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Jul 26, 2010


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"Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed."

To fully appreciate the absurdity of this particular meme, we only need consider from whom the link originated, the blog owner's well-established partisanship on issues like this, and the little gems of witlessness like the one posted, and like this one:

"That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts."

All this only emphasizes the importance of finding a way to neutralize the apparently incurable Krugman Syndrome disease. I think we'll make good progress toward that goal this November

Andrew Brod

One of the most interesting points in Wolf's post is his characterization of "supply-side economics" as a political tactic rather than an economic theory. Politically, it's an act of genius (at least for now). But as economics, it's not supported by the data and it hasn't worked as advertised. Conservative economists agree, but as the title of this thread suggests, it's not about data or verifiable results. It's about faith.


Time to cut through the partisan crap on display.

First, the tax rates under Clinton were still substantially lower than they were before Reagan took office. So if we are arguing that supply side is a failure because of the rates under Reagan and Bush then they must have been a failure under Clinton as well.

Second, the frugality of the Clinton years was due to the election of a Republican Congress in 1994. Recall the battles over shutting down government of 1995 because Clinton wanted to spend more and the GOP wanted to spend less. So the revenue increasing tax cuts were the product of the GOP as well as the lauded "frugality" of the Clinton years. Yet those represent a "failed religion" according to Ed and the author of his link.

So tell us, what did Democrats do during this time? Clinton's tax increase doesn't count because as I've already mentioned, it was still well below pre-Reagan top tax rates and as such was still very much under the supply side umbrella.


"...still very much under the supply side umbrella."

What is the tax rate which defines the line between supply-side economics and not supply-side?

Andrew Brod

Spag's rewriting history. When Clinton's tax increase was under discussion, Republicans argued to the high heavens that it would harm the economy. That's not what happened, but now Spag's devised a way to wedge that inconvenient fact into the supply-side legend. Apparently now there's an umbrella.

By that reasoning, we should attribute the weakness of the 2001-2007 expansion (either the weakest or 2nd-weakest since WWII, depending on how you measure it) to supply-side economics.

Similarly, we can all calm down about Obama's proposal to let the Bush tax cuts expire for high earners. After all, the top rate under Obama's proposal will be less than before Reagan took office, and in fact will be equal to what it was during the supply-side Clinton years. The magic of supply-side, whatever it is, will continue doing its work even if Obama gets his way with tax rates.

But this is off-topic. Wolf is talking about government finance and the ability of tax cuts to pay for themselves via the Laffer Curve. They didn't pay for themselves during the '80s or the '00s, and the converse happened in the '90s (tax rates rose and so did receipts). For the current batch of Republicans to argue that we need to keep the Bush tax cuts in place in the name of fiscal responsibility is a joke.


Okay, so let's say there was no Ronald Reagan and Clinton came along and dropped the top bracket from 70% down to 39.6%. Is that supply side or not?

Dave Ribar


If Reagan's tax cuts were so great for the deficit, why did deficits continue to increase from 1984-1986 even as the economy was growing?

Also, in what way were Republicans responsible for the annual deficit being cut by 1/3 to 1/2 from Clinton's entry into office until the Republicans gained control of the House in Jan. 1995?


"First, the tax rates under Clinton were still substantially lower than they were before Reagan took office."

"Second, the frugality of the Clinton years was due to the election of a Republican Congress in 1994. Recall the battles over shutting down government of 1995 because Clinton wanted to spend more and the GOP wanted to spend less. So the revenue increasing tax cuts were the product of the GOP as well as the lauded "frugality" of the Clinton years."

"Clinton's tax increase....was still well below pre-Reagan top tax rates"

1.)Which of the above non-opinion passages represents "rewriting history" such that they render the opinion based on them a joke?

2.) Do you similarly teach economics by belittling students who disagree with your slant?


>>Time to cut through the partisan crap on display.

Oh, the irony.



1) Increased spending outpaced increased revenues. NOTE: The 1984 deficit was lower than the 1983 deficit and the 1987-1989 deficits were lower than the 1984 deficit.
2) The deficit started coming down in 1993. Those revenues would have been based on tax policy before Clinton took office. The biggest declines begin in 1996, the first year after the GOP set the budget.

Regardless, this does not change the premise that during the Clinton years, tax rates were MUCH lower than before Ronald Reagan took office and that the GOP was more frugal than Clinton which was the reason for the 1995 budget standoff.

The premise of Ed's post is that low tax rates are a "failed religion" but the author wants to exempt the Clinton years even though tax rates were still much lower than when Reagan took office and the frugality during the Clinton years was in large part due to the GOP- the same group of people that are demonized in the article.

The facts are what they are.

Andrew Brod

The premise of Ed's post is that the claim that tax cuts pay for themselves is a "failed religion." It's failed because the facts are indeed what they are. "Supply-side" tax cuts have not paid for themselves.


