Laugh at Laffer Over Supply-Side Economics
Posted: Thursday, October 11, 2007
by Richard Walrath
Articles and Answers.com
Since 1913, almost a hundred years now, this is the first time that we have had back-to-back elected presidents of opposing parties who have served two full terms.
Being able to compare the results of the economy under such diametrically different policies is a once-in-a-life-time opportunity. Balanced budget and surplus under
Economic policies in effect under President Clinton were not only able to balance the U.S. Budget; they were able to put the budget in surplus. When the
Historically, the pattern for the
If you look at the statistics, your immediate reaction will be 'hey, wait a minute - the national debt increased under President Clinton' - which is correct, but the increases were entirely due to the interest charged on the federal debt. When a new president takes office, the interest on the national debt doesn't stop - it continues, so the interest charges are still there.
Bill Clinton was in office for 8 years. The U.S. National Debt increased by $1.5 trillion dollars during his 8-year presidency. During this same 8-year period interest on the National Debt totaled $2.7 trillion dollars. If you eliminate the interest, the National Debt was actually reduced by $1.2 trillion dollars under President Clinton.
In contrast, George W. Bush has been in office since January 20, 2001. During the 6 years and 8 months that he has been in office, the National Debt has increased $3.2 trillion dollars.
An interesting note is the National Debt has increased by twice as much during the 6 years and 8 months that Bush has been in office, compared to the full 8 years that
Remove interest from the equation and the National Debt was reduced by $1.2 trillion dollars under
Arthur B. Laffer's napkin theory has to do with what is known as supply side economics. There is nothing very original about it, actually, a French economist, Jean Baptiste Say, came up with the idea well over a hundred years ago with Say's Law which says, simply, "Supply creates its own demand."
The idea is that if you're going to produce something, you have to go out and buy the raw materials first in order to manufacture the product. The Bush years should have been the best possible of all times for supply-side economics. The theory was practiced to the fullest possible extent. We're going to hear a lot about supply-side economics because it has been such a dismal failure for the last almost seven years. What is really laughable is the Bush comment at his September 20 press conference at which he declared that he is a "supply-sider."
"I'm a supply-sider. I believe supply-side economics, when properly instituted, enables us to achieve certain objectives. One, people find work and there's hope in the economy. Two, that supply-side economics yields additional tax revenues. And if we're smart about how we manage the fiscal budget, it leads to balance, and that's what we have done..."
Keynes, in his The General Theory of Employment, Interest and Money attacked the problem from the other direction--demand. Nobody was going to go out and do anything if there was no demand for it. During slack times, such as recessions, the government could help take up the slack by providing demand for goods and services through spending. Ideally, the government would run at a deficit during recessions and a surplus when aggregate demand was sufficient to provide full employment. According to Wikipedia, Laffer commented on Bush's supply-side economic policies on page A18 of the February 14, 2005 Wall Street Journal as follows:
"When 'W' ran for president in 2000, I voted for him but not enthusiastically. I had voted for Bill Clinton in the prior two presidential elections, but with Al Gore as the Democratic candidate in 2000 the choice was easy for me even if I wasn't all that excited about George Bush. I am now flabbergasted by the performance of Bush 43. [...] George W. Bush could well turn out to be the best president in recent history. [...] Because of President Clinton, President Bush's budget deficits can easily be absorbed by the
A common misconception regarding tax cuts is that if government revenues increase after tax cuts, it must be that the tax-cuts were the reason. The question you would have to ask is, what would revenues have been if there had been NO tax-cuts. This, of course, is a debatable issue because it is difficult to prove.
The following chart depicts US Revenues for the period of 2000 through 2006. 2000 was the last full year that
We had combined individual and corporate revenues of $1.2 trillion the last year of the
In 2005 Corporate revenues increased considerably so it could be said the Bush economic policies are working as planned, but are they?
Corporate revenues increased due to the fact the Department of Defense contract awards doubled from $133 billion in 2000, to $269 billion in 2005 and further increased to $295 billion in 2006.
The differences between the two presidencies are dramatic - under Clinton there were tax increases, coupled with increased benefits as well as increased revenues, budget surpluses "as far as the eye can see" and a reduction in the increase in National Debt. Under Bush there have been tax cuts, coupled with benefit cuts, decreased revenues, budget deficits and major increases in the National Debt.
Nobody, anywhere, is forecasting a surplus now.
Bush is now talking about eliminating the budget deficit by 2013, as he continues to add billions of dollars to the National Debt.
How is it possible to turn a surplus "as far as the eye can see" into $3.2 trillion of additional debt? Just what is so good about doing that? How many additional billions of dollars is that just to pay the interest on the $3.2 Trillion?
Where did the money go?
It's time to start turning the clock and the wheel in a different direction. They've been turning backwards for almost seven years.
