The Political Genius of Supply Side Economics (must read)

http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

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To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

.....much more

We have had thirty years of Supply Side economics. Every metric (and I mean every one) shows how much this whole idea has been a failure to provide prosperity for all. Republicans used this ridiculous notion as a Trojan Horse to win elections. The tax rates on the wealthiest were revamped to favor the wealthy. At the same time - wages stagnated. Personal debt was substituted for a "living wage". The victims of these policies are people who do not directly benefit from Supply Side Economics but vote for Republicans and their promises.

Kentuck - you have my gratitude for raising this issue as it cannot be denounced enough. The utter vacuousness of this economic theory has become so stark and irrefutable that proponents of these ideas at the University of Chicago's Booth School of Business have publicly contorted themselves - asking how their ideas could have possibly gone so wrong.

Their ideas have given us thirty years of debt enslavement due to the efforts of monetarists like Friedman, Rubin, Greenspan, Bernanke and Summers. Republicans and conservative Democrats also shoulder the blame.

It's not that long.

Isn't our government in the ongoing process of supplying trillions in loan guarantees and direct cash payments to the world's largest banks? Didn't our President just allow BP to organize its own clean up effort?

Deregulation, tax cuts, and, when possible, a direct infusion of cash from the taxpayers to multinational corporations--that's the very soul of "supply side" economics. Supply side ain't dead, and it's not even mostly Republican any more. Supply side economics are the basic orthodoxy.

and we're feeding into the trickle down theory by talking about extending the Bush tax cuts for the so-called middle class.

dopes are still touting supply side as the big answer.