Supply-Side Economics in Fact and Fancy

[Donnachaidh]

http://www.commondreams.org/view/2011/05/07-7

Supply-side economics is a hearty perennial, one that closely follows the election cycle. Every four years ambitious Republican politicians (and not a few ‘centrist’ Democrats) rediscover that the wealthy would like to pay less in taxes. But the rhetoric of politics does inhibit the wealthy, their kept intellectuals, and paid spokesmen from arguing their case directly. In democracies, even those resembling plutocracies, the rich must present their own interests as coinciding with the general good.

With this in mind, and yet still aspiring to a tax cut, the wealthy have lavishly supported ‘astroturf’ political organizations and ‘think tanks’ which, in turn, hire photogenic and eloquent spokespersons to present their case to the public. In its best form, the argument is that tax cuts for the rich will: (1) increase the national savings rate because the wealthy save a larger percentage of their incomes than others. This increased quantity of savings will (2) provide the funds required to spur business investment in plant and equipment. From this it follows that (3) supply-side tax cuts will have the effect of providing strong economic growth, which will “trickle down” to the “regular guy.” We are assured that not only are these propositions true, but that they were proven decisively during the Reagan Administration.

Let’s look up the figures. The key to this theory is in steps 1 & 2, describing a causal relationship between lower tax rates and increased private investment. Our starting point, or baseline, will be the average of what is called "net private domestic investment" over President Jimmy Carter's four years (1977-1980), which we will compare to the average across the four years of President Ronald Reagan’s second term (1985-1988). The reason to select the former years is that they are widely recalled as having been dismal. Indeed, we have been repeatedly told that they were so bad that voters granted Reagan a mandate to pursue supply-side economic policies. Likewise, the latter years are selected as the effects of the enormous tax cuts enacted during Reagan’s first term should have had their strongest effect during his second term. Selecting data from Reagan’s second term allows us to set aside the economy’s abysmal performance during his first term with its devastating recession -- the worst that occurred between the Great Depression and the Crash of 2008. In addition, by Reagan’s second term the wealthy should have had ample opportunity to adjust to their lower tax rates.

When we look up the figures on the official National Income and Product Accounts, we find that “net private domestic investment” did not increase. On the contrary, it declined from an average of 7.0% of total Gross Domestic Product during Carter’s four years to an average of 5.7% during Reagan’s second term. More shockingly, if we factor out inflation, we find that the real dollar amount of investment fell slightly despite the fact that the American economy of the late 1980s was over 17% larger than the late 1970s. To put it mildly, this is a powerful refutation of the supply-side story.

More at the link --