The Myth of Supply Side Economics Part 87

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.

Ben Cohen is the editor and founder of The Daily Banter. He lives in Washington DC where he does podcasts, teaches Martial Arts, and tries to be a good father. He would be extremely disturbed if you took him too seriously.