Monday, April 09, 2007

Supply-side Economics

Bruce Bartlett's April 6 Op-Ed piece has generated a lot of discussion which Brad DeLong quotes. Krugman says that Bartlett is misrepresenting the Keynesian position in the 1970's, but I haven't seen any discussion of the rest of Bartlett's historical claims.

I think Bartlett is misrembering (or misrepresenting) some of the history. Rather than pit my memory against his, I'll post some excerpts from an April 13, 1980 New York Times article by Steven Rattner (page F1):

From the start of the 1980 campaign, he [Ronald Reagan] has added to his standard anti-Government stance a new brand of Republican theory known to most as "supply-side economics."

That view has been represented to Mr. Reagan principally by Representative Jack Kemp of Buffalo and Jude Wanniski, a New Jersey economic consultant. It holds that taxes are now so high that a cut will generate a new upsurge of economic activity that will produce more revenues for the Federal Government than were lost by the original cut. The theory is set out in the Laffer Curve, named after Arthur Laffer, an economics professor at the University of Southern California and sometime advisor to the Reagan campaign.

Bartlett writes that the original supply-siders that tax cuts might increase revenue "under very special circumstances." But the question was whether cutting taxes in 1980 would increase revenue, and supply siders--or at least the ones getting the attention Ronald Reagan and the press--are reported as saying it would.

Continuing directly:

The Kemp-Wanniski group has also been promoting the notion of returning to the gold standard, under which dollar bills could once again be turned in for gold.

Bartlett claims that the supply-siders supported "tight money to stop inflation," which seems misleading to me. A gold standard can result in tight money, but "tight money to stop inflation" sounds like a reference to Volker's policy rather than a call for a gold standard. Continuing:

Both of these concepts are in conflict with the more traditional Republican conservatism, which has emphasized, as the first fiscal priority, reducing the size of Government and the size of Government spending. In addition, that camp has voiced little interest in the gold standard as a solution to the nation's economic ills.

The article goes on to list advocates of "traditional" view associated with the Reagan campaign, and says that there is some uncertainty about where Reagan stands on economic policy because his advisors have differing views.

To all appearances, the supply-side group has thus far remained the more influential.

Although he has stressed the need for a balanced budget, Mr. Reagan has also argued in favor of the 30 percent, three-year tax cut proposed in a bill bearing the names of Mr. Kemp and Senator William V. Roth Jr. of Delaware.

Particularly, Mr. Reagan favors the notion that such a cut would lead to an increase in Federal revenues, because of the new economic activity.

Other Republicans have found that this tenet has not been persuasive. After first backing a Kemp-Roth bill that included only the tax cut, Republicans Congressional leaders have now reverted to the more traditional party view, that the first priority was spending cuts, which in turn would allow tax reductions. A revised Kemp-Roth bill now embodies this idea.

Bruce Bartlett tells us that the writers of the Kemp-Roth bill expected it to lose revenue all along.

Bartlett complains that asserting that lower taxes result in higher revenues is "a simplification of what supply side economics is all about," but if so it's a simplification that's appeared in political discussions since supply side economics first appeared.

UPDATE: An anonymous commentator on Mankiw's blog summarized it nicely:

The point seems to be that if you broaden the "supply side" theory to be the elements that have persevered (and are often in common with other theory), then people today are supply-siders. The flipside is that if you pigeon-hole Keynesian economics into just what Keynesians thought in the 1970s, then people today aren't Keynesians. Thus his conclusion is drawn through generalization and oversimplification.
The parts of supply side economics that the supply siders were selling to the Reagan campaign, namely that the tax cuts would pay for themselves and that the U.S. dollar should be convertable to gold, appeared dubious at the time and don't look any better in retrospect.


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