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OpEdNews Op Eds    H2'ed 2/3/14

What Is Supply-Side Economics?

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If I had known then just how corrupt politics was, I would have thought twice before warning Baker that the hidden deficits would be used to discredit the policy even if the policy cured stagflation. Baker was allied with George Herbert Walker Bush, Reagan's VP, and the fight was on from day one for the succession to Reagan. Kemp was in the forefront, because he was identified with Reagan's economic policy, and Bush had called it "voodoo economics." If Baker could make Reagan's policy appear to be successful only because Bush had moderated it, all the better for VP Bush's claim to the succession.

Tip O'Neill, the Democratic Speaker of the House, offered an alternative supply-side tax rate reduction to the administration's bill. Speaker O'Neill's bill had a smaller reduction in marginal tax rates on personal income, but had a superior pro-growth tax reduction on the business side. The House Democrats' bill offered expensing of business investment.

The Reagan administration was too fearful to propose expensing (immediate write-offs) of business investment, and here was the leading Democrat in the nation offering it to them. I told Jim Baker to jump on it, to work out a compromise with O'Neill on the size of the personal tax rate reductions and to give the Democrats equal credit for the policy. That, I told Baker, would ensure the policy's acceptance and success.

For political reasons Baker was more committed to giving Reagan a "victory" over Democrats than he was to the success of the policy. Baker wanted a headline. I wanted a policy. From Baker's standpoint, if Democrats for political reasons turned against the policy, they would help to create welcome roadblocks to Jack Kemp's challenge to George H.W. Bush for the succession.

Reagan's version of supply-side economics carried the day over Tip O'Neill's version. Deputy Assistant Treasury Secretary Steve Entin prepared a graph comparing the Reagan and O'Neill tax rate reductions. The Democrats' tax cut was initially larger, but Reagan's was better over time. That let Reagan go on national TV, point to the graph and say, "the Democrats have the best bill -- if you only expect to live one more year."

The history and explanation of supply-side economics are in my book, The Supply-Side Revolution (Harvard University Press, 1984). Books published by Harvard are peer-reviewed, which means that publication depends on a go-ahead from outside experts. A book that was "voodoo economics" or simply said that "tax cuts pay for themselves" or that "trickle-down economics works by giving the rich money to spend and some of it will trickle-down to help the poor" will not clear peer review.

Thirty five to 40 years after supply-side economics made its appearance in policy debates the vast majority of Americans, including apparently some economists and public intellectuals, have no idea what it is. For example, on February 1, 2014, Information Clearing House posted Bill Moyers interview of David Simon, "America as a Horror Show." This important interview gets fouled in its opening lines when Simon declares: "Supply-side economics has been shown to be bankrupt as an intellectual concept. Not only untrue, but the opposite has occurred."

Supply-side economics was not relevant to the interview. Yet off the bat Simon destroys the credibility of his interview. Supply-side economics cured stagflation exactly as supply-side economists said it would do. That was its only claim. I know. As Assistant Secretary of the Treasury for Economic Policy, I was in charge.

In 2013 The Supply-Side Revolution, which Harvard has kept in print for three decades, was published in China in the Chinese language. Why would a leading Chinese publisher translate and publish a 30 year old book about a subject that "has been shown to be bankrupt as an intellectual concept"? Why would Chinese economists request a publisher to translate and publish a book about a discredited and useless subject?

Why does Simon, a reporter who was on the Baltimore Sun's city desk covering crime during the Reagan administration, think that he knows anything about supply-side economics?

How can America save itself when its public intellectuals have no idea what they are talking about?

As I am associated with supply-side economics and the Reagan administration, the coterie of Reagan haters will write in to the many sites that post my column with sarcastic comments denouncing me for "again defending Reagan." I am not defending anyone. I am merely stating the facts. Anyone can find the facts. All they have to do is to look. But many had rather shoot off their mouths and demonstrate their ignorance. They can't stand the thought of having one less reason for hating Reagan.

As I am an interested party, let's turn to a non-interested one, Paul A. Samuelson, "the father of modern economics." Samuelson was the doyen of Keynesian economics, America's greatest 20th century economist, and the first American economist to win the Nobel prize. If anyone was harmed by supply-side economics, it was Keynesian economists' human capital. Yet in the 12th edition of his famous textbook published in 1985, Samuelson shows how supply-side policy can cause aggregate supply to increase or decrease, a first for economics textbooks. Samuelson validates supply-side economics in principle and says that its policy impact varies from "modest" to "substantial," depending on circumstances. He also says that in Britain, "the supply side policies appear to have had an unexpectedly large impact, improving both inflation and productivity more than many observers expected."

Is the "foremost academic economist of the 20th century" (New York Times) another trickle-down, voodoo kook like me and Ronald Reagan?

I met Samuelson in his MIT office when I gave the annual State of the Economy address to the combined economic faculties and graduate students of Harvard and MIT sometime in the 1980s. Samuelson had an open mind and could absorb new thinking. At the conclusion of my address, I received a standing ovation. No one in the large liberal audience of professors and graduate students said I was a voodoo economist or an agent for the rich. I have debated in public forums Keynesian economists who are Nobel prize winners, such as James Tobin and Larry Klein. They were always respectful. At a meeting of the Eastern Economics Association, Tobin acknowledged that I was correct.

Supply-side economics dealt with the problem of its time -- stagflation. Supply-side economics has no cure for an economy decimated by jobs offshoring and financial deregulation. The problems of today are different. I have made this clear in my book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West.

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Paul Craig Roberts Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His books, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available (more...)
 

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