the Supply-Side Monster Back From the Dead
August 21, 2001
It is the year 2001, so why is the Bush Administration trying
to turn back the clock to 1980? It has already launched plans
to continue testing SDI, the missile defense pet project of
Reagan and his minions, and the fiscal policy of the Bush
administration hearkens back to the supply side economics
of the Gipper. As Reagan once said in a debate with Walter
Mondale, "There you go again." Well, here the Republicans
go again, trying to resuscitate a dead economic policy which
has been thoroughly discredited by the economic boom built
by the Clinton administration.
Supply side economics was a major component of Reaganomics,
as Reagan's economic policies came to be known later. Supply
side economics argued that the more the government cut top
tax rates, the more these cuts would spur economic growth.
So Lawrence Kudlow in the office of management and budget
during the first Reagan term in office, and allies in Congress
did just that. They passed the Kemp/Roth Bill in 1981 and
passed a flat tax cut reform bill in 1986. The result of all
these tax cuts was a top income tax rate that came down from
70% to 28% and cut 455 billion dollars in tax revenues from
The Republicans would have you believe that as soon as the
tax cuts were implemented the economy took off like a rocket,
and stayed there until Clinton came to office. Not true, there
was a recession in 1981, and sustained growth for a period
of time, but that does not tell the whole story. There was
a downside to Reaganomics - its huge budget deficits - that
caused critics to call it Trickle Down Economics, or even
Voodoo Economics. The last term was coined by George Bush
the elder, before he was converted to supply side economics,
if he ever was converted to supply side economics, that is.
What caused these budget deficits if Reagan was cutting spending
on social programs? Well, the truth is, while he cut some
programs, mostly for the poor, he left the big middle class
entitlement, Social Security intact. Despite signing some
amendments to Social Security in 1983, Reagan did nothing
to privatize Social Security, because doing so would have
been political suicide in the 1980s. And it still might be
for Dubya in 2002.
What also caused the deficit to explode was the unprecedented
defense spending of the Reagan era. One estimate says that
the defense department spent 1.6 trillion dollars on defense
in the 80's. Money well spent say the conservatives, the US
won the cold war because of Reagan's military spending. But
as I've argued before, the collapse of Communism came over
a long period of time with many presidents deserving a share
of the credit. Moreover Communism fell because it is bad economic
theory, it never allowed for economic incentive and would
have fallen eventually of its own weight.
Somehow the budget-balancing conservatives were lost during
the dizzying heights of supply side economics, and the Republican
party was taken over in the 1980s by what I call "credit
card conservatives." These new conservatives were piling
up debt as fast as they could and relying on nations like
Japan to pay our bills, which only worked because Japan was
in good economic shape in the 80's.
The results of supply side economics were starting to materialize
in a negative way. For the first time in many decades homelessness
became a visible problem, and the Reagan administration turned
a deaf ear to an epidemic in its infancy, an epidemic still
sadly with us, called AIDS.
In June 1990, George Bush Sr. abandoned supply side orthodoxy
and his silly "no new taxes" pledge made in 1988,
and raised taxes. Bush Sr was facing a budget deficit of 290
billion in 1992, so he compromised with Congress and signed
a tax increase. Republicans rewarded Bush the elder as only
they can, by either sitting on their hands, or voting for
Ross Perot, and Bill Clinton was elected.
Clinton further distanced himself from supply side or Reaganomics
by pushing his own economic plan through congress. It included
tax increases on the wealthiest Americans, 70% of Clinton's
tax increases were paid by people making above 100,000, and
for that reason Republicans voted against it en masse. Clinton's
economic plan passed the house 218-216, and it passed the
Senate 51 to 50 with Al Gore making that famous tiebreaking
The drumbeat of doom and gloom continued from Republicans
continued, with Newt Gingrich becoming speaker and the Republicans
gaining majorities in both houses of Congress. If you raise
taxes on the wealthy, economic growth will come to a grinding
halt, went the Republican mantra. Budget battles loomed in
the 1990s between Clinton and the Republican congress, culminating
with the Republican shutdown of the government. On January
6, 1996, the longest government shutdown ended after 22 days.
Most Americans blamed the Republicans for the shutdown, and
America realized that while it didn't like government in abstract
terms, when it was shutdown, America liked and needed government
very much. This was a turning point for Clinton and the nation,
he had stood up to Republican rhetoric and proven them wrong.
Despite all the Republican doom and gloom, the accomplishments
of the Clinton economic plan cannot be diminished. 22.5 million
jobs created, an average of 4% growth 116 months straight
of economic growth and the erasing of hundreds of billions
of dollars of debt, turning it into a budget surplus. The
end of budget deficits meant a self reliant economic policy
for the United States, no more of Japan paying our debts for
us, and that is important. Japan has faced a severe economic
downturn in the 1990s and has not pulled out of it since,
and we escaped economic problems because our economic house
is in order. The Clinton economic record did more than any
Democratic think tank ever could to destroy supply side economic
theory. Or so we thought.
But along came George W. Bush and his big lie technique to
save us from our own prosperity. Dubya brought us The Return
of Supply Side! Like some monster that wouldn't die, along
came Bush Jr with his 1.6 trillion dollar tax cut.
The biggest lie of all was that we could afford a tax cut
of that size, have huge defense spending increases, and still
have money left over to spend or save for a rainy day.
The second lie was the tax cut was not tilted toward the
extremely rich. It lowered the top tax rate from 39% to 35%,
and it phases out what Bush calls the "death tax,"
(which the rest of us call the estate or inheritance tax)
except the rest of us don't have estates to inherit. The phasing
out of the inheritance tax only affects 2% of the country,
and guess what, it ain't the bottom 2% either.
The third lie is that all tax payers got tax relief. Many
tax payers who do not pay income tax, but pay Social Security
taxes, get nothing from Bush's tax cut. In fact the tax cut
may bring some taxpayers close to the threshold of having
to pay the Alternate Minimum Tax - a complicated tax system
that dates back to 1969.
Despite the pack of lies, Bush's tax cut passed both houses
of Congress, after a teeny tiny compromise lowered the tax
cut to 1.35 trillion dollars. On the Senate side 12 Democrats
voted with 45 Republicans (and James Jeffords) to pass the
bill, on the House side, 240 members voted to pass the bush
tax cut. Dr. Frankenstein-like shouts of "It's Alive!" could
be heard from supply siders everywhere. Yes, supply side economics
was indeed alive and kicking.
But wait, this monster might die yet, the Congressional Budget
Office is set to report on August 28th that the Bush administration
might have to dip into the Social Security fund to pay for
budget priorities. In January the surplus was thought to be
$125 billion, $74 billion of that went into the tax cut this
year, another $40 billion was lost in the economic slowdown,
leaving the Bush administration with only $14 billion to play
with before they raid the Social Security trust fund. To counteract
that bit of news the Bush administration said they "found"
an unexpected $4.3 billion in the Social Security trust fund.
Sounds like more deception and fuzzy math from the Bush administration.
George W. Bush learned exactly the wrong lessons from his
father's no new taxes pledge and pledged to cut taxes without
fully understanding what these tax cuts would do to the budget.
Instead of waiting to see what the budget numbers looked like,
Dubya and his Republican brethren gave life to a monster thought
to be long dead, bringing the threat of budget deficits with
it. Maybe on August 28th the congressional budget office will
give us the tools we need to finally kill the lying beast
called supply side economics once and for all.