The Church of the Perpetual Supply-Side Miracle

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Posted in: Tax and Economics

With the perhaps-temporary death of the Republicans’ efforts to repeal and replace the Affordable Care Act, the question now is where they and the Trump White House will turn their fickle attentions.

In the very short term, that question has been pushed aside by Trump’s order last week to fire missiles on Syria. Even though that knee-jerk reaction seems neither to have improved the long-term situation nor even to have had a meaningful short-term impact, Trump has nonetheless “won” a few news cycles.

Even so, that glow will fade soon enough, and unless Trump decides simply to start bombing countries for the sake of good news coverage – a cynical and murderous possibility that is not at all beyond the realm of possibility for our current president – the betting odds are that he will soon join the Republicans in trying to pass severely regressive tax cuts for the rich.

If (or more likely when) this comes to pass, we will soon be treated to another chorus of dishonest claims from Republicans about the miraculous effects of tax cuts. They will even claim that their proposed tax cuts are not truly regressive at all, instead attempting to sell the upward redistribution of income and wealth as a tonic to make the economy grow for the benefit of everyone.

Count on hearing every Republican, wrongly thinking that he is quoting Ronald Reagan, endlessly repeat the meaningless dictum: “A rising tide lifts all boats.” This is the aphorism that conservatives love to invoke to support trickle-down economics.

In a recent column (mostly devoted to a different topic), I noted in passing that “the Republicans are talking about permanently cutting rich people’s taxes, which is the very definition of a bad reason to increase long-term government debt. Trickle-down economics still does not work.”

The embedded link in that quote takes readers to my Verdict column from March 22, 2012, in which I summarized the most important results from decades of empirical economic research showing that tax cuts are not the magical growth-inducing elixir that Republicans claim them to be.

Notwithstanding the accuracy of what I wrote there, writing the truth this bluntly is guaranteed to enrage true believers in conservative dogma, and they are the people who will most definitely try to claim that tax cuts – especially tax cuts for the very wealthy – are just what we need to jumpstart economic growth.

They will still be wrong. The most interesting aspect of this all-too-predictable drumbeat of protest, however, is not just how wrong it is but how much it resembles religious belief. Faith over reason is fine (indeed, necessary) for a system of belief in a god or gods, but it is a poor basis on which to build economic policy.

Belief, Evidence, Religion, and Science

My father was a Presbyterian minister, so I had to come to terms with the faith-versus-reason conundrum early in life. That was actually rather easy, however, because my father always taught me that one could believe in the usefulness of science – what we would now call being “reality based” – without challenging one’s belief in God.

Evolution was not a threat to religion, he told me, because it is still legitimate to believe that something or someone had to have created the universe and put the rules of evolution in motion. Only the pathologically literal would be stumped by that one.

Importantly, the difference between science and religion is not a matter of what one can see versus what one must accept without seeing firsthand. In a recent issue of The Progressive, for example, a writer bizarrely claimed (in a letter that is not available online) that belief in climate change was a matter of blind faith:

“I, for example, ‘believe’ in climate change because I trust (somewhat) friends who are scientists and who trust other scientists. . . . My point is that belief in climate change is now a sort of evangelical religion, enforced from on high.”

This is beyond muddled thinking. The idea, apparently, is that people who are not trained in climate science and have not analyzed the data themselves are engaged in the same kind of faith-based thinking that leads one to believe in, for example, transubstantiation or immaculate conception.

That, however, simply is not how evidence-based thinking works. People who know the science and have looked at the data have reached conclusions that have held up to the rigorous standards of peer review and that other, skeptical people can test and replicate.

I have not seen with my own eyes that the earth is not the center of the universe, but I know how to prove that it is not, and I know that others have done so. I cannot similarly test whether Jesus is the son of God.

Again, the difference lies in the ability to test and prove or disprove, as opposed to something that could never be verified or disproven through any system of logic. You cannot prove that my father was wrong to be a Presbyterian, but you can prove that supply-side economics does not hold up to the evidence.

There is thus obviously nothing wrong with faith, in its proper place. But economics, like other evidence-based inquiries, is not one of those places. What I have always found fascinating is how many conservatives simply cannot accept the fact that their secular religion – trickle-down economics – is not exempt from the rules of logic and mathematics.

Let me be clear, however, that I am not one of those economists who claims that our branch of the social sciences is a Real Science – proudly pounding our chests about the upper-case “R” and “S” – that can be just as much of a science as climatology or evolution (or astronomy or any of the other so-called hard sciences).

The fact is that the empirical conclusions that economists are able to verify are generally much more tentative and much less specific than we would like them to be. This is, moreover, not a matter of thinking that something like Big Data or better computers will allow economics to become more science-like. For various reasons, economics will never be like chemistry or biology.

Even so, there are some questions that come up over and over again, that are studied at length, and for which an honest reading of the evidence is clear. The supply-side effects of tax cuts are among that small group of questions for which the evidence has piled up over the years.

There are still conservative economists who can cook the books to “find” the desired effect – which is one of the reasons that economics will never truly be a science – but they are the outliers. Even middle-of-the-road economists who found the theory of supply-side economics plausible have not been able to make an evidence-based case to support the Republicans’ favorite theory.