I find it interesting that certain Democrat candidates for re-election have decided that they are now indeed supply siders, and have decided that perhaps the Bush tax cuts need to stay-- even those for "the rich", at least until the lame duck session, or until some other future date, as yet undetermined.

Regarding the wonderful Clinton economy,none of the Clintonomics apologists ever mention that the growth period in that administration came as a result of the technology advances of the period, and the tax cuts of 1997. This tax cut was followed by significantly higher growth from 1997 to 2000 than produced by the period after the 1993 Clinton tax increases, and a huge increase in employment from the tax hike economy.

One other thing: If indeed "higher taxes" encourage growth, as some have suggested, why does the same group of people always sell a tobacco tax increase as a way to discourage consumption of the product?

Of course, all this sort of talk triggers lots of Krugman Syndrome flareups, but I'm afraid that's just the price we will have to pay for talking about reality instead of economic fiction.

Andrew Brod

No one has suggested that higher taxes encourage growth. And bringing in tobacco taxes is irrelevant.


The WSJ and others have noted that historically federal tax receipts have averaged 18-19% of GDP. It does not matter who was president or what the tax rates were at the time. Spending is projected to be 25% of GDP over the next few budget cycles. Even the CBO as well as Obama's debt commision has said that spending needs to be addressed. Neither party has credibility when it comes to making the hard decisions of addressing spending. This discussion of allowing the Bush tax cuts to expire just plays at the margins and if they were allowed to expire would have no material effect on the projected deficits to come.

Dave Ribar


Federal receipts as a proportion of GDP were down substantially in 1986 from where they were when Reagan took office (from 19.0% in FY 1980 and 19.6% in FY 1981 to 17.5% in FY 1986). Spending was up as a percentage of GDP but by a smaller amount (21.7% in FY 1980, 22.2% in FY 1981 and 22.5% in FY 1986). Non-defense spending was actually smaller as a share of GDP in 1986 than when Reagan took office.

The tax provisions that would eventually close the budget gap during Clinton's term were enacted in the 1993 Omnibus Budget Reconciliation Act -- a year and a half before Republicans regained control of Congress.

Andrew Brod

Steve, that's not true according to this graph (scroll down to see it). Check out the orange area.


Gosh, I thought Brod was another one of those "I don't read what Bubba writes" team members.

How wrong I was on that point!

"No one has suggested that higher taxes encourage growth."


Really for real?


Dave, even if that is correct about the 1993 act, it does not support the contention of Ed's post or the article. You are still dealing with a much lower tax rate than before Reagan's supply side tax cuts.

We are supposed to believe that the economic growth since 1982 is a "failed religion".

"The premise of Ed's post is that the claim that tax cuts pay for themselves is a "failed religion." Really? That doesn't seem to be the premise of the article. Are you arguing that we would have had greater revenues with a top bracket of 70% than we did at 39.6% under Clinton? Should we go back to 70%? What is so magical about that number?

Andrew Brod

Nothing is magical about 70%, and it's a red herring to start focusing on that number. No one's advocating a return to 70%. What's at issue is an increase of a few percentage points, up to 39.6% I believe. But even that small increase is being opposed by conservatives who make the standard Laffer-Curve arguments.

No one doubts the broad outlines of the Laffer-Curve concept. Of course tax revenues will be zero if the average tax rate is at 100%. And of course tax revenues will be zero if the tax rate is zero. What happens in between is where the action is. Where the curve is negatively sloped, reducing tax rates will increase tax revenues.

Now, one complication is that the Laffer Curve does not necessarily imply zero tax revenues if the top marginal rate is 100%. You could hit lower brackets with low rates and only hit the very highest brackets with a confiscatory rate, and you'd get tax revenues. I'm not advocating that, but it's important for understanding what the Laffer Curve does and does not imply.

No one doubts that there are negatively sloped segments of the Laffer Curve. Could one such segment be between the current 35% and the 70% just mentioned? That is, if we increased rates in that range, would we reduce revenues? Probably, but it'd require increasing more than just the top marginal rate. The political debate places more emphasis on the top marginal rate than it deserves from a purely economic standpoint.

Speaking of the political debate, political conservatives (in sharp contrast to conservative economists) have no patience for such fine points. They've long claimed that wherever we are, no matter what the current rate, the Laffer Curve is negatively sloped. That's why they're opposing the expiration of the Bush tax cuts on high-end earners, and that's why Martin Wolf is so pessimistic.


Wonderful speech Andrew. Too bad it has little to do with the premise of the article which is that supply side economics is a politically motivated failure. If the Laffer Curve is optimized at Clinton's 39.6% then supply side economics is still vindicated. But according to Ed it is a "failed religion". Obviously then the right religion must be taxes at or above the rates when Reagan took office before all that supply side tax cutting nonsense, right?


