The Myth of Supply-Side Economics Carries On

Supply-Side Economics Fantasy

The graph above is taken from Jared Bernstein’s article in The Washington Post, A Graphical Assault on Supply-Side Tax Cuts. I had to change it quite a lot to make it fit the format of this site, but the original graph included the text, “Note: The data in this chart are not real.” That’s important to remember. This is what we would see in economic data if supply-side economics worked.

The graph shows that as you decrease the top marginal tax rate, the growth of the economy increases. And on the other side of things, as you increase the tax rate, the growth of the economy decreases. This is really very simple. And we hear almost nothing but this kind of supply-side economics from conservative politicians. They claim that their tax cuts for the rich are going to stimulate the economy.

This is the argument of the supposedly reasonable Republican, John Kasich. His vague tax plan is supposed to create a 3.9% growth rate. The last time we saw this kind of sustained growth rate was during the dot-com bubble. But it is amusing that Kasich offers such an exact number. Jonathan Chait mocked it perfectly, it is “way more responsible than those crazy 4 percent growth promises made by Jeb Bush!”

But there’s a larger issue that I’ve been talking about for a while. Who cares what happens to GDP? We are all aware of the following graph from Josh Bivens and Lawrence Mishel. My question continues to be: why do we still pretend that we are living in that 1948-1973 period? Productivity does not help out workers, so why should workers continue to care that GDP is going up?

Productivity Wages Divergence

Jared Bernstein provided a counter to the first supply-side economics fantasy graph. He did it with six graphs of actual data. He looked at: employment, investment, productivity, real per capita GDP, real median income, and real per capita revenue. In all cases, the graphs show the same thing: a small correlation in the opposite direction. That is to say that in as much as the data indicate anything, it indicates that higher top marginal tax rates are good for the economy.

Here is the data for real per capita GDP growth — pretty much what the fake data above was supposed to represent:

Real Per Capita GDP Growth vs Top Tax Rate

Bernstein is clear that this doesn’t prove that raising top tax rates will improve the economy, “But the fact that the simple empirical record is uniformly hostile to the supply-side story should put the burden of proof squarely on those arguing that supply-side tax cuts will be pro-growth.” And he ends with a nice comparison of the employment growth in Kansas versus that in the surrounding states since Kansas got on board the supply-side train and provided massive tax cuts to the rich. The result: Kansas has seen 0.8% growth while the nearby states have seen 1.7% growth — over twice as much.

Like most conservative policy, supply-side economics lives on because conservatives want it to live on. Every even remotely good idea that conservatives have had has been co-opted by the Democratic Party. So the Republicans really are left with nothing but bad ideas — at least when it comes to the economy. But supply-side economics is just comical. But as long as the media continue to allow politicians to get by with these outrageous claims, we will continue to hear the claims.

Even after his ridiculous claims about 3.9% growth due to tax cuts to the rich and unstated deregulation to The Washington Post, they wrote, Republicans Don’t Like Kasich Because he Sounds Like Obama. As Dean Baker noted, the paper was making a claim about Kasich’s tone, not his policies. Of course, reporters don’t actually know what kind of temperament that politicians have. “They should be sharing this information with readers so that they will understand that Mr Kasich is making promises that are out of touch with reality.” Instead, we hear about how calm he is.

Meanwhile, he’s allowed to use supply-side economics to say that he will growth the economy at 3.9% per year based on no evidence at all.

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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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