The Blind Faith of the Committed Believers: Tax Cuts are Always Good, Even When We Cannot Prove It

Even so, the basic Republican mantra boils down to something like this: Tax cuts put more money in the pockets of people and businesses, which means that they get to keep more of their money when they work and earn profits, which encourages them to work harder, which means that tax cuts must surely increase growth and prosperity.

As an aside, one can believe in these supposed miracles of supply-side economics without taking the additional step of believing in the so-called Laffer Curve, which claims that the increases in economic activity due to tax rate cuts will be so large that the government will actually collect more tax revenue at lower rates than it would at higher rates.

In more pithy terms, the Laffer Curve supposedly proves that “tax cuts pay for themselves.” I discussed all of this in “Why Laffer Lingers: Tax Cut Snake Oil Is Still for Sale” three years ago on Verdict, and I revisited the question (adding additional lessons from, among other things, Kansas’s disastrous embrace of tax cuts) in a column last summer.

To its credit, the Treasury Department under former President George W. Bush definitively conceded that tax cuts do not pay for themselves, but some conservatives never received that memo – or, again, they refused to allow their faith-based belief in the Laffer Curve to be undermined by evidence.

Even if we set the crankery of the Laffer Curve aside, the basic Republican position remains that tax cuts must be good for the economy, because the theory says so. But what happens when experience and evidence do not bear out the predictions of the theory?

One ever-present possibility is to misread the evidence. Most prominently, the early Reagan years are often held up as proof that tax cuts can work miracles. That defense, however, has never made sense, for a number of reasons (only two of which I have space to summarize here).

First, the high economic growth rates in the latter part of Reagan’s first term are actually a simple matter of the economy’s emergence from an extremely severe recession in 1981-82. After correcting for that effect, growth and job creation during Reagan’s two terms are unremarkable.

Second, simply declaring that a president’s policies are supply-side economics does not validate the theory. The end of the recession in 1982 was caused by the Federal Reserve’s shift toward expansionary policy and the huge defense buildup. The spending-related effects of tax cuts also helped to bring the economy back. They were not the supply-side results of tax cuts.

The Return of that Old-Time Religion

But wait, you say. If tax cuts helped to end the Reagan recession, then does that not tell us that supply-side economics works? The answer is hiding right in the theory’s name: supply-side economics. It is not enough to say that an increase in economic activity validates supply-side economics if the effect is the result of increased demand rather than supply.

This might seem to be an academic distinction, but in fact it is the lynchpin on which the entire debate hangs. The supply-side story emerged, after all, in response to conservatives’ bête noire, John Maynard Keynes’s demand-side economics. Republicans loved the idea that they would not try to induce more purchases (that is, demand by potential customers) but instead that they would give businesses the incentives necessary to expand and sell more goods.

In other words, stripped to its simplest elements, the difference amounts to this: Demand-side economics means giving people the means with which to buy goods and knowing that businesses will step in to meet that demand, whereas supply-side economics means giving businesses incentives to produce more goods at lower prices in the belief that customers will buy what the companies are selling.

Again, there is nothing inherently illogical about either of those theories. Both could contain an element of truth. The question from the standpoint of policy is whether the best way to increase growth in the U.S. is to continue to shift the distribution of income and wealth upward, chasing our tails in the faith that someday, somehow, it will all pay off.

Given how badly the supply-side experiments that began in 1981 have played out, however, it seems like a bad bet to continue to believe that trickle-down economics will ever work as advertised.

If trickle-down did work, moreover, liberals like me would gladly get on board. After all, if it really turned out that lavishing money on rich people ended up helping everyone else, why would we not want to make that happen? What matters is who is ultimately better off, not where the money starts.

Republicans simply want to give tax cuts to the rich. I suspect that most, maybe even almost all, of them are either aware or do not care that trickle-down economics does not work. They are in the game to help the rich, full stop.

But those who genuinely continue to believe in the miraculous effects of supply-side tax cuts represent the triumph of faith over reason. Tax cuts should work as advertised, therefore these people insist that they do work as advertised, no matter the evidence.

As the tax debate heats up, expect both the dishonest cynics and the true believers to join together in insisting that regressive tax and spending policies are our ticket to a new Garden of Eden. It has not worked before, and the evidence tells us that it will not work again. Believing it will not make it so.

Posted in: Tax and Economics

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  • Edward Tomchin

    Only the wealthy own boats. The lower classes just sink to the bottom. HELP! How in the hell does supply side anything work. If the wealthy have more supply but the bottom have no money there is no way to buy that supply.

  • Chris Cavanaugh

    William Jennings Bryan’s 1896 Cross of Gold speech; legislate to make the those on top prosperous and that wealth will “leak through” on those below. Legislate to make the masses prosperous and that prosperity will rise up on every social class which rests upon them. Old ideas, but good ideas nonetheless.

  • Robert Slagle

    A rising tide May float all boats, but it doesn’t mean a damn thing when the captains of some of these ships allow people to drown so they don’t have to have them on their boats.

  • Appleaday

    If you have the wherewithal to divert the tide to your boat, you can float away while the rest of us are still high and dry. THAT’S supply-side economics.