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A Defense of Supply-Side Economics
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10443 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
2 / 1993 |
2,824 Words |
| Author
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John H. Fund
John H. Fund is an editorial writer for the Wall Street
Journal. |
Nearly twelve years ago, in August 1981, President Ronald Reagan signed into law a supply-side tax cut that set the stage for the longest economic expansion in American history. The 1981 tax cut, although it effects were watered down in the years tax reform to revitalize the U.S. economy.
It was only when President George Bush agreed to abandon supply-side principles in the 1990 budget summit that the economy began to veer off course.
The supply-side revolution in tax policy was emulated throughout the world. During the 1980s, tax cutting became accepted policy in Britain, Norway, Australia, Canada, Austria, Belgium, South Korea, West Germany, and even Japan, which all cut tax rates. In 1990, even Sweden's Social Democratic government threw in the towel and cut marginal tax rates, saying it had learned a lot from America's experience in tax policy.
This supply-side revolution was a direct challenge to Keynesian economics, which supplanted classical economics during the economic collapse of the 1930s. Supply-siders focused on incentive and tax-policy questions that were at the heart of classical economics but had been forgotten by Keynesians, who were obsessed with macroeconomics and demand management policies. They had allowed marginal income sectors of the American economy, thus creating a political Achilles' heel that supply-siders exploited.
The Success Of Supply-Side
In the late 1970s, Keynesians were also at a loss for how to cure stagflation, that uncomfortable combination of rising unemployment and inflation that drove Jimmy Carter from office in 1980. Carter's but modest ones whose only purpose was to expand demand.
Supply-siders maintained that the way to cure stagflation and expand noninflationary economic growth was to reduce high marginal tax rates, restrain government spending and regulation, and gradually reduce the rate of monetary growth. The Keynesians and their liberal allies argued that the supply-side program would be inflationary, result in greater poverty, and bring about an ultimate economic decline.
"The engines of economic growth have shut down here and across the globe, and they are likely to stay that way for years to come," wrote MIT professor Lester Thurow in the New York Times in early 1982.
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