.0 percent annually compared to 1.4 percent after 1981 and 0.3 percent after 2001.
* Wage levels also did better after 1993. Average real hourly earnings following 1981 fell at an annual rate of 0.1 percent and following 2001 rose at a rate of only 0.3 percent. Following the 1993 tax increases average hourly earnings grew by 0.9 percent per year.
* Employment growth was weaker during the supply-side eras than during the post-1993 era. Average annual employment growth was 2.1 percent after 1981, 2.5 percent after 1993, and 0.6 percent after 2001.
* Federal budget deficits and national debt increased during supply-side periods and decreased following the 1993 tax increases. In the seven years from 1993 to 1999, the country went from a federal deficit of 3.9 percent of GDP to a surplus of 1.4 percent. After 1981 the deficit ballooned to 6 percent of GDP by 1983. In the year the 2001 tax legislation was adopted, there was a surplus of 1.3 percent of GDP. This turned into a deficit of 3.6 percent by 2004, which fell back to 1.2 percent in 2007 but will undoubtedly be higher in 2008. The national debt has followed a similar pattern, rising by an astounding 14.8 percentage points relative to GDP over the 7 years following adoption of the 1981 supply-side tax cuts, shrinking by almost 10 percentage points relative to GDP following 1993, and moving back up by 3.8 percentage points relative to GDP after the 2001 tax cuts.

Of course, the reason for the failures of the supply-side periods to deliver as strong an economic performance as the 1993 to 2001 era may not have anything to do with tax policy. Other short-term factors and long-term trends influence the economy as well. The evidence that supply-side tax cuts help economic growth is, however, weak at best and much contradicted in the economic literature. As the data we present in the pages that follow shows, economic policies with tax cuts for corporations and the wealthy as their centerpiece have simply failed to produce strong economic growth by a variety of measures.

http://www.epi.org/publications/entry/supply_side/

 

Let's look at two basic claims of supply side economics. The first is that if you increase the incentive to produce, then supply (i.e. what is produced) will increase. Anyone want to disagree with that one?

The second is that there's an optimal tax rate, above which tax revenues will actually fall. Again, anyone want to argue with that one?

 

Tax cuts *from what rate*? A tax cut from 100% to 90% would have a different effect to a tax cut from 10% to 0%.

Also, the article you cite uses ONE DATA POINT - it only focuses on the USA. There are over 2 dozen countries which instituted supply-side reforms, one must study ALL OF THEM, not just one.

Finally, like all macroeconomics, there are no controlled experiments, so even with a large sample size, one cannot draw firm conclusions *solely* from empirical data.

Do not cite lazy cunts who can't even follow the basic principles of scientific research.

 

No you won't. That is one data point. You need to look at every single case of supply-side reforms, not just two periods in one country.

 

I think that the issue arises when someone wishes to take a good thing to extreme and create an imbalance. Incentives to produce must be met with the ability to buy. Focusing tax cuts principally at the top end has historically been met with less than ideal results, as the figures in my prior post show. Proponents of (American style) supply-side economics characteristically fail to acknowledge the deficit spending that contributed to all that (relatively narrow) prosperity.