What is Supply-Side Economics?

What is Supply-Side Economics?


As political footballs go, there are few as worn as ‘supply-side economics’. Squabbling over its merits – or lack thereof – has, for many a year, underpinned much political discourse; belief in, or rejection of, its principles helping demarcate Republican from Democrat, Tory from Labour, etc. It has operated under a number of guises; its tenets followed to varying degrees; and ever since its conception in the 1970s, it has been one of politics’ most volatile fault lines.

In a nutshell, it argues that a lowering of taxes across the economic spectrum and removal of regulation is the most effective way of ensuring growth. By minimising state intervention in the economy investment is stimulated, which translates into a greater supply of goods and services for the consumer, while simultaneously boosting employment. In practice, however, owing to a combination of vested interests and lobbyist influence, supply-side economic policy has often prioritised the slashing of taxes for the rich, bringing it closer to its theoretical cousin, the universally-lambasted trickle-down economics.

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Reaganomics and its enduring appeal

The theory entered the American collective consciousness in the 1980s, popularised in the economic policies of President Ronald Reagan, whose wholesale adoption of the supply-side mantra became known as ‘Reaganomics’. Since then, it has enjoyed a logic-defying life. Rigorously discredited by the academy – and not just by critics from the left – the theory has remained, implacably, a stalwart of GOP policy, both Bushes and now Donald Trump keen adherents. On a state level, too, it has often found expression, perhaps most notoriously in Kansas, as part of the 2012 ‘Brownback plan’, when unprecedented income tax cuts wrought untold damage on the state’s economy. Planned as ‘shot of adrenaline into the heart of the Kansas economy’, the reality was closer to a bullet, as the cuts quickly bankrupted the state’s coffers. 

The Laffer curve

At odds with consensus thinking, supply-side economics derives its theoretical underpinnings and apparent authority from the infamous ‘Laffer Curve’, accredited to the roguish arch-conservative economist, Arthur Laffer. His story began in mythical fashion in 1974, suitably, given his reputation, in a bar. Summoned by senior Gerald Ford administration advisers Donald Rumsfeld and Dick Cheney, it was here that Laffer first sketched his economic vision, quite literally, on a napkin. With just a few strokes of his pen on a crumpled, coffee-stained serviette his curve was born. And despite its inevitable imprecision – the setting did not lend itself to mathematical theorising – his company was impressed, Cheney, in particular, readily converted. The theory was soon assimilated into the Republican Party policy-making machine and by the time of Reagan had become its economic orthodoxy. 
Supply-side economics

The curve itself proposes a relationship between levels of taxation and government revenue. At one end of the curve is a 0% tax rate, which translates, predictably, into no revenue. At the other end, is a tax rate of 100%, which, given people are presumed not to work without take-home pay, also raises no revenue. The interesting part is the inverted U in the middle. Somewhere on the continuum, Laffer argues the existence of a ‘tipping point’, where the incentive to work and invest quickly decreases once tax rates become too onerous. In helpful explanation of his already rather simple model, he declared, ‘tax something, and you get less of it. Tax something less, and you get more of it’.

As an actual tool, the curve is more theoretical than practical. Its claim of where the tipping point actually lies is noticeably non-specific, a vagueness that has been one of its greatest utilities, making it impressively versatile. For regardless of the scale of the intended tax cut, with a quick rejigging of its numbers, the curve can be pointed to as ‘academic justification’, proof that what will be lost in reduced tax revenue will be more than made up for in growth. Big business, unsurprisingly, happily threw its weight behind it, as it helps free the path to greater profits. Republican loyalty, on the other hand, is harder to fathom, existing, as it does, in the face of mounting evidence pointing to its ineffectiveness. Whether a genuine belief in its efficacy or cynical intellectual cover, its motivation is difficult to make sense of.

Repeated failure

Since Reagan’s adoption of its key principles, opposition to supply-side economics has steadily grown, culminating in a moment of rare academic unity, a single castigating voice. Indeed, the evidence does look incontrovertible: US tax cuts in the last 40 years have not been self-financing as promised, a superficial glance over recent history telling its own story. Reagan’s cuts, deep as they were, resulted in ballooning national debt, and although the economy boomed in the mid-80s as it recovered from recession, there was little to no sustained economic improvement for most Americans. Instead, wealth simply concentrated at the top and inequality spiralled. By the end of his government, and after almost a decade of his economic policy, middle-class incomes were the same as they had been 10 years before; poverty rates had actually risen; and there had been no marked productivity growth.

George W. Bush began his presidency in similar fashion with big tax cuts for the rich (the biggest, in fact, since Reagan), premised on the guarantee that all would benefit – a true indication of his trickle-down credentials. As it happened, rather than trickling down, the dividends defied gravity, trickling upwards. By 2005, the top 1% had seen their after-tax household income increase by 80% compared with 1979, an increase over 10 times quicker than that experienced by the bottom 25%. As he left office some 4 years later, wages were lagging far behind inflation, resulting in stagnating living standards, and employment growth was falling fast, in stark contrast to the booming Clinton years. The optimism of the 90s had well and truly died.

Old dogs, old tricks

Obama’s administration made some modest attempts to better balance the tax burden, estimates even suggesting the richest 1% paid more in tax in 2013 than they did in 1980. Trump, however, abruptly stalled and then reversed this progress. Disregarding the evidence, he gave supply-side another go, rolling out, in 2017, nation-wide tax cuts predicted to cost $6.2tn in just 10 years. As described by Paul Krugman, these included ‘a cut in top individual tax rates; a cut in corporate taxes; and an end to the estate tax.’ All, he was convinced, would ‘overwhelmingly benefit the wealthy, mainly the top 1 percent.’ The cuts added more to the national debt than any other single American tax bill in the past three decades, and the widening of the deficit they’ve caused has sparked fears of future cuts to social security and Medicare. In truth, the real extent of the damage they will cause remains to be seen. If history is anything to go by, though, the middle and lower classes should brace themselves.

Epitomising the strangeness of these times, Trump followed up his tax reforms by awarding Arthur Laffer the Presidential Medal of Freedom, the nation’s highest civilian honour. In the midst of a deafening chorus of criticism, he re-swore his allegiance to the Laffer creed. Despite being derided by economists left and right, supply-side prescriptions remain inexplicably influential, guiding the policy of the world’s largest economy. And regretfully, Trump’s endorsement is no outlying opinion; indeed, it is the glue that’s holding, and has often held, the Republicans together. A party that historically prided itself on its empiricism has lost itself down the rabbit hole. Quite what it will take to divorce it from this obsession is anyone’s guess; the attachment is evidently a fierce one. Insanity – we should remember – is doing the same thing over and over and expecting a different result, which prompts the question: how can they possibly think it will be any different this time around?