Monday, July 26, 2010

Just A Reminder: Supply-Side Economics Doesn't Work

There was a great article that I found on The Financial Times by Martin Wolf that explained the political genius of supply-side economics - the preferred economic theory of "Reagan Republicans."

According to the article, the theory allowed Republicans to ignore deficits and keep spending the same, in hopes that lower taxes will spur growth, thus creating more tax revenue, and if it doesn't work and deficits grow out of control, they can fall back on the "starve the beast" theory, cutting spending and elliminating programs like welfare until the budget stabilizes.
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?
The article is very interesting and very correct - who wouldn't want what the GOP promises?  Lower taxes without reduced spending?
Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

 Isn't that interesting?  You get all these teabaggers crying about how President Obama is going to ruin the country, but when you look at the facts, a majority of the problems stem from conservative economic philosophies.  Sure there were probably some things liberals had done to contribute to the overall problem, but as the article points out, the stimulus was only a fraction of the deficit, which was a remnant of the Bush years.  Assuming the article lumps together both stimuluses, you could split that number in half, giving ownership of one stimulus to the previous administration and one to the current, in which case Obama and the Democrats would have only contributed to a tenth of the cumulative deficit.

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