Take a Walk on the Liberal Supply Side

Posted in: Tax and Economics

The economy can grow faster and its rewards can be shared more fairly, and liberal policies are the only way to make that happen. That is news to Republicans, of course, because they are absolutely certain that the only way to make the economy grow faster is to cut taxes on the rich and to eliminate consumer, worker, and environmental regulations.

Last week, I wrote a column describing the Republicans’ unshakable belief in the ability of tax cuts to increase growth. I described that belief as the equivalent of a religion—impervious to evidence and a matter of fervent faith-based commitment.

Interestingly, however, there is a reality-based version of supply-side economic analysis, but its policy implications become more and more left-leaning the more closely one looks at the theory and evidence.

The ultimate lesson is that even people who think (incorrectly) that only the supply side of the economy matters should not support the Republicans’ tax cuts or anti-regulatory agenda.

Supply and Demand: What Could Be More Fundamental?

To begin, we need to be clear what we mean by the terms supply-side and demand-side, which will allow us to understand how those terms became associated with conservatives and liberals, respectively.

The simplest way to explain the difference is to say that demand-side economics is based on the belief that there are not enough customers lining up to buy the potential output that firms could produce today. Business might be bad not because firms are unwilling to sell more wares but because there are not enough customers.

We have only recently emerged from a grindingly (and unnecessarily) long experience with exactly this demand-side problem. In both the U.S. and Europe, the economy from 2009 onward was held back by inadequate demand, as people and businesses were afraid to spend in the aftermath of the Great Recession.

Worse, governments—especially the Tory governments in the UK and the center-right government in Germany, along with the Republican majorities in the U.S. Congress—were adamantly opposed to helping the demand side of the economy through infrastructure spending or other effective policies.

That is a tragedy, but at some point, we hope that the self-inflicted pain will end and the economy will begin to approach something like full capacity. There is still good reason to believe that none of the world’s major economies, including ours, have reached that point, but we are closer today than we have been in years.

This is where the non-ideological version of supply-side economics becomes relevant. The economy can grow in the long term only if we figure out how to increase inputs that will cause supply to rise: more people willing to work, more investment in modernized technology, and so on.

After all, we generally want the economy to produce more goods and services, and to do so at a lower cost. For example, if we can provide health care to more people while charging them less, or if we can provide better housing without driving up rents or housing prices, then we have made people’s lives better.

It is possible that this happy outcome can still be driven by demand, with supply responding as needed. Or it could be that demand follows supply. The question should not be one of ideology but simply evidence: If we give people more money to buy things, will that have a bigger indirect effect on supply than the direct supply-side effect of giving people and businesses more incentives to produce those things?

How Did This Become So Political?

The ideological split on supply- or demand-side economics arose when conservatives accused liberals of only caring about demand-side matters, which was never true. Conservatives further asserted, again contrary to the evidence, that only their tax cuts and attacks on regulation could change the growth in the economy’s capacity over time.

As I described in last week’s column, the Republicans quickly adopted an especially dumbed-down version of this already dumbed-down economic theory. In their world, businesses were chafing under onerous taxes and regulations, praying to be set free to give people jobs and allow the tide to rise, lifting all boats.

In a subsequent column, I referred to “Republicans’ commitment to trickle-down (that is, supply-side) economics,” which was an accurate but incomplete shorthand. That is, whereas today’s Republicans are devoted to trickle-down economics—the theory that high-end tax cuts end up helping everyone—they will still at least pay lip service to the possibility that all tax cuts (not just regressive tax cuts) are good for the supply side.

The basic idea is that even regular Joes and Janes who work for a paycheck are supposedly discouraged from working by high tax rates. If tax rates were decreased, they would happily work more hours.

The problem is that there is no good evidence to support that theory, either, because most people do not have the ability to control their work hours. There is also a demand-side effect to tax cuts, which means that any boost to the economy might not be a result of supply effects but simply of people spending their increased take-home pay (that is, demanding more goods).

In any event, conservatives accused liberals of being single-mindedly obsessed with demand, when in fact liberals were perfectly willing to follow the evidence to either the demand- or supply-side policies that would help the economy.

It was in fact the conservatives who were single-minded, and they made it even worse because they were not merely committed to ignoring the demand side but were only willing to consider a tiny subset of possible policies that might (but in fact do not) have supply-side effects.

The Liberal Supply-Side Story

By coincidence, the publication of my column last week was followed by the appearance of a New York Times piece by their economics writer, Neil Irwin: “Supply-Side Economics, but for Liberals.” There, Irwin laid out the evidence showing that many of the most important policies that liberals have been advocating for decades can have important supply-side effects.

For example, Irwin notes research showing that the expansion of the Earned-Income Tax Credit—an antipoverty program that Ronald Reagan loved but that today’s conservatives deride as a handout—substantially increases the number of people who are willing to work. Similarly, child-care subsidies also encourage more women to participate in the paid labor force.

None of that should be surprising, and the evidence is piling up in favor of these liberal supply-side policies—just as the mass of evidence has so definitively demonstrated that Republican tax cuts do not make the economy grow faster (and conversely that tax increases have not made the economy grow slower).

In fact, much of the story of economic policy over the last generation has been one in which Democrats and liberals have offered evidence-based reasons to believe that certain policies will expand the supply side of the economy, while conservatives and Republicans blow raspberries and pretend that this is all just an excuse for the expansion of Big Government.

