Let's talk about supply side economics

[John_Stamos_Left_Ear]

First of all, let’s define it:

Supply-side economics is a school of macroeconomics that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services as well as invest in capital. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices; furthermore, the investment and expansion of businesses will increase the demand for employees. Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.

Wikipedia

The theory has been desired and implemented by Republicans in America since Reaganomics in the early '80s and it’s principles are still at work in states such as Wisconsin, Kansas and North Carolina (where results have not been very good) and in fact still seems to be a major part of what Republicans hope to achieve in 2016:

There’s a presidential election brewing, and like clockwork, a new crop of Republican hopefuls is turning to Arthur Laffer, the father of supply-side economics.

Wisconsin Gov. Scott Walker, widely seen to be gearing up to run for the White House, met with Laffer on Wednesday in New York. Former Texas Gov. Rick Perry, another potential candidate, has talked with Laffer as well. They join a long line of GOP candidates: In 2012, for example, Chas Sisk wrote about how Laffer was being rediscovered by a generation of Republicans including Herman Cain, Michele Bachmann and Newt Gingrich.

More recently, Laffer-inspired policies have been on public trial in Kansas, where Republican Gov. Sam Brownback cut income tax rates only to see the state’s budget shortfall balloon. Laffer recently said the policy just needs more time to produce its promised economic acceleration.

Washington Post

With all due respect to Laffer, we’ve been trying it in various forms in the country and the state for over four decades now! When is that wealth supposed to trickle down as it was promised to?

I, and most economists, don’t think it will. Thomas Piketty’s best-selling Capital in the Twenty-First Century took it to task: “The decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.”

His conclusion: "In contrast to what many people in Britain and the United States believe, the true figures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden. In other words, the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.”

Four decades of this economic policy has shown us that the wealthy do not share their savings from paying taxes and following regulations: They hoard billions of dollars, they pay themselves increasingly outlandish salaries while workers income remain flat, they hide money overseas and generally do anything but allow it to trickle down through expansion to their work forces, more money in the hands of their employees or cheaper products and services for Americans.

So let’s talk about supply side economics. Is it as big if a failure as it seems? If it is (or even if whatever benefits it may cause the economy are outweighed by negatives) why are the Republicans still listening to the beating drum by an increasingly smaller number of economists that it works? And what can the Democrats do to counter this?

[The_Joker_and_the_Thief]

There is more to supply-side economics than simply top marginal tax rates. In fact, according to your very own cite, supply-side policy reccomendations involve lowering marginal tax rates across the board and reducing regulation. You’ve chosen to focus on less than half of supply-side policies. I have no problem debating Reaganomics or top marginal tax rates, but this thread is mislabeled.

[BrainGlutton]

@The_Joker_and_the_Thief

There is more to supply-side economics than simply top marginal tax rates. In fact, according to your very own cite, supply-side policy reccomendations involve lowering marginal tax rates across the board and reducing regulation. You’ve chosen to focus on less than half of supply-side policies. I have no problem debating Reaganomics or top marginal tax rates, but this thread is mislabeled.

What reason have you to think that deregulation would help the economy expand?

[The_Joker_and_the_Thief]

@BrainGlutton

What reason have you to think that deregulation would help the economy expand?

Because regulation is a ban on a type of mutually beneficial transaction, and its been well established that more trade generally leads to better outcomes. Now, regulation is often enacted to prevent negative externalities or market failures, so it’s certainly possible for regulation to improve outcomes. But I don’t have enough faith in the competence of government to believe that the regulation we have right now is perfect, and thus it is possible for deregulation to be economically beneficial.

[BrainGlutton]

Supply-side economics:

Supply side economics is an economics theory built around the idea that by giving the rich enough money, tax breaks and deregulation, they will be freed from the constraints that allegedly prevent them from expanding their businesses and hiring more people. In turn, by expanding their businesses and employee pools, they will expand and fortify the nation’s economic strength. According to John Kenneth Galbraith, the theory dates back to the 1890s when it was called horse and sparrow theory – i.e., if you feed horses enough oats, it will pass through their digestive systems and their droppings will provide enough leftover oats to feed the sparrows. Regrettably, it’s a pretty inefficient way to feed sparrows.

