The Great Lie of Supply-Side Economics

I am very pleased to see this, and not just because there's a link to this site. I've been frustrated with the press on the 'Laffer curve, tax cuts have paid for themselves' issue because the press has enabled a big lie. It's a lie Republican candidates, even the president, can still repeat with very little attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned. Some of you around here are probably tired of hearing about it (though see here), but it's a lie with consequences. The tax cuts that went through were sold on false premises - what it costs us is far greater than advocates said, advocates who claimed it would actually increase revenue and cost us nothing. It does cost us, hundreds of billions of dollars so far, and that cost has not been presented honestly to the public by either the advocates of the tax cuts or the press reporting on the issue. Without an adequate understanding of the true costs, the public discussion on the issue is distorted and the result is bad public policy.

The big lie matters, and the sooner the press starts to call politicians on it, the better for us all. There are encouraging signs, Jon Chait's recent book being one example and this being another, but it's still possible to tell the lie with little consequence from the mainstream media. Here's James Surowiecki (whom I've come to respect as an excellent reporter on economics):

The Tax Evasion: The Great Lie of Supply-Side Economics, by James Surowiecki, The New Yorker: In American politics, supply-side economics is the monster that will not die. The supply-side argument that, in the United States, tax-rate cuts pay for themselves ... has little or no support within the mainstream economic profession, and no hard empirical data to back it up. Myriad studies have demonstrated that both the Reagan tax cuts of the nineteen-eighties and the tax cuts put through under the current Administration shrank government revenues and led to bigger budget deficits.

Yet the absence of proof for supply-side theory has not dimmed Republicans’ devotion to it. Last month, President Bush told Fox News that his tax cuts had “yielded more tax revenues, which allows us to shrink the deficit.” Dick Cheney insists that “sensible tax cuts increase economic growth and add to the federal treasury.” Every major Republican Presidential candidate ... is on the record as saying that tax cuts pay for themselves. And, just last week, a New York Sun editorial published a list of what “the Republican Party stands for.” First on the list? “Reductions in top marginal tax rates . . . lead to greater government revenues in the long run.”

This supply-side orthodoxy is striking in a couple of ways. First, it requires Republican politicians to commit themselves publicly to a position that is wrong—and wrong not as a matter of ideology or faith but as a matter of fact. ... Second, despite the fact that the supply-side faith has no grounding in reality, within the Republican Party there is little room for dissent on the subject, as Jonathan Chait details in his new book, “The Big Con.” Last week, the blogger Megan McArdle wrote that she had a book review for an unnamed right-wing publication spiked because in it she dared suggest that, in the U.S., tax cuts decreased government revenues.

The cynical explanation for the persistence of the supply-side dogma is that it’s simply cover for cutting taxes for the rich. But the supply-side orthodoxy has flourished for other reasons, too. To begin with, the absurd idea that tax cuts pay for themselves is based on an idea that is not at all absurd, which is that tax rates can have an impact on people’s behavior. Increase taxes too much, and people may work less ... and invest less..., and so the economy will grow more slowly. The opposite can happen if you cut taxes. (How much of an impact tax rates have ... is a subject of much debate in economics, but it’s inarguable that they do matter.) What supply-siders have done is start with that reasonable idea and extrapolate it to unreasonable lengths.

They’re aided in that extrapolation by the simple fact that the American economy grows over time. As a result, even if you cut taxes the federal government will eventually take in more tax revenue than it once did. And that allows supply-siders to fashion a spurious syllogism: taxes were cut in 2001, government revenues are higher in 2007 than they were in 2001, therefore the tax cuts increased revenue. The comparison that really matters in analyzing the impact of the tax cuts, of course, is ... the comparison between actual tax revenue in 2007 and what tax revenue would have been in 2007 had there been no tax cuts in 2001. And studies that make these types of comparisons—including one by Bush’s own Treasury Department ... find that government revenues would be greater had taxes not been cut. But that hasn’t stopped President Bush from claiming victory.

In one sense, of course, it’s odd that a Republican President should treat higher government revenues as a point of pride. Historically, after all, Republicans have been the party of small government...

The conservative pundit Larry Kudlow recently attacked the Republican candidates for failing, in their most recent debate, to explain what spending cuts they would advocate to accompany the tax cuts they propose. But Kudlow should hardly have been surprised, because supply-side rhetoric suggests that spending cuts aren’t really necessary. ... This tax-cut-and-spend approach is the promise of a free lunch, something that voters like to hear. The appeal of that promise may make it easier for politicians to run a campaign. But the fraudulence of the promise makes it awfully hard to run a government.

Update: Maybe I spoke too soon:

The Case of the Missing Surowiecki Column, by Felix Salmon: Memo to Jeff Bercovici: What's with Jim Surowiecki's column in this week's New Yorker? It's right there on the website – complete with no fewer than nineteen hyperlinks. (Someone give this guy a blog!) But it's in the "online only" section: if you pick up the actual magazine, it skips straight from the Talk of the Town section to the feature well, which means that Surowiecki's "Financial Page" is a page only in metaphor.

The most charitable explanation I can think of is that the New Yorker decided the column was simply too reliant on its hyperlinks to work in print. But if that's the case, why didn't they just ask Surowiecki to write a different column, or to rewrite this one so that it worked in print form? ...

I can't remember Surowiecki ever being banished from the print edition like this before, which is why it's so bittersweet to read this, from Mark Thoma:

I am very pleased to see this, and not just because there's a link to this site. I've been frustrated with the press on the 'Laffer curve, tax cuts have paid for themselves' issue because the press has enabled a big lie. It's a lie Republican candidates, even the president, can still repeat with very little attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned.

He's writing, of course, about Surowiecki's column, which is about supply-side economics. And it turns out that the one time he singles out "the press" for praise in exposing the lie is also the one time that the article remains unprinted by any physical press.