Ed, thanks for the article. This article is comparing deficits to GDP. I am referring to the actual US budget vs. GDP. These are 2 different metrics. As you read through the article, specifically The Obama Budget, they state basically the same thing I said and that is that we are on an unsustainable path. Even looking at the chart, I do not see the costs going away any time soon for the wars, Fannie and Freddie have an unlimited line of credit. The latest number is $150 million owed to the tax payers with no end in sight. Fannie and Freddie were not addressed in the financial reform bill. I doubt any real savings will come out of health care. Social Security, Medicaid, and Medicare have yet to be addressed.

Andrew Brod

No, not right. Sorry you're not getting it.

For one thing, if "the Laffer Curve is optimized at Clinton's 39.6%," then it's illogical for Laffer-Curve-believing Republicans to oppose ending the Bush tax cuts, which after all would move the top rate back to the optimal 39.6%. But the reality is that the Laffer Curve is just a rhetorical device to argue eternally for lower taxes, regardless of the fiscal consequences.


Okay Andrew, because I don't get it, maybe you can explain what you think Ed meant by labeling his post "failed religion" and at what tax rate does a policy become "supply side"? Were the tax rates under Bill Clinton supply side? Again I refer you to a previous question I asked: If there was no Ronald Reagan and Bill Clinton came along and cut the top rate from 70% down to 39.6%, was that supply side?

Andrew Brod

I already answered Spag's first question.

I also already explained what "supply-side" means in my "wonderful speech," but I did it in the context of the Laffer Curve. I realize that I didn't connect that discussion directly to the term "supply-side." My bad, and I'll fix that now. In American politics, "supply-side" means claiming that the Laffer Curve is negatively sloped regardless of where we are now, i.e. claiming that reducing tax rates always increases tax revenues regardless of the current tax rate.

I'm not sure what to make of the rest of Spag's questions. "At what tax rate does a policy become 'supply-side'?" I don't even know what that means.

Of course Spag's money question is his final one, homing in as it does on his fixation on the partisan. Yes, if Bill Clinton had come along and argued for reducing tax rates in order to increase tax revenues, then that would have been a supply-side claim.


"'supply-side' means claiming that reducing tax rates always increases tax revenues regardless of the current tax rate."

I don't know any conservatives who make that claim. The Laffer Curve itself makes no claims.

Recall the title of Ed's post "Failed Religion". This implies that all of supply side is a failed theory. But you aren't arguing that. Instead you are essentially arguing not that supply side is a failure but that Clinton did a better job with the Laffer Curve than Republican's did. That may be true, it may not be, but that argument is also highly political.

If cutting the top rates from 70% to something less in order to increase revenue is supply side at work, then Clinton must also be a supply sider. He didn't raise them back to 70% or higher. In fact, the top tax rates under Clinton were lower than the top rates for the first four fiscal years of the Reagan Administration. So if the "religion" of lower top tax brackets has been a failure, then you have to include the Clinton years- with the shrinking deficit- as a failure, too. Same religion, just a different party at the helm. But like so many issues discussed on this blog, often times that makes all the difference.


Clinton was helped by a few other things in addition to the tax rate so the surplus was not merely the result of supply side economics.


I agree. Cutting spending also helped in the Clinton years. Similarly, the increase in the deficit during the Reagan years cannot be blamed on lower revenues from tax cuts because revenues increased. Instead, the problem was with too much spending. That's what Stockman's book was about.

Andrew Brod

If Spag doesn't know of any conservatives who make that claim, he's obviously not paying attention.

He's also not paying attention to the original article, which talks about the politics of "supply-side economics." Spag's misinterpretation of my remarks about the underlying economics suggests that when arguing with him, doing anything other than disagreeing with every single point he makes is foolish, because he's just going to take what you say, run with it, and get it wrong.

For example, I am not arguing that "Clinton did a better job with the Laffer Curve than Republicans did." Clinton wasn't even thinking about the Laffer Curve. To be sure, he raised the top tax rate and tax revenues rose, and I guess if one wants, one could say that there was a Laffer Curve governing this from behind the scenes. But so what? All the "supply-siders" at the time were screaming bloody murder. This is about "supply-side economics," not the Laffer Curve per se. But again, it's my fault for trying to provide a little background.

Did tax revenues rise under Clinton because he raised tax rates? Maybe, but there were so many other things going on at the time, and some of them were due to actions taken under Reagan (and I say this knowing that Spag will take this as well and misinterpret it). Just as Reagan benefited from the industrial and transportation deregulation begun under Carter, Clinton benefited from the financial deregulation started under Reagan. The point is that there was so much going on other than tax rates. This is what conservatives repeatedly get wrong: they believe that tax rates are really, really important; that they essentially determine the economy's growth and vibrancy. In reality, they're a second-tier factor. But to conservatives they're everything, man.


For an economist, you should be embarrassed that you have allowed your own politics to cause you to make such a convoluted argument to avoid saying Ed is wrong and/or to exempt Clinton tax policy from that which Ed calls a "failed religion".

Sometimes it's okay to be even just a little intellectually honest.

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