Sources: National Debt -
Revenues - Budget of the United States 2007 - Historical Tables
How do you "control" for 9/11 and the war in Irag ... material events that impact the macroeconomy and it's balance sheet and income statement.
Thank you for your comment. Am not exactly sure of your question, but it appears you're asking how to avoid the impact major events have on national accounts. You cut your losses by putting policies in effect geared towards growing the economy after a major event. Using 9/11 as an example - this administration took the stance tax cuts to the rich and big business would boost economic recovery by promoting investment leading to job creation, it was a dismal failure.
It's an interesting piece. The author overstates his argument a bit ... what's his suggestion for an alternative ... at what levels are taxes, for example, fair and justified? We have a mildly progressive tax code now ... up until about $10M a year, at which time it becomes neutral or regressive. I would like to know if the author is proposing EU type tax burdens? Also, it would be nice to model in the various macroeconomic impacts in both tenures ... a highly frothy dot-bomb scenario and an exogenous shock in 9/11 + the war. I'm not dogmatic on either side ... I think the moderate, balanced, and holistic view is the right path ...
To: Anomymous That's a clear, concise, cogent comment on our article. Thank you. The one thing I would point out when comparing tax rates in the United States with those in Europe is what people get for their money. In the United States, the people receive defense expenditures equal to those of the rest of the world plus wars such as Vietnam, Afghanistan and Iraq that almost totally left out counties of Europe. On the other hand, people of Europe receive universal health care for their taxes while nearly fifty (50) million go without health insurance in the United States. Also, people of Europe are deprived of having a huge defense budget. This is probably a bad time to compare Europe with the United States which appears to be headed into a recession if it is not already in one. Meanwhile, growth in Europe for 2008 looks pretty good.Yep your prediction was Dead on.....WRONG.
If you haven't noticed, Europe (all) is in it up to their Cool German Sunglasses.
Let me ask you this......Do Europeans really live better compared to US?
Yes, they have their Healthcare, but what is the incentive? A 4-week holiday to get their colon cleaned and their teeth whitened. No they do not live better than US citizens. The only way that they ever will is if Obama lets Seaz and Piketty redistribution economics loose. You my friend will wish that you were in another country when and if that happens. Their Hume/Rawlsian -like methodology will put America in the biggest bind since the Civil War.. This is a prediction that you can take to the bank - If there are any by the time Obama gets his hands on them.
One thing that is coming up bad for the US is that we went off of the Gold standard. Our Dollar would have been soaring like an eagle. In case you didn’t know, Germany is the only country that has its money backed totally by gold.
BTW - England needs better dentist for that free care that they give.
On your dissertation about Clinton’s tax hike:
Your presentation for Clinton was the benefactor after War growth of Iraq invasion coupled with the electronics boom that grew out of the 12 years of Conservative politics previous to Clinton, and a Republican low spend congress in 1995. The congress wanted to spend money on Military, but they made a promise to the American people to balance the budget – it was not Clinton.
Bush’s :
Economics needs to stay out of politics. It should just be about helping people make more money – not redistributing it.
Bush 43 - Rebuilt a depleted army thanks to Clinton Bush had to, handled 9/11, did away with a known enabler of terrorist activity. All That costs money and he and his dad were not really Conservatives. More like one-worlders, even though I don't thing that Bush jr totally bought into what his dad was selling.
Nevertheless, if you really want to get to the matter - what happened in 2006? Didn't the Dems get control of the congress? There -in lies the problem.
On another note: Laffer may not be the genius, but we know that it was actually Milton Friedman. Supply - side just came along for the party.
Al,You wrote: "Yep your prediction was Dead on.....WRONG.
If you haven't noticed, Europe (all) is in it up to their Cool German Sunglasses."
What prediction are you referencing?
IT’S NOT SUPPLY SIDE OR DEMAND SIDE. IT'S THE SILICON CHIP THAT DID IT AND NO TAX CUTS FOR TTH RICH BECAUSE THEY DID NOT NEED IT AND NO MILITARY SPENDING AND WARS,
WHILE DEMAND SIDE IS APPLIED TO PREVEBT A DIP INTO CREAT DEPRESSION WITH GOVERBMENT PUMPING MONEY INTO THE ECONOMY AND WHEN TEIR NO SILICON CHIP INDUSTRY OR CONSTRUCTION INDUSTRY OR ANYTHING THAT CREATE JOBS, IT WILL FAIL TO INSTITUTE RECOVERY AND IT WAS NOT INTENDED TO DO THAT TO START WITH. I THINK BIO-DIESEL FOR OUR CARS AND TRUCKS AND BIO-DIESEL PRODUCTION COULD HAVE CREATED A SUSTAINABLE ECONOIC GROWTH BIGGER THAN BARAZIL CORN ETHANOL. EFFICIENT 100 MPG B100 BIO-DIESEL WILL SELL, GIVING A BOOST TO THE CRUBLING AUTO INDUSTRY, A DOMINO EFFECT