Why Supply Side Economics Doesn’t Work

Neera TandenI came upon an old article by the President of the Center for American Progress, Neera Tanden, Burying Supply-Side Once and for All. I really liked the way that she framed the issue, because I hadn’t thought about it in such stark terms. Conservatives claim that tax cuts will save us all because it will increase investment. But that isn’t the way that economic stimulus works — ever.

According to the supply side dogma, we mustn’t just lower taxes — we must lower taxes on the rich — the “makers.” Doing so will incentivize them to work more. The theory seems pretty straight forward. Imagine that you are working 20 hours per week for $10 per hour. Your boss wants you to work more hours, but you don’t want to. If she offered you $20 per hour if you worked full time, you would be far more likely to take that deal. The problem is that it isn’t like this at all income levels. And an even bigger issue is that the rich get most of their money from capital gains. They aren’t going to work more if their taxes are lower. And they aren’t going to invest more, because they are almost certainly investing as much as the investment environment dictates.

So this isn’t how stimulus works. Instead, it works by giving people more money, which they spend. Given that the rich already spend as much as they want, giving them even more money makes no sense. They will save it. And saving it will not get funneled into investments when we aren’t at full employment. (Note: we are almost never at full employment.) Thus, if we are going to give money to people, we should give it to the poor, because we know that they will spend it and thus cause the money to move through the economy, doing the actual work of stimulus.

This is an excellent way to think about supply side dogma. It shows why it doesn’t work. But also, it explains why conservatives say things that seem — on their face — to be ridiculous claims. When Trump and Bush and Rubio put out tax “reform” plans that are just big giveaways to the rich, it looks different to them. They think this is how you stimulate the economy. They implicitly accept the Say’s Fallacy that supply creates its own demand and that any money given to the rich will automatically be invested. So it isn’t like they are totally unhinged. They just have a deeply flawed theory of how the economy actually works. (Or they only care about the rich. Or both.)

The other side of this is that we have empirical data. Paul Krugman dealt with the issue in his column on Friday, Voodoo Never Dies. Supply side economics didn’t even work under Ronald Reagan. The economy was good under him because of Federal Reserve policy and good old fashioned Keynesian stimulus. Under Clinton, the economy was supposed to fall apart when he raised taxes, but it didn’t. It was supposed to boom because of George W Bush’s huge regressive tax cuts — but instead we got anemic growth. And the economy was again supposed to die when Obama allowed top tax rates to go back up and Obamacare to start. Instead, the economy did even better.

So supply side is nonsense. But I do think it is important to understand so that you can counter conservatives. It won’t do for us to talk past each other. They need to have their nonsense confronted directly. Because it is literally killing Americans.

Actually, it turns out that I had read Tanden’s article before. But the article I wrote about it (and another) are worth checking out, Supply Side Dogma.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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