Supply Side Economics - does it actually work?

[Natorgator]

So everyone knows about Bush's big 700-something billion tax cut that he's pushing, and he claims that it will create new jobs, etc etc etc.

I've also read conservative pundits who claim that lowering taxes will increase government revenues (allegedly, as they say, like it did in the 80s under Reagan) because they seem to think we're on the far side of the bell curve. Did government revenues actually go up when Reagan cut taxes, because I have read articles with differing accounts.

And while we're talking taxes, how would you change Bush's plan to stimulate the economy?

[Alex Moon]

In theory supply side economics should work, according to the models that I've been taught so far. However economists tend to be divided on its effectiveness, and from what I understand, the evidence does not show decisively either way.

As for revenues going up in the 80s, I've seen a lot of stuff that says they did. However, in general a lot of the economic prosparity can be attributed to Paul Volkner's tighter fiscal policy of the early 80s, which is believed to have broke the stagflation cycle we were in.

[Alex Moon]

In theory supply side economics should work, according to the models that I've been taught so far. However economists tend to be divided on its effectiveness, and from what I understand, the evidence does not show decisively either way.

As for revenues going up in the 80s, I've seen a lot of stuff that says they did. However, in general a lot of the economic prosparity can be attributed to Paul Volkner's tighter fiscal policy of the early 80s, which is believed to have broke the stagflation cycle we were in.

EDIT: I meant Paul Volkner's tighter monetary policy

[Crayz9000]

Yeah, I've been hearing a lot of college economics professors disagreeing with Alan Greenspan lately...

[Alex Moon]

Yeah, I've been hearing a lot of college economics professors disagreeing with Alan Greenspan lately...

Ask two economists their opinions on the economy and you'll get five different responses

[RedImperator]

According to supply side theory, lowering taxes reduces the tax burden on the economy, allowing the economy to grow and actually increase government revenues. The theory is based on the Laffer Curve, that states that the optimal tax rate T* is somewhere between 0% and 100%, and any deviation from T* in EITHER direction will REDUCE tax rates. This is somewhat counterintuitive, as most people wouldn't think that raising taxes would reduce revenue, but it logically follows if a little bit of basic human psychology is used. If the tax rate is 100%, it's reasonable to assume nobody would work to generate taxable income because there'd be nothing to gain from it--they'd spend their time and gain nothing. At 0%, of course, people would work their asses off because they get to keep every nickel, but the government would collect no revenue for reasons so obvious that if I have to explain them, you're in the wrong thread. Laffer stated that as taxes go up, productivity goes down based on these assumptions. So somewhere there's an ideal tax rate that maximises revenue (NOT productivity--maximum productivity would only be possible with a 0% tax rate, and the government would collect no revenue).

Of course, economics is not an exact science, and it could be that Laffer's assumptions are wrong, though they've been borne out in certain overseas economies that had near 100% tax rates on certain income brackets (see Sweden and it's near economic collapse before reforms in 1991). Also, it's a guessing game to figure out where T* is--you could argue that we're below it, and we should actually raise taxes, though again I think real world data from the 1990s would give lie to this. Supply-side as practiced by the Reagan Administration is tricky because there's other factors like a tight money supply breaking stagflation in the early 1980s and enormously increased spending (military AND social). Deficit spending does all kinds of bizarre things to the economy, probably none of them very good in the long term. I think, in fact, that revenue did increase following the Reagan tax cut, but Congress was on a spending spree throughout the 1980s AND we were trying to run the Soviets into bankruptcy, so that extra revenue was turned into slop for the hogs in short order.

Bush's tax cut is so piddling it's hardly worth mentioning, and there's not going to be any spending cuts--our compassionate conservative president wants spending to grow at the inflation rate, which is nice except that we've been outpacing inflation for almost forty Goddamn years now, and we'd have to freeze the budget for decades or take a chainsaw to it next year to get down to where we should be. Then arguments over taxes would be meaningless because we'd be swimming in surplus revenue we could send back to the people (and I'm talking about REAL, on-the-books-right-now surpluses, not Bill Clinton's pretend trillion dollar surpluses based on TEN YEARS of economic projections).

[Axis Kast]

Bush's tax cut is mostly psychological.

As RedImperator said, it comes down to piddling peanuts in the end from the point of view of actual income saved. It's just that the exhilaration of getting a check in the mail - or assuming you're paying fewer taxes - is a relaxant in and of itself.

In the end, it's all predicated around (A) putting your faith back in the economy by way of obliging you to spend that "saved" money - which really amounts to hundreds, not thousands of dollars and (B) throwing your faith toward the Republican Party come November 2004.

At this point, it's a failure. Not only are the political battlelines more or less drawn anyway - the two hundred dollars doesn't really matter to most people, and those in historic need are Democrat bastion voters anyway -, but the psychological impact of war in Iraq, September 11th, and corporate missteps have more or less prevented targeted spending. The average consumer takes in less these days because of percieved - and largely real - inadequacies on the personal level. The budget buys the same kinds of things - but in less quantity. And therein lies the problem. People aren't saving enough money to buy more. The tax cut is just too small. Not that it could get larger either, though. States are already working to subvert Bush and raise sales or property taxes further anyway. Oh well.

