"VOODOO ECONOMICS" STILL CASTS ITS SPELL
In his opinion piece "How to Destroy American Jobs: Obama's proposals for increasing the tax burden on U.S.-based multinationals would harm our most dynamic companies" (Wall Street Journal, February 3, 2010) Prof. Matthew J. Slaughter, of Dartmouth's Tuck Graduate School of Business, succumbs to the supply-side myth that higher tax rates discourage economic activity and lower rates stimulate it. The facts say otherwise.
Real economic growth during the Reagan and Bush II years, when personal and corporate tax rates were cut, was significantly slower than during the Clinton years, when tax rates were raised. ("The largest tax increase in history," according to horrified supply-side critics.) This outcome is the exact opposite of what supply siders predict.
The supply-side myth is based on a flawed understanding of human behavior in the aggregate:
Reagan's supply-siders believe if the tax hurdle is lowered, taxpayers (both corporate and individual) will work harder because they get to keep more of what they earn, stimulating economic growth. Conversely, if tax rates are lowered, they will work less because they get to keep less and economic growth will suffer. In short, they believe greed is the overarching human motivator. They mistake in projecting their own predilections upon the population at large.
The relatively higher growth experienced during the Clinton years reveals a strikingly different pattern of collective human behavior:
Lower the tax hurdle (as Reagan did) and the government makes it easier for individuals, including corporate executives, to achieve their (after-tax) goals, so they opt for more leisure, don’t work as hard, take fewer risks and the economy slows. Raise the tax hurdle, (as Clinton did) and the government makes it harder for taxpayers to achieve their (after-tax) goals, so they work harder, take more risks, so as to achieve their goals, and the economy grows faster.
The comparatively faster growth in the Clinton years, relative to the Reagan and Bush years, tells us that achieving near-term goals and the enjoyment of leisure trumps greed as the dominant human motivator.
Moreover, the huge federal budget deficits of the Reagan and Bush years and the budget surpluses during the Clinton years, tell us that if you want to raise more government revenue, raise tax rates moderately. That's what Obama is proposing to do by raising taxes on overseas corporate profits.
Supply-siders have a real problem in that the world just doesn’t work as they say it does. Not only do the data confirm their misperception of human nature, as revealed above, but also none of the Reaganomics forecasts based on supply-side theory came to pass.
Reagan promised an end to deficits, faster long-term growth in revenues than would be the case if tax rates were left as they were, and, according to the “trickle-down” theory, more income and wealth for everyone.
Reaganomics produced just the opposite: the largest deficits in the history of the nation to that time, a slowdown in revenue growth and greater inequality of wealth (the rich got richer, the poor got poorer, and the middle class marked time and sustained a rising standard of living with debt which has now come back to bite us). In the bargain, during the Reagan years, the U.S. went from being the world's largest creditor to the world's largest debtor nation. The same occurred during Bush II, to the point where the U.S. now exhibits the greatest inequality of wealth of all advanced nations and is more deeply in debt to foreigners than ever before in our history.
Supply-siders try to blame the deficits on “spendthrift” Congress. But anyone with a modicum of Washington savvy will tell you that it’s much easier to cut taxes than it is to cut spending. Recognizing that, responsible fiscal conservatives should have demanded the spending cuts before they cut taxes. Had they done so, they would have discovered that every dollar of Federal spending has a constituency behind it resisting the cuts. They would have found it impossible to reduce spending enough to pay for their tax cuts, and, therefore, would have foregone them.
How any fiscal conservative could support the Reagan and Bush II tax cuts (other than for selfish reasons or sheer ideological obstinacy) in view of the facts, defies logic. G.H.W. Bush was right when he dubbed Reagan's supply-side theories as "Voodoo economics."
When asked why he had “switched sides” in the realm of economic theory, John Maynard Keynes replied: “When the facts change, I change my opinion. What do you do, sir?”
The question for supply siders is how much more data refuting their theories do they need before they change their opinion?
What do you do, Prof. Slaughter?
David L. Smith
Dartmouth 1962