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OpEdNews Op Eds    H3'ed 1/27/12

Selling the "Supply-Side' Myth

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This article cross-posted from Consortium News

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Former House Speaker Newt Gingrich with his third wife, Callista

Despite Newt Gingrich's claim that "supply-side" economic theories have "worked," the truth is that America's three-decade experiment with low tax rates on the rich, lax regulation of corporations and "free trade" has been a catastrophic failure, creating massive federal debt, devastating the middle class and off-shoring millions of American jobs.

It has "worked" almost exclusively for the very rich, yet the former House speaker and the three other Republican presidential hopefuls are urging the country to double-down on this losing gamble, often to the cheers of their audiences -- like one Florida woman who said she had lost her job and medical insurance but still applauded the idea of more "free-market" solutions.

Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the rich, combined with sharp reductions in the role of government. That approach, once famously mocked by George H.W. Bush as "voodoo economics," was supposed to spur businesses to expand production (the "supply side"), thus creating jobs and boosting revenues from all the commercial activity.

"I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked."

But that is not what the historical record really shows.

In 1980, I was working as an Associated Press correspondent covering budget and economic issues on Capitol Hill -- and at the time, the "supply-siders" had two key arguments in their favor: first, the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial base.

Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future.

No More Mystery

Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has the absence of "demand-side" consumers, not the availability of money to build more productive capacity.

And the reason that there are fewer consumers is that the Great American Middle Class, which the federal government helped build and nourish from the New Deal through the GI Bill to investments in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three decades.

Though many Americans were able to cover up for their declining economic prospects with excessive borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class. So today, businesses are sitting on vast sums of cash -- some estimates put the amount at about $2 trillion.

And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories.

For Americans, this has represented a downward spiral with no end in sight. American workers, whether blue- or white-collar, know that computers and other technological advancements have made many of their old jobs obsolete. And modern communications have allowed even expert service jobs, like computer tech advice, to go to places like India.

While painful to millions of Americans who find their talents treated as surplus, these developments do not by themselves have to be negative. After all, humans have dreamed for centuries about technology freeing them from the grind of tedious work and freeing up society to invest in a higher quality of life, for today's citizens and for posterity.

The problem is that the only practical way for a democratic society to achieve that goal is to have a vibrant government using the tax structure to divert a significant amount of the super-profits from the rich into the public coffers for investments in everything from infrastructure to education to arts and sciences, including research and development for future generations, even possibly Gingrich's "big idea" of a colony on the moon.

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Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Secrecy & Privilege: Rise of the Bush Dynasty from Watergate to Iraq, can be ordered at secrecyandprivilege.com. It's also available at
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