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Supply-Side Deficits, Again

July 28, 2010

Reihan Salam has pulled some stuff from an old New Yorker piece detailing some of the big personalities in the rise of supply-side economics.  There’s a lot of good stuff here, but it’s interesting to note how it meshes with what I was saying the other day about supply-side and deficit reduction:

It’s worth noting that Ronald Reagan was very resistant to making extravagant claims regarding the impact of tax cuts on revenues, much to the frustration of the supply-siders. He favored reducing taxes that discouraged individual initiative, yet he was not a supporter of reducing taxes in any and all circumstances. Reagan and his closest advisors were also very cautious about arguing that tax cuts would raise revenue — in many instances, the team was more inclined to argue that the revenue decreases would be less than what we’d see under static analysis, which is about right.

Reihan also noted that Reagan thought the country would have to go through two or three years of “suffering” to “pay for this binge we’ve been on”.  He also quotes Robert Mundell, an economist regarded as one of the pioneers of supply-side, as advocating limited compassion, “the virtues of Keynesian economics in a downturn”, and as saying “the idea you should always cut taxes is absurd”.

It’s always worth remembering, again, that Reagan had a Democratic Congress, so laying all of the blame for the deficits of the 80s at his feet is an exercise in inaccuracy, but let’s just look at this in a vacuum one more time.  I said before that I didn’t believe supply-side economics was designed as a theory that would reduce deficits because of tax cuts — although I admitted that I didn’t really know — and these stray quotations, although not comprehensive, seem to confirm that.  Supply-side economics isn’t a “failure” because deficits didn’t go down during the last thirty years.  Political interests simply got in the way of economic ones, as is so often the case.  Let’s not be so quick to forsake entire economic theories because of the mistaken words of a few uninformed Republican senators.

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2 Comments leave one →
  1. Reihan permalink
    July 29, 2010 10:27 PM

    Mundell was objecting to what the supply-siders were saying in his name. Supply-side economics as a political doctrine was all about the idea that tax cuts would reduce deficits because it would increase revenues. That was the whole point. The entire text of the article makes that clear.

  2. August 3, 2010 10:53 AM

    Len Burman is an odd choice to pick for describing what supply-side economists said or thought. He is a rather extreme zealot for playing Robin Hood with the tax code, such as trying to tax capital gains at the same rate as income and raising the tax rates on top incomes whenever their share of pretax income goes up (it fell in 2008).

    If Burman, Dave Stockman and the like could catch folks like me saying debt service is a free lunch, or most tax cuts pay for themselves, then they’d quote us instead of making it up. It’s not as if I didn’t have a 39 year paper trail on tax policy and deficits, much of it at National Review and The Wall Street Journal. Here’s a good rule of thumb: If it’s not a direct quote it’s probably a direct lie.

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