<snip>

In fairness

Supply-side economics is a valid economic theory, and there is a place for it in a modern economy. However, as with any complex matter, it is not the only solution to an economic problem, and its counterpart demand side economics should be employed to deal with short-run economic problems.

Problems with terminology

Supply-side is a whipping boy for moonbats in large part due to the loose way in which the term is used. In the broadest sense, supply-side can simply refer to a school of economics that puts more emphasis on supply than demand or a certain area of economics that concentrates on supply. This is a more esoteric and academic use of the term. In a stricter sense, the term applies to the group of politicos surrounding figures like Stockman, Wanniski, Bartlett, etc. (not all of the supply-siders were actual economists) that rose to prominence through their influence on Reagan’s economic policies. Finally, the term is used in the strictest sense simply to mean “tax cuts for the rich,” which the “trickle-down” pejorative is often applied to. As conservative economist Thomas Sowell writes:

“There has never been any school of economists who believed in a trickle down theory. No such theory can be found in even the most voluminous and learned books on the history of economics. It is a straw man.[21]”

However, as noted above, “tax cuts for the rich” may be a straw man when it comes to real economics, but the idea has simply translated into “always cut top tax rates” for the modern Republican party. Even Milton Friedman’s work did not suggest that simply cutting taxes for the rich would be a panacea. In simple terms, his famous “permanent income hypothesis” states that the average person’s consumption was based more on long-term estimates of their income, implying that the rich would be more likely to just squirrel away their new tax breaks rather than immediately spend.[22] There is a good body of evidence supporting the notion that the rich will tend to save more.[23] Thus, the notions of “trickle-down” as a cure-all are far more based in political rhetoric than actual economics.

[BrainGlutton]

Demand-side economics:

Demand side economics is an outgrowth from Keynesian economics, which is of course itself the economic theories espoused by John Maynard Keynes. Keynesian economics proposed a series of economic ideas that ran contrary to the classic economic formulations, notably the concept of counter-cyclical budget management as a means to mitigate the ebb and flow of economic cycles of glut and recession. For Keynes, aggregate demand from businesses, the government and consumers is a more important influencing economic activity than free market forces. Keynesian economics disagrees with the classical economics of Adam Smith and others by maintaining that unfettered free markets do not inevitably lead to full employment.

To accomplish this, Keynes proposed that, contrary to accepted economic theories, a government ought to cut taxes and increase infrastructure spending during an economic downturn, and focus on increasing tax revenue during an economic upturn.

Demand side economics comes into play when the increases in infrastructure spending and cuts in taxes results in an increase in the nominal wages of those who tend to spend the greatest portion of their income on consumables. Keynes viewed excessive saving and investment as a potential harm to the economy, since giving additional income to the rich gives them a low marginal incentive to spend, whereas giving additional income to the poor and middle class provides a high marginal incentive for additional spending – which results in improved business income and grows the economy.

Since Keynes, worldwide governments have felt they have a duty to maintain employment at a high level.[1]

Criticism

Demand side economics is sometimes called “inflation economics,” demand side growth is accompanied by an increase in prices which offsets that growth. For example, the 2008 stimulus enacted by George W. Bush happened at the same time as an increase in the price of oil to $140/barrel,[2] though this was also heavily influenced by issues in international trade. The problem is described by classical economists where an increase in demand shifts its curve to the right (econ speak for “this leads to higher prices”). Generally speaking, the resulting inflation is caused not by the increase in spending, but rather the monetary policies of increasing the supply of money in order to keep interest rates low. Low interests rates help avoid the “crowding out” effect that can happen when governments increase spending when an economy is relatively healthy: ie the government absorbs the excess capital present instead of the private sector, which yields zero gain in terms of increasing output (or the GDP) of the economy. The increased supply of money cancels out this effect, but at the cost of rising prices (how high the prices rise, relative to increases in income, are difficult to decifer). Of course, the majority of economists will tell you that controlled inflation is pretty much needed for economic growth and generally speaking this problem only is less prevailent when the economy is in a recession (or when the stimulus is most needed), so this criticism is one largely ignored by the mainstream (called “Orthodox”) of the science, other than the New Deal, this sort of government policy has never been implemented consistently enough to produce sustained economic growth.

