Monday, September 03, 2007

Jon Chait on Supply Side Economics

These are fighting words--many of them accurate. Cult, wingnuts, and crackpots: the founders of supple side economics and the Laffer Curve?

But this is not a DailyKos like screed (although it is punchy), this is a well researched, well argued position that admits that supple side is by itself not a problem (true). The problem is that it has become a mono-explanatory creed (partial/totalizing). He writes:
Like most crank doctrines, supply- side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences. And there have been periods in American history when, nearly any contemporary economist would agree, top tax rates were too high, such as the several decades after World War II. And there are justifiable conservative arguments to be made on behalf of reducing tax rates and government spending. But what sets the supply-siders apart from sensible economists is their sheer monomania. You could plausibly argue that, say, Reagan's tax cuts contributed around the margins to the economic growth of the 1980s. But the supply-siders believe that, if it were not for Reagan's tax cuts, the economic malaise of the late '70s would have continued indefinitely. They believe that economic history is a function of tax rates--they insisted that Bill Clinton's upper-bracket tax hike must cause a recession (whoops), and they believe that the present economy is a boom not merely enhanced but brought about by the Bush tax cuts...All this is to say that the supply-siders have taken the germ of a decent point--that marginal tax rates matter--and stretched it, beyond all plausibility, into a monocausal explanation of the world.

The major downside of supple side-at the margins economics is deficits. (Given that government continues to grow).

But what, you may ask, about deficits, the old Republican bugaboo? Supply- siders argue either that tax cuts will produce enough growth to wipe out deficits or that deficits simply don't matter. When Reagan first adopted supply-side economics, even many Republicans considered it lunacy. ("Voodoo economics," George H. W. Bush famously called it.) Today, though, the core beliefs of the supply-siders are not even subject to question among Republicans. Every major conservative opinion outlet promotes supply-side economics. Since Bush's heresy of acceding to a small tax hike in 1990, deviation from the supply-side creed has become unthinkable for any Republican with national aspirations.
What Chait also points out is that the Laffer Curve-Supple Side Magic Formula is so irresistible to operatives, politicians, conservative media outlets because of its simplicity. Monocausality is easy. Cut taxes for the rich and everyone wins. Tough to resist for a politician--doesn't have to deal with complexity, explain complexity of economics to voters, nor call for sacrifice.

Chait then does some biographic background of the main theorists behind Supple Side--not exactly sound thinkers in other arenas let us say.

I love articles like this because I am perpetually amazed (though I know its coming just not the degree to which it will happen...) at how dogmas take over. How clear-thinking withers on the vine. How constant repetition of an illusion (technically true but partial, but perhaps a minor truth in this case) simply makes it to be.

The major points of the article are on target. The Laffer Curve is inherently problematic. Cutting taxes rates at the top does do things for the rich, but the trickle down is just that (or worse), a trickle. But it does not cover all economic reality positive or negative.

I imagine one point that will be criticized--perhaps with some validity--is Chait's underestimating of supple side/tax cuts at the margins. Exactly how large are those margins. Others will likely retort that the characters (like Waninski and Gilder) were not as influential as Chait maintains. That may be or not, but it still reflects badly that such thinkers' ideas still exist as orthodoxy today when they themselves are forgotten/ostracized. Important to remember the source of such ideas. Good intellectual archeology on Chait's part.

The final point Chait sets out to make is that inequality (the result of supple-side economics) hurts democratic culture. This is a common meme of the left. While true I would say, I'm not as troubled by the idea of income inequality as I am by opportunity inequality and social inequality (like Mickey Kaus). I don't know Chait's position on this per se (this article is a tease to his upcoming book), but I imagine he is more traditional left/center-left on the issue. I would certainly agree that it is overall bad for political discourse that inequality has become so heretical a term to discuss in movement conservatism (New Right). I think that cedes the ground of inequality too much to the left which is out to fix the market in some fashion as a redress.

Chait again:
Indeed, this theory offers an uncannily precise description of what has happened in American politics over the last 30 years. The business lobbyists have turned the Republican Party into a kind of machine dedicated unwaveringly to protecting and expanding the wealth of the very rich. As it has pursued this goal ever more single-mindedly, the right has by necessity grown ever more hostile to majoritarian decision-making for the obvious reason that it's hard to enlist the public behind an agenda designed to benefit a tiny minority. The old ways of conducting politics have broken down in the face of this onslaught. The mores of the old Washington establishment--the assumption of some basic intellectual goodwill on both sides, the focus on character over substance, the belief in compromise--all developed during an era when there were few ideological differences between the parties. The old ways may have done a decent job of safeguarding the national interest when the great moderate consensus prevailed, but they have proven unequal to the challenge of a more ideological time.
Chait's words I think here are given more weight by the fact that he has taken on the Netroots within his own party, comparing them to movement conservatives (Kristols, National Review, Hoover Institution, etc.). In other words, this breakdown has occurred in both parties. And while this isn't raised in the issue, the same pattern Chait correctly shreds on the right could easily gain traction among movement leftists (say a neo-protectionist meme).

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