In a brilliant article in the FT, Martin Wolf describes the political benefits of the now completely debunked supply side economics theory:
First, it allowed conservatives to ignore deficits. They could argue
that, whatever the impact of the tax cuts in the short run, they would
bring the budget back into balance, in the longer run. Second, the
theory gave an economic justification – the argument from incentives -
for lowering taxes on politically important supporters. Finally, if
deficits did not, in fact, disappear, conservatives could fall back on
the “starve the beast” theory: deficits would create a fiscal crisis
that would force the government to cut spending and even destroy the
hated welfare state.
The theory, of course, is complete garbage as proven by the failure of the Bush Tax cuts to provide extra revenue through 'stimulating the economy' and the dramatic collapse of the massively deregulated financial system. Writes Wolf:
The tax-cutting eras of Ronald Reagan and George H. Bush and again of
George W. Bush saw very substantial rises in ratios of federal debt to
gross domestic product. Under Reagan and the first Bush, the ratio of
public debt to GDP went from 33 per cent to 64 per cent. It fell to 57
per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush.
Equally, tax cuts in the era of George W. Bush, wars and the economic
crisis account for almost all the dire fiscal outlook for the next ten
years (see the Center on Budget and Policy Priorities).
Unfortunately, this theory still remains the status quo in the extremely narrow spectrum of public debate, and as people like Wolf argue, it means we might be set for years of economic stagnation:
With one party indifferent to deficits, provided they are brought about
by tax cuts, and the other party relatively fiscally responsible (well,
everything is relative, after all), but opposed to spending cuts on core
programmes, US fiscal policy is paralysed.
As other countries assert more control over the economies using Keynesian formulas to bring their industries back to life, the years of American economic hegemony are set to end because of a fantasy economic theory that proves successful politically, but disastrous in real life.