The recession of 1938 is the an example of how reversing Keynesian policies quickly threw the US economy back into chaos. FDR wisely reinstated demand side practices to continue the upward trajectory in economic growth as involvement in WWII approached.

[Wesley_Clark]

The missing crux of the op is the fact that supply side economics is not meant to work as an independent economic theory, the true goal is to provide a cognitive framework that justifies strengthening the plutocracy and oligarchs. You can’t just say ‘let’s give more power and wealth to the top’ so you have to invent a philosophy that convinces the bottom 99.9% that their interests are best served by serving the interests of the 0.01%. If the economy gets better, that is because supply side works. If it gets worse, that means it would’ve gotten even worse without supply side. Win-win no matter what the economy does.

I’m on my phone but I’ve seen at least one paper finding supply side is about the least effective investment to create jobs and gdp.

Doesn’t matter though.

[Voyager]

@The_Joker_and_the_Thief

Because regulation is a ban on a type of mutually beneficial transaction, and its been well established that more trade generally leads to better outcomes. Now, regulation is often enacted to prevent negative externalities or market failures, so it’s certainly possible for regulation to improve outcomes. But I don’t have enough faith in the competence of government to believe that the regulation we have right now is perfect, and thus it is possible for deregulation to be economically beneficial.

Support for deregulation is different from support for the optimization of existing regulations, something I think you’d find broad support for (in theory, anyhow.) Those who actively support broad deregulation downplay the possibility of negative externalities, and often have a naive view of players in the market. The example of Greenspan expressing surprise that people in the financial sector were greedy is a perfect example. Another is the strong libertarian who says that because he would research the safety of drugs everyone would, so government regulation of drugs is unnecessary.

[BrainGlutton]

@Voyager

Another is the strong libertarian who says that because he would research the safety of drugs everyone would, so government regulation of drugs is unnecessary.

I did once hear a Libertarian argue that the FDA should remain in place, but only as a labeling agency, and if you’re rash enough to take something without the FDA seal of approval that’s your problem.

[John_Stamos_Left_Ear]

Harping on a supposedly lack of the deregulation is a red herring.

First of all, there has been deregulation. Reagan notoriously deregulated, as are many of the governors I mentioned. Hell, this very second Scott Walker is making Wisconsin a right to work state, ostensibly to boost their flagging economy.

But even if you take the view that there were still too many regulations, the fact is lowering tax cuts and what deregulation did occur did in fact put a lot more money in the hands of corporations and the few people who lead them.

I pointed out there is no shortage of money at the top. That is the point of supply side economics. But it’s not trickling down.

[BrainGlutton]

@John_Stamos_Left_Ear

But even if you take the view that there were still too many regulations, the fact is lowering tax cuts and what deregulation did occur did in fact put a lot more money in the hands of corporations and the few people who lead them.

Which, one is uncharitably tempted to suspect, was the whole and only point all along . . .

[Voyager]

@The_Joker_and_the_Thief

There is more to supply-side economics than simply top marginal tax rates. In fact, according to your very own cite, supply-side policy reccomendations involve lowering marginal tax rates across the board and reducing regulation. You’ve chosen to focus on less than half of supply-side policies. I have no problem debating Reaganomics or top marginal tax rates, but this thread is mislabeled.

You see, if you reduce all the marginal tax rates you have this problem of getting enough money for government. Yes, I know the theory is that this will increase tax revenue, but the smart Bush called it voodoo economics and he was right. Economic expansion does increase revenue, but this has not been correlated to tax reduction.
I understand that for supply siders hollowing out the government is a feature, not a bug.

[puddleglum]

