The Rise and Fall of Supply-Side Economics

Bruce Bartlett explains his new new book, The New American Economy, and why he thinks supply-side economics should declare victory and go away before it causes any more problems.

The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora’s Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d’être. In particular, the idea that tax cuts will “starve the beast” and automatically shrink the size of government is extremely pernicious.

Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. As I explained in a recent column, a key reason why deficits restrained spending in the past is because they led to politically unpopular tax increases. But if, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year.

My book is an effort to close Pandora’s Box and explain to people why I believe that SSE should go out of business–or declare victory and go home, if that makes the idea easier to accept. To the extent that it has any valid insights left to inform policymaking they should be used to design a tax system capable of raising considerably more revenue at the least possible economic cost. Going forward, I believe that financing an aging society and a permanent welfare state is the biggest economic problem we face. (See my discussion here.) Failure to do so leads straight back to the stagflation that SSE came into existence to cope with. . . .

Many of my friends believe I have abandoned supply side economics and become a Keynesian. (Among conservatives there are few insults more damning than to be labeled a “Keynesian.”) But as I try to explain in my book, my views haven’t changed at all; it’s circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don’t understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it’s simply become dogma totally disconnected from reality.

I don’t always agree with Bartlett, he’s almost always worth reading.