[TrailerParkJawa]

The problem with cutting taxes to increase govt revenue is that the govt will make sure to spend more than the increase in revenue.

[Joe]

The problem with cutting taxes to increase govt revenue is that the govt will make sure to spend more than the increase in revenue.

That's why I have issues with supply-siders (not supply-side economics persay, just the people who actually practice it). Most supply-siders today don't emphasize cutting spending at all. Just Keynesianism for right-wingers.

[Andrew J.]

Economics is such a complex area that all you can do is pick something that seems right for the situation, do it, and hope for the best.

[RedImperator]

Economics is such a complex area that all you can do is pick something that seems right for the situation, do it, and hope for the best.

Not quite. Economics is so complex we don't know how to make it BETTER. Any idiot can make it worse, and we have an entire government full of idiots trying their best right now.

[Master of Ossus]

It works, but there are social problems associated with its implementation. The effects of it are more slow, but also more far-reaching than more traditional economics.

[Falcon]

In reality the President can do very little to benifit the economy and a whole lot to harm it. We all claim to believe in a free market, so why not try to be 'hands off' as much as possible...

[Illuminatus Primus]

In reality the President can do very little to benifit the economy and a whole lot to harm it. We all claim to believe in a free market, so why not try to be 'hands off' as much as possible...

While practical--this is not a push-button political platform. Idiots want to hear that their problems will be solved, and now.

[Joe]

In reality the President can do very little to benifit the economy and a whole lot to harm it. We all claim to believe in a free market, so why not try to be 'hands off' as much as possible...

While practical--this is not a push-button political platform. Idiots want to hear that their problems will be solved, and now.

Even though they won't. Americans take forever to realize that something is wrong, and then they fuck it up entirely with added bullshit.

[Master of Ossus]

In reality the President can do very little to benifit the economy and a whole lot to harm it. We all claim to believe in a free market, so why not try to be 'hands off' as much as possible...

There are actually lots of industries in which the economy would be very badly harmed by allowing them to operate in a true pure-market system. I'm not claiming that what we currently do is perfect (it's not by any means), but there are a substantial numbers of industries in which there would be a significant tendency to over- or under-produce.

[NecronLord]

Ah. Bush's economic policy. It can be summed up thus.

"Upon finding a weed, throw it further down the road, and let it grow into a Triffid."

[Natorgator]

Informative responses...so what does everyone think of the Democrats' plan? It seems like throwing $300/$600 checks at poorer folks isn't going to do much good at all, since it didn't last time.

[Joe]

Informative responses...so what does everyone think of the Democrats' plan? It seems like throwing $300/$600 checks at poorer folks isn't going to do much good at all, since it didn't last time.

The poorest 50% of this country pays no more than 5% of the income taxes. It's not going to do shit.

[TrailerParkJawa]

Informative responses...so what does everyone think of the Democrats' plan? It seems like throwing $300/$600 checks at poorer folks isn't going to do much good at all, since it didn't last time.

$300 is 10-12 weeks of gas for me. Nothing to shake a stick at. Its not the best stimulus package, but most of it will get spent in the consumer market which is a good thing.

[Falcon]

In reality the President can do very little to benifit the economy and a whole lot to harm it. We all claim to believe in a free market, so why not try to be 'hands off' as much as possible...

There are actually lots of industries in which the economy would be very badly harmed by allowing them to operate in a true pure-market system. I'm not claiming that what we currently do is perfect (it's not by any means), but there are a substantial numbers of industries in which there would be a significant tendency to over- or under-produce.

I'd be curious to know just which companies\industries would either a)overproduce, wasting money on products they can't sell or b)underproduce and make less profit (I'm not saying that over\under production doesn't happen, but when it does its usually self corrected pretty quick)

[TrailerParkJawa]

I'd be curious to know just which companies\industries would either a)overproduce, wasting money on products they can't sell or b)underproduce and make less profit (I'm not saying that over\under production doesn't happen, but when it does its usually self corrected pretty quick)

Having been laid off from a company that had a good product, but bad leadership, I cant say that over/under production can often come from a CEO out of touch with his sales and customer support depts.

[Falcon]

I'd be curious to know just which companies\industries would either a)overproduce, wasting money on products they can't sell or b)underproduce and make less profit (I'm not saying that over\under production doesn't happen, but when it does its usually self corrected pretty quick)

Having been laid off from a company that had a good product, but bad leadership, I cant say that over/under production can often come from a CEO out of touch with his sales and customer support depts.

You cant judge an entire system by one isolated incident. A government official can make a bad production decision as easily (I'd say even more easily) than a CEO.

[Joe]

There are actually lots of industries in which the economy would be very badly harmed by allowing them to operate in a true pure-market system. I'm not claiming that what we currently do is perfect (it's not by any means), but there are a substantial numbers of industries in which there would be a significant tendency to over- or under-produce.

This sort of spits in the face of the rationality principle, which is essential whenever you talk about economics. Which ones?

[TrailerParkJawa]

You cant judge an entire system by one isolated incident. A government official can make a bad production decision as easily (I'd say even more easily) than a CEO.

Im not making any judgements of an entire system. Just illustrating how things can fail, even in the best of systems.