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A Critique of Supply-Side Economics
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10455 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
2 / 1993 |
5,578 Words |
| Author
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Gary A. Dymski
Gary A. Dymski is assistant professor economics at the
University of California, Riverside. He is an organizer and
editor of a major Economic Policy Institute study on monetary
policy and financial restructuring that will be published as a
later this year by M.E. Sharpe. |
If you ... reduce tax rates and allow people to spend or save more of what they earn, they'll be more industrious, they'll have more incentive to work hard. ... The result: more prosperity for all and more revenue for government. A few economists call this principle supply-side economics. I just call it common sense.
--Ronald Reagan, An American Life
For the past twelve years, a revolution has reshaped U.S. domestic economic policy-making. Its centerpiece is "supply-side" tax reform.
Cutting tax rates on earned income, the supply-side theory says, is supposed to increase labor supply, while cutting tax rates on unearned income should trigger efficient shifts of wealth portfolios and more entrepreneurial activity. These reactions should, in turn, raise investment and increase tax revenue. President Reagan twice signed tax cuts of this type into law, and President Bush made reduced capital gains taxes the sine qua non of his antirecession plan.
This essay shows why the supply-side approach arose as an alternative to traditional macro economic policies, and why it has failed. In fact, it concludes that the United Sates needs a second supply-side revolution to reignite its economy, largely to overcome the effects of the first one, in whose shadow the Clinton administration has now come to power.
Tax cutting is not the unique province of Republicans; both Presidents Kennedy and Carter authorized tax cuts and credits. But the tax cuts and other supply-side changes implemented by Reagan were different.
Prior to the Reagan administration, the consensus of economists since World War II held that tax policy had two aggregate effects. First, the reasoning went, adjusting the relative tax rates of low and high-income households would affect income distribution and hence the degree of inequality in society. Second, according to economists, adjusting overall tax rates downward or upward could speed or retard the economy's growth rate by affecting after-tax buying power. Indeed, shifting the level of tax rates was one of the tools of fiscal policy, whereby the size of government spending and revenues was adjusted so that the economy's aggregate demand for goods and services would suffice to fully employ the labor force.
These two goals of government policy were
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