Supply-side economics transformed America and the world into a vastly more prosperous place. Championed by Jack Kemp, put into effect by Ronald Reagan, and then extended by Bill Clinton, supply-side economics has propelled America, and the world, to unprecedented heights of prosperity.
On November 13, 1979, the day Ronald Reagan declared his candidacy for the presidency, the Dow Jones Industrial Average was at 814. (No, there’s no comma missing.) It’s now at 17,000. Supply-side having been picked up from America by many world leaders propelled world annual GDP, then around $11 trillion dollars in 1980, to over $60 trillion today. Trillion with a “t”.
This does not adjust for inflation or population growth—both significant—yet still this gives some idea of the scope of prosperity ignited by supply-side economics. It was not for no reason that I once called its mastermind, Prof. Robert Mundell, who later won the Nobel Prize in Economics, “The $100 Trillion Man.”
However, supply-side economics still is not widely understood. It was designed to cure, and did cure, stagflation. Briefly put, supply-side economics held that tax rates were so high — 70% in the then-top bracket — that they stifled economic growth and thereby reduced rather than increased tax revenues. It was true.
Voters understood this wasn’t voodoo; Reagan won in a landslide. He cut tax rates across the board and it worked. The misery index collapsed. Reagan won in another landslide.
The rest is history.
Supply-side was based on the insight that monetary policy was no less important than tax policy and that what I have called “good money” was better for general prosperity than “easy money.” With the critical assist by Fed Chairman Paul Volcker, Team Reagan slayed the inflation dragon. Volcker instituted a monetary regime that became known as “the great moderation.”
Prosperity is the byproduct of lower tax rates and good money, as noted at Forbes.com by supply-sider Peter Ferrara:
“Over the next 7 years after the end of Reagan’s recession in 1982, the huge American economy, the largest in the world by far at the time, grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy. Nearly 20 million new jobs were created during those 7 years, increasing U.S. civilian employment by almost 20%.”
But now there’s a problem.
America has struggled, now, through 15 years of terrible economic growth, averaging less than 2% per year—what I have called a “Little Dark Age.” This is well below the long-term trend of 3.3% and dramatically below both the 4% levels enjoyed by Reagan, after wringing inflation from the system, and Clinton.
Why did the steam go out of the U.S. economy? Of the five major policies that determine whether we have a climate of equitable prosperity, only one changed dramatically for the worse 15 years ago. Neither tax policy, trade policy, regulatory nor spending policy materially degraded around the turn of the millennium.
Only monetary policy dramatically worsened from “the great moderation” to a boom-and-bust cycle. Evidence suggests that bad monetary policy is the likely culprit for the ensuing era of stagnation.
We do not have stagflation. We are confronting, rather, stagnation. Different problems may require different approaches. So let’s consider updating our policies to fine tune them for the problem we now are experiencing. The supply-side revolution (as it was termed by one of its leading figures, Dr. Paul Craig Roberts) has been a victim of its own success.
Most of the 2016 presidential contenders are attempting to emulate it. It’s not at all clear that the contenders grasp supply-side substance rather than form.
Reducing the top marginal tax rate from 70% to 28%, as did Reagan, is qualitatively different from reducing it to 35%, 28% or even 25%. Moreover, Reagan pretty well exhausted the “loopholes” in order to reduce rates.
With the important exception of the flat taxes being proposed by Sens. Paul and Cruz, none of the other tax proposals are authentically supply-side. And a flat tax by itself is unlikely to achieve Reagan-era growth.
Bill Clinton’s raising of the top marginal rate (while regrettable) didn’t slow down America’s boom in any notably way. Clinton, under pressure from or working with Newt Gingrich, passed NAFTA, a major free trade agreement, cut the capital gains tax rate, and reformed welfare. These were three major supply-side policy advances. Job creation sizzled. Hello, federal surplus!
We haven’t seen anything like this since then. The Bush tax cuts were not focused on marginal rate cutting and were not supply-side. Furthermore, a rogue Fed torpedoed the Bush presidency by indulging in booms which led to both the DotCom bust and the really horrific Housing bust. The past 15 years have seen a terrible departure from the “rising tide lifts all boats” equitable prosperity of Reagan and Clinton.
Supply-side was designed to—and did—cure the presenting problem of the 1970s, stagflation with its high misery index. In doing so, we wrung most of the macroeconomic juice from the tax code mango.
Other than the Paul and Cruz flat taxes (both, not coincidentally, primarily authored by Dr. Arthur B. Laffer, co-architect of the Reagan tax rate cuts), the current crop of Republican tax reform proposals take the form but lack the intentionality — raising economic growth across-the-board for workers as well as for business — of classic supply-side economics. Most of the Republicans’ tax reform proposals represent effigies of the Kemp and Reagan tax reforms. They resemble the work of a Cargo Cult.
A Cargo Cult? What’s that?
A Cargo Cult refers to a weird social phenomenon, particularly as occurring in the South Pacific islands after World War II. During the War, the allies placed airstrips on various formerly isolated Pacific islands. The GIs provided the natives with “manufactured clothing, medicine, canned food, tents and so forth” previously unavailable to the technologically primitive islanders. Then we won the war and departed.
As Wikipedia has it:
The name derives from the belief that various ritualistic acts will lead to a bestowing of material wealth (“cargo”). … Cult behaviors usually involved mimicking the day-to-day activities and dress styles of US soldiers, such as performing parade ground drills with wooden or salvaged rifles. The islanders carved headphones from wood and wore them while sitting in fabricated control towers. They waved the landing signals while standing on the runways. They lit signal fires and torches to light up runways and lighthouses.
For the anthropologically minded, the John Frum cult continues to this day on Vanatua. (One would be incorrect to infer a relationship between John Frum and the Atlantic Monthly’s conservative apostate David Frum … although certain similarities between the two Frum cults are eerie.)
The Republican presidential candidates resemble nothing so much as “Supply-side Revolution Re-enactors.” Or as T.S. Eliot wrote, in The Hollow Men “Shape without form, shade without colour,/ Paralyzed force, gesture without motion…. … Lips that would kiss/ Form prayers to broken stones.” It’s a charade.
With no disrespect for supply-side economics (whose principles were and are sound and among whose undaunted advocates I was, and am, counted), let’s stop tackling our current economic challenge with tools designed in the 1970s to solve the problems of the 1970s. That was 40 years ago.
Our job is to solve the stagnation besetting us in the 21st century. The lack of job creation and economic mobility is a challenge that at least correlates with, and may be rooted in, the collapse of productivity and the failure of productivity increases to inure to workers. (Here’s a good look at the productivity bust. And another at how productivity increases are not inuring to workers.) Stagnation and especially lack of productivity gains are our presenting challenge.
It is time to build on the foundation of supply-side economics. Yes, surely, let’s restore that foundation where it has caved in, as it has caved in on high integrity monetary policy. That’s crucial. By all means let us embellish it along the lines of the Cruz and Paul flat taxes.
That said, if the Republican Party and growth-oriented members of the Democratic Party wish to be transformational, as Kemp, Reagan, and Clinton were transformational, let’s build upon, not merely scavenge around inside, the foundation laid for us.
CLICK HERE to read how Human Capitalism is the solution for ending 15 years of economic stagnation.
Photo Credit: Lexington Downtown Area by Fredgar