There is no one who believes in trickle down economics. It is 100% a straw man. What supply side theory says is that government revenue is the same at a 100% tax rate as it is at a 0% rate. Every sane economist agrees with this. This insight forms the basis of neo-liberalism, which states that lower taxes are better for an economy all other things being equal. Neo-liberalism has worked everywhere it has been tried.
The specific criticisms in the OP have no basis in reality. First of all it calls Kansas a public trial. Kansas cut its top rate from 6.45 to 4.8%. In terms of overall tax burden that is a miniscule cut. No economist would expect a large impact of such a small cut. Furthermore income taxes are not the only type of taxes. The Tax foundation which ranks states by how business friendly their taxes are moved Kansas down from the 19th ranked state to the 22nd ranked state. Mostly because of changes to their corporate tax system which made it more complex. Kansas is a bad test for supply side economics. South Dakota would be a better test. It has no state income tax, no personal property tax, no inventory tax, and no inheritance tax. It is ranked second in the business friendliness of their tax. The results are an unemployment rate of 3.0% which is 5.2% lower than the national average.
Secondly, Piketty claims that all the cutting of taxes has meant more power to the wealthy. Twenty five years ago the top federal tax rate in the nation was 28%, the top 1% of income earners paid 25.13% of total income tax paid, and the bottom 50% of earners paid 17.17% of total income tax. Now the top rate is 39.6%, and increase of 41%. The top 1% of earners pays 37% of total income tax and the bottom 50% pays 2.36% of total income taxes. The federal income tax has gotten significantly more progressive, so unless what the rich really want is to pay alot more of the income tax burden, Picketty is dead wrong.
I don’t know how he reckons “true figures” about growth. But if he used GDP growth like the rest of us, he would find that US GDP has grown 160% in the last 25 years, the UK’s GDP has grown 141%, France’s GDP has grown 122%, Sweden’s has grown 120%, Germany’s has grown 110%, and Japan’s has grown 89%. I would say that 160% growth is more rapid than 89%. This is even more impressive when you consider that the US had a much higher starting place so catch up growth models would predict slower growth for the US, all else being equal.

[msmith537]

“Supply side economics” is part of a larger Republican narrative that we live in a free society where rich people deserve to be rich by virtue of their greater ingenuity, hard work, entrepreneurship and business acumen. Conversely, if you are poor, then you’re simply a fuckup who didn’t work hard or smart enough.

This narrative is very appealing if you happen to be well off. It allows people to pat themselves on the back that they deserve everything they achieved. And tales of people abusing the welfare system allows us to not feel guilty about helping those who are less fortunate.

And it would be a great system if all the poor people would just walk into the sea or allow themselves to be ground up into Soylant for food or something. But being the selfish people they are, they continue to not die (or at least move to where we can’t see them).
Of course, I don’t know why anyone would consider “trickle down” a good system anyway. If all the wealth is at the top, then it’s only the interests of those at the top that matters.

@The_Joker_and_the_Thief

Because regulation is a ban on a type of mutually beneficial transaction, and its been well established that more trade generally leads to better outcomes. Now, regulation is often enacted to prevent negative externalities or market failures, so it’s certainly possible for regulation to improve outcomes. But I don’t have enough faith in the competence of government to believe that the regulation we have right now is perfect, and thus it is possible for deregulation to be economically beneficial.

And yet you maintain your faith in the honesty, integrity and compassion of big business?

Regulation is also a ban on mutually harmful transactions. Such as selling products that injure, defraud or otherwise harm people.

[Fuzzy_wuzzy]

It’s virtually impossible to discuss supply side economics without it turning political. This is especially the case when talking of modern supply side economics. However, we can look at 19th century supply side economics slightly more dispassionately. The evidence suggests it worked. Society as a whole did become richer. Now, opponents may counter 19th century results with valid criticisms of unfairness etc, but evidence does show that between 1800 and 1900 saw an utterly remarkable growth in wealth. A growth that had not been witnessed at any previous time or place in world history. Virtually all of the growth in 19th century wealth resulted from supply side economics.

Perhaps the most obvious example of supply side economics in action; repeal of the Corn Laws in Britain and the subsequent fall in price for consumers.

[Voyager]

@puddleglum

There is no one who believes in trickle down economics. It is 100% a straw man. What supply side theory says is that government revenue is the same at a 100% tax rate as it is at a 0% rate. Every sane economist agrees with this. This insight forms the basis of neo-liberalism, which states that lower taxes are better for an economy all other things being equal. Neo-liberalism has worked everywhere it has been tried.

The important issue about the Laffer curve is both its shape and whether the slope of where we are on it is positive or negative. If it is positive then raising taxes raises revenue. Sure it is clearly negative around 100% taxes but no one wants to go there. All evidence from the past few decades is that we’re in positive slope territory.

