Supply-side Economics - Criticisms

Criticisms

Critics of supply-side economics point to the lack of academic economics credentials by movement leaders such as Jude Wanniski and Robert Bartley to imply that the theories behind it are bankrupt. David Harper and others dismiss the theory as offering "nothing particularly new or controversial" to an updated view of classical economics. Nobel prize winning economist Paul Krugman published a book dedicated to attacking the theory, and Reaganomics, under the title "Peddling Prosperity". Mundell in his The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel acceptance lecture (awarded for unrelated work in optimum currency area) countered that the success of price stability was proof that the supply-side revolution had worked. The continuing debate over supply-side policies tends to focus on the massive federal and current account deficits, increased income inequality and its failure to promote growth.

In 2006 Sebastian Mallaby of The Washington Post quoted George W. Bush, Dick Cheney, Bill Frist, Chuck Grassley, and Rick Santorum misstating the effect of the Bush Administration's tax cuts. On January 3, 2007, George W. Bush wrote an article claiming "It is also a fact that our tax cuts have fueled robust economic growth and record revenues." Andrew Samwick, who was Chief Economist on Bush's Council of Economic Advisers from 2003-2004 responded to the claim:

You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.

The Congressional Budget Office (CBO) has estimated that extending the Bush tax cuts of 2001-2003 beyond their 2010 expiration would increase deficits by $1.8 trillion dollars over the following decade. The CBO also completed a study in 2005 analyzing a hypothetical 10% income tax cut and concluded that under various scenarios there would be minimal offsets to the loss of revenue. In other words, deficits would increase by nearly the same amount as the tax cut in the first five years, with limited feedback revenue thereafter.

From time to time a politician makes blunt claims that tax cuts increase government revenue (e.g. Mitch McConnell in July 2010 ) However, the Laffer Curve reflects the hypothesis that only cutting tax rates to the right of peak economic performance rate will increase revenues, and that cutting tax rates to the left of the peak rate will decrease revenues.

The paradigm of a tax system which rewards investment over consumption was accepted across the political spectrum, and no plan not rooted in supply-side economic theories has been advanced in the United States since 1982 (with the exception of the Clinton tax increases of 1993) which had any serious chance of passage into law. In 1986, a tax overhaul, described by Mundell as "the completion of the supply-side revolution" was drafted. It included increases in payroll taxes, decreases in top marginal rates, and increases in capital gains taxes. Combined with the mortgage interest deduction and the regressive effects of state taxation, it produces closer to a flat-tax effect. Proponents, such as Mundell and Laffer, point to the dramatic rise in the stock market as a sign that the tax overhaul was effective, although they note that the hike in capital gains may be more trouble than it was worth.

Cutting marginal tax rates can also be perceived as primarily beneficial to the wealthy, which commentators such as Paul Krugman see as politically rather than economically motivated.

The economist John Kenneth Galbraith noted that supply side economics was not a new theory. He wrote, "Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows." Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896.