July 26, 2010

The political genius of supply-side economics

England's Martin Wolf has a good take on the state of our political dialogue on economic policy. I read this and thought of the ongoing conversation over at ATK, where one person has boldly defended the Bush economic policy while blaming all the economic troubles on the Democrats taking over the house in 2006. It is funny. One party can control the WH, and both houses for 6 years (or most of that 6 years) but anything bad that occurs after is not their fault.

I am increasingly convinced that most Republicans have been sold a bill of goods. Wolf makes a good case for this in his piece and notes that Republicans moved from being the party of a balanced budget to being the party of tax cuts.
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.
It is a brilliant political strategy. Assure the American people that their deficit will go away as long as you cut taxes for the super rich. Sure, you throw a bone to the middle class, though you don't note that while their federal taxes will go down slightly, their local and state taxes will probably go up--or they will see a steady decline in services. College tuition will continue to climb, and more and more fees and licenses will be regressively taxed.

But you don't tell them that. Nor do you tell them that you probably will not come close to cutting any major budget items. You will make it harder on scientists looking for grants, and will demonize poor people and minorities, but will not actually cut the budget in any meaningful way. But you will continue to sell them the lie that reducing taxes will eventually increase revenues to the point that the budget will be balanced. All through magic.

And it doesn't matter the state of the economy, the existing tax rate, or the state of the deficit. Tax cuts are magical. They will fix whatever economic problem you have, even when lower tax revenues are one of your problems. Republicans have turned into a caricature of themselves and remind me of the Far Side cartoon about the vet wing for horses. Every illness or injury has the same treatment: shoot them.

Hell, if you think about it, Republicans haven't even been consistent on this argument. In 2000, they justified a tax cut because of the surplus. The argument was that the government had too much of our money, so they had to give us some back. Wouldn't that have theoretically increased the surplus? Yeah, I realize 9-11, two unfunded wars, and Medicare Part D didn't help, but in 2000 I assume most republicans didn't know about those huge expenditures. If tax cuts always increase revenue, wouldn't that have been the argument? But it wasn't.

It just became that when the deficit ballooned and the economy tanked. Then tax cuts weren't because the government didn't have too much money but because we needed to stimulate the economy and then the tax revenues would once again rise.

Bill of freaking goods. And Democrats are expected to pay the bill and take responsibility. Meanwhile Republicans promise to return to the good old days when people get their free lunch--well, it would be free except for those damn minorities who are always taking your stuff.



Smitty said...

LIke I said on my blog, I drank my way through Econ at Grand Valley State. That said, from what little I do understand about economics, I generally agree with what you write. This in particular is so true that it makes me cry a little: remind me of the Far Side cartoon about the vet wing for horses. Every illness or injury has the same treatment: shoot them.

Bob said...

GVSU? Isn't that a chick school?

steves said...

I believe it is, Bob. That being said, I had the worst professor at MSU for my econ classes. He was a 90+ year old professor emeritus that really should have completely retired. He occasionally nodded off during his own lectures (as did I). The end result was that I really don't have a good understanding of economics.

While I think it is reasonable to let the Bush tax cuts die, I am concerned about the lack of any balanced budget. It is fine to complain about past economic policies, but an increased deficit is concerning.

Smitty said...

Isn't that a chick school

If by "chick school" you mean a school where there are more girls than boys, then yes, it was brimming with drunk girls who outnumbered drunk boys all looking for something to do in a college built in a cornfield 20 minutes west of Grand Rapids.