Secondly, Piketty claims that all the cutting of taxes has meant more power to the wealthy. Twenty five years ago the top federal tax rate in the nation was 28%, the top 1% of income earners paid 25.13% of total income tax paid, and the bottom 50% of earners paid 17.17% of total income tax. Now the top rate is 39.6%, and increase of 41%. The top 1% of earners pays 37% of total income tax and the bottom 50% pays 2.36% of total income taxes. The federal income tax has gotten significantly more progressive, so unless what the rich really want is to pay alot more of the income tax burden, Picketty is dead wrong.

[utl=Income Inequality - Inequality.org]Here is a page with a chart showing income share of the top 1%. In 1987 it was somewhere around 13% - but picking dates to compare can lead to cherry picking - I invite people to look for themselves. (It has gotten worse since 2012.) It is very typical for people who whine about how much the rich pay to leave out data on the share of income the rich have.

[Buck_Godot]

While it may be true that supply side economics has worked at various points in history, such as in the 19th century or in the early 80’s, it doesn’t mean that it is appropriate at all times, which seems to be the mantra of the Republicans.

If credit is tight, such that it is difficult for businesses to grow and meet demand then supply side economics makes some sense. Given money business owners will invest it to expand their business to meet pent up demand, and the economy grows. However in the current state of affairs, interest rates are low, companies are awash with cash, but they aren’t growing their business because there is no one to buy their products. So they are just sitting on their money waiting for things to change. In this case, giving them more money won’t change anything. What makes more sense is transferring some of this money to the consumer side so that they will be able to buy products and give the business owners a reason to use their pent up cash to expand their business.

@Voyager

[utl=Income Inequality - Inequality.org]Here is a page with a chart showing income share of the top 1%.

link broken, here is the correct one.

Income Inequality - Inequality.org

[puddleglum]

@Voyager

The important issue about the Laffer curve is both its shape and whether the slope of where we are on it is positive or negative. If it is positive then raising taxes raises revenue. Sure it is clearly negative around 100% taxes but no one wants to go there. All evidence from the past few decades is that we’re in positive slope territory.
[utl=Income Inequality - Inequality.org]Here is a page with a chart showing income share of the top 1%. In 1987 it was somewhere around 13% - but picking dates to compare can lead to cherry picking - I invite people to look for themselves. (It has gotten worse since 2012.) It is very typical for people who whine about how much the rich pay to leave out data on the share of income the rich have.

The point of government policy should not be to maximize government revenue but to maximize the size of the overall economy. In order to increase revenue via tax cut the deadweight loss of the taxes have to be a multiple of the size of the tax cut. This is unlikely to be the case for most tax cuts but that does not mean that the deadweight losses have not occurred. Whether the slope is positive or negative, damage to the economy is still occuring.

The income share is not determined by the political process but by market process. Tax rates are determined by the political process. What the OP said was that income inequality was leading to a system where the rich hijack the political process to give themselves lower rates and give the tax burden to other people. The actual facts show that the tax rates have gone up for the richest, and down for the poorest. Thus the assertion of the OP is completely groundless.

[adaher]

It’s important to distinguish between sound economic thinking and stupid politicians cherry picking what they like. The wikipedia article says what few economists would dispute: lower barriers to commerce and you’ll get more commerce and everyone is better off.

Republicans took that to mean, “Cut taxes and the growth will be so awesome that revenues will grow!” Um, no.

Keynesian economics is similarly butchered by politicians. They are all about deficit spending in bad times but when good times come they can’t run surpluses because it might hurt the “struggling” recovery. If you believe the politicians, this country has either been in recession or a weak recovery for a good 80% of its history.

[The_Hamster_King]

“Trickle down” is an excellent example of how physical metaphors can be horribly misleading.

If you conceptualize the rich at the top and the poor at the bottom then it seems intuitively obvious that money flows down and pumping more to the top will improve the overall flow.

But the rich aren’t really “higher” than the poor. That’s just a metaphor. In fact, in economic terms its more accurate to put the rich on the bottom and the poor on the top. Money from the poor and middle class naturally trickles down to the rich. Without proper intervention you wind up with the rich swimming in a huge pool of money at the bottom and and everyone else languishing on the arid slopes above. Good economic policy involves pumping money from the stagnant pool at the bottom back up to the poor people on the peak. That keeps everything flowing and the economy strong and healthy. But it’s hard for people to grasp because they intuitively put the rich on top.