Supply reduction

Supply-Side Economics & the Reagan Years: Deregulation, Money Controls, Foreign Trade (1992)

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• published: 28 Apr 2014
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Ronald Reagan made supply-side economics a household phrase, and promised an across-the-board reduction in income tax rates and an even larger reduction in capital gains tax rates. When vying for the Republican party presidential nomination for the 1980 election, George H.W. Bush derided Reagan's supply-side policies as "voodoo economics". However, later he seemed to give lip service to these policies to secure the Republican nomination in 1988, and is speculated by some to have lost in his re-election bid in 1992 by allowing tax increases. (See: "Read my lips: No new taxes".) In the United States, commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Ronald Reagan were largely based on supply-side economics. During Reagan's 1980 presidential campaign, the key economic concern was double digit inflation, which Reagan described as "Too many dollars chasing too few goods", but rather than the usual dose of tight money, recession and layoffs, with their consequent loss of production and wealth, he promised a gradual and painless way to fight inflation by "producing our way out of it". Switching from an earlier monetarist policy, Federal Reserve chair Paul Volcker began a policy of tighter monetary policies such as lower money supply growth to break the inflationary psychology and squeeze inflationary expectations out of the economic system.[32] Therefore, supply-side supporters argue, "Reaganomics" was only partially based on supply-side economics. However, under Reagan, Congress passed a plan that would slash taxes by $749 billion over five years. As a result, Jason Hymowitz cited Reagan—along with Jack Kemp—as a great advocate for supply-side economics in politics and repeatedly praised his leadership.[33] Critics of "Reaganomics" claim it failed to produce much of the exaggerated gains some supply-siders had promised. Krugman later summarized the situation: "When Ronald Reagan was elected, the supply-siders got a chance to try out their ideas. Unfortunately, they failed." Although he credited supply-side economics for being more successful than monetarism which he claimed "left the economy in ruins", he stated that supply-side economics produced results which fell "so far short of what it promised," describing the supply-side theory as "free lunches".[34] Krugman and other critics point to increased budget deficits during the Reagan administration as proof that the Laffer Curve is wrong. Supply-side advocates claim that revenues increased, but that spending increased faster. However, they typically point to total revenues[35] even though it was only income taxes rates that were cut while other taxes, notably payroll taxes were raised.[36] That table also does not account for inflation. For example, of the increase from $600.6 billion in 1983 to $666.5 billion in 1984, $26 billion is due to inflation, $18.3 billion to corporate taxes and $21.4 billion to social insurance revenues (mostly FICA taxes).[37] Income tax revenues in constant dollars decreased by $2.77 billion in that year. Supply-siders cannot legitimately take credit for increased FICA tax revenue, because in 1983 FICA tax rates were increased from 6.7% to 7% and the ceiling was raised by $2,100. For the self-employed, the FICA tax rate went from 9.35% to 14%.[38] The FICA tax rate increased throughout Reagan's term, and rose to 7.51% in 1988 and the ceiling was raised by 61% through Reagan's two terms. Those tax hikes on wage earners, along with inflation, are the source of the revenue gains of the early 1980s.[39] It has been contended by some supply-side critics that the argument to lower taxes to increase revenues was a smokescreen for "starving" the government of revenues, in the hope that the tax cuts would lead to a commensurate drop in government spending. However, this did not turn out to be the case on the spending side; Paul Samuelson called this notion "the tape worm theory—the idea that the way to get rid of a tape worm is [to] stab your patient in the stomach". http://en.wikipedia.org/wiki/Supply-side_economics