For example, during the beginning of the Obama Administration, when the economy was teetering on the brink of a second Great Depression, liberal (as well as most centrist) economists noted that increased infrastructure spending would have both demand-side and supply-side effects.

That is, because there were millions of newly unemployed people available to work, and because there were trillions of dollars of investment funds looking for a safe haven, it was the perfect time to spend big on rebuilding roads and bridges, sewer and water systems (Hello, Flint!), improving public schools, and on and on.

This government investment would give workers and contractors more money to spend (the demand-side effect, which is multiplied as it works its way through the economy), but it would also expand the capacity of the economy when we eventually emerged from the economic disaster. And we could finance it with borrowing that was in effect cost-free to the government, because interest rates on government bonds were often lower than the inflation rate.

There were, by modest estimates, already in 2009 over two trillion dollars in deferred repairs to the nation’s infrastructure that were desperately needed, to say nothing of the expansions that would be essential to help the economy grow in the future.

What did Republicans say in response? They spent the next several years trying one excuse after another to justify their refusal to spend money. They said that infrastructure projects were not “shovel-ready,” even though there were plenty of projects that were ready to go. In another bizarre attempt at an argument, former House Speaker John Boehner complained that a high-speed rail project in California and Nevada would not help his constituents in Ohio. (Hard to argue with that!)

When all else failed, the Republicans’ strategy was to pick at details of specific line items to try to trivialize the importance of the overall approach. Thus we experienced a few news cycles during which politicians debated whether the government should spend money to re-seed the grass in the National Mall. Oy.

In other words, there was never really a debate. Republicans managed to shrink the Obama stimulus package and then attacked it for being ineffective. Of course, they claimed that it had failed, even though it had only as much positive impact as it could have had after Republicans gutted it.

The Snake Oil Salesmen Will Not Go Away

The Democrats, then, were and are interested in enacting policies that have supply-side benefits. What Democrats did not do, however, as Irwin points out, is assert “that these programs pay for themselves by generating more economic growth.”

That old-time snake oil is still the province of only the most committed believers in the Laffer Curve, the extremists among the extremists. As I explained in a Verdict column three years ago, that theory has never withstood any level of independent scrutiny.

None of which, of course, has deterred the true believers. The most outstanding recent repudiation of the snake-oiliest version of supply-side economics has been the disaster that Kansas Governor Sam Brownback inflicted on his citizens, yet he is reportedly excited about moving his “experiment” to the national level, even as his own party repudiates him in his home state.

And what of the Trump Administration? Although it has never been clear whom or what Donald Trump trusts (other than his own “very good brain”), he has at least had conversations with the most unreconstructed of the supply-side, Laffer-style true believers, including Arthur Laffer himself.

In a new op-ed this week that The New York Times might as well have published as a parody, Laffer and his posse offer their own take on what Trump and the Republicans should do. Mostly, the supply-side gurus are confused about why their own brilliance is so difficult for Republicans to understand.

To get a sense of the political anti-savvy that these gentlemen offer, consider this assertion: “The Republicans tried to fix the trillion-dollar health insurance market instead of keeping the focus on repealing Obamacare.” Right. The problem apparently was that the Republicans did not simply repeal the Affordable Care Act, which would have enormous and disastrous effects on the trillion-dollar health insurance market, and instead stopped to think about what effect repeal would have on the trillion-dollar health insurance market.

If this is the level of analysis that Republicans are receiving in terms of how to keep things “simple,” then they are in real trouble. “Pretend that what you are doing has no consequences, and everything will be fine.”

Laffer and friends suggest that Republicans modestly hold back from fixing the entire tax code and merely focus on changing the entire business tax system. How? Cut rates by more than half and allow immediate full deductions for all business investment. In other words, give trillions of dollars to businesses in the hope that they will increase supply.

The snake oil is most obvious, however, in their third proposal, which is a tax holiday for earnings held offshore, which is supposedly going to encourage companies to pay more taxes now in order to take advantage of the holiday. In other words, if you cut your prices down to almost nothing, you will be amazed at how quickly your store’s shelves are emptied—but you will have collected at least some money. As tax policy, this amounts to giving businesses a huge tax cut because we refuse to collect the taxes that they already legally owe.

The rest of the op-ed boils down to arguing that trickle-down economics really, really works. (Just look, they say, at this study that was rigged to show the results that we like!) And to entice Democrats, they would toss in some infrastructure spending, but only if it goes as much as possible directly into private businesses’ hands. (Translation: “We’ll spend government money as long as the people who support us get a big cut of the loot.”)

But the bottom line is that Republicans are stuck. Some of them are full-on Laffer types who are willing to believe the most exotic tales of magic elixirs curing all of our ills. Others are committed to cutting taxes for rich people and businesses, simply because that is what they became politicians to do.

If the concern is what will most help the economy, in the long term as well as the short term, and on the supply side as well as the demand side, liberals and Democrats have a full slate of evidence-based policies that would help solve real problems.

Republicans, by contrast, have faith that what has never worked before will work next time. Faith is sometimes rewarded, but this is beyond a risky bet. As I put it at the end of last week’s column: “Believing it will not make it so.”

One response to “Take a Walk on the Liberal Supply Side”

  1. J.E. Tarrant says:

    I find it interesting that no matter how many times Marxism rebrands itself, as socialism, communism, and post-modernism, it is still the ideology that murdered 100 million people in the 2Oth Century, and every country that adopts it collapses into chaos because it economically unviable; otherwise intelligent people continue to advocate for its’ many guises. No wonder the left is losing ground world wide.