Friday, April 21, 2017

Is It Even Possible to Be Too Hard on Supply-Siders?

by Neil H. Buchanan

The Republican leadership uniformly despised Donald Trump during last year's primaries, fiercely opposing him before finally meekly submitting to his misrule.  Throughout this tragicomedy, however, Trump and his party have always agreed on one thing: the magical effects of tax cuts for rich people.

No matter what concerns Republicans might have had about Trump's anti-trade shouting, or his proud ignorance of foreign affairs, or his very un-Republican track record on social issues -- a record that has not prevented Trump from now supporting the worst excesses of his party's culture wars -- Trump was as solid as a rock on regressive tax cuts and heedless slashing of safety and environmental regulations.

Trump is, in short, every bit as much of a believer in supply-side economics as every other eager Republican has been for the past generation or so.  This is why his decision to turn the page from his growing list of abysmal failures by trying to enact a big change to the tax code has made it important to understand again just what is wrong with the trickle-down version of supply-side economics that Republicans so fervently embrace.

In a number of recent columns, I have offered some fairly brutal assessments of supply-side economics.  I have argued, for example, that "those who genuinely continue to believe in the miraculous effects of supply-side tax cuts represent the triumph of faith over reason."

It is, however, worth stopping to ask whether I am being too hard on the supply-side devotees.  Is support for their theory as weak as I have been saying?  The answer is, if anything, that I have gone too easy on them.  It might well be impossible to be too dismissive of supply-side economics.

I entered graduate school in economics the same year that Ronald Reagan entered the White House, and his political advisors were very excited about this new theory called supply-side economics, which they were using to promote what was then a radical departure from Republicans' familiar conservative economic policies.

The new theory was being used to justify reverse-Robin Hood policies, and it looked like a clumsy repackaging of old-fashioned trickle-down claims.  As a budding economist, however, I thought that it was important to study the new theory to see whether it made sense.

A couple of years later, when I had my first opportunity to design an undergraduate seminar for economics majors, I thought: "Well, I should devote the entire semester to studying the theory and evidence for supply-side economics, because it's so important politically, and this will give me an opportunity to study it in depth and explore its nuances with the students.  Surely there's more to it intellectually than we're hearing from the politicians."

Ah, the naivete of youth!  By the end of the semester, I could only conclude: "Wow, there really is nothing there."  I have now spent more than thirty years researching and writing on other issues in economics and the law, but I could not stop myself from paying attention to the zombie-like nature of Republicans' claims about the wonders of supply-side economics.  What is most surprising is that they are still offering the same old song-and-dance, with nothing new or even mildly interesting that would change an honest skeptic's view.

Surely, however, I must have been exaggerating when I wrote that "[t]he supply-side effects of tax cuts are among that small group of questions for which the evidence has piled up over the years," and that no non-ideological analysts have "been able to make an evidence-based case to support the Republicans’ favorite theory."  There must be something to it that keeps it going.  Right?

Let me start with an absurd analogy.  Suppose I claim that every coin in the world is unbalanced, such that tossing any coin is going to result in tails rather than heads almost every time.  I offer the theory that the metal on coins' heads side is heavier than on the other side, so the heavy side is always going to land downward.

That theory could be true, but of course it is actually false.  Among other things, I can pick up any coin and toss it a number of times and watch it come up tails only about half the time.  But is there no evidence that my theory is true?  I can excitedly announce every time that tails comes up.  I can even pay people to publish studies in which they report that scientific testing found tails coming up in fifty straight coin tosses.  (That can happen, of course.)

The tails-only theorists thus can claim that we have evidence that our belief is true.  They do not have to rig the actual tossing of the coins in order to rig the "evidence."  And then they can proclaim: "People who say that there is no evidence that tails-only is right and true are lying."

We can now move from my absurd hypothetical faith-based theory to real-world theories that should have been laughed out of town, but which have lingered because powerful people have found them convenient.

Is there no evidence that climate change is a myth?  Of course not.  Cherry-picking a few data points (without even needing to falsify data) is easy, and Republicans have been doing their patrons' bidding in grabbing onto any tiny factoid that allows them to say, "Global warming is a scam," or the more modest, "The evidence is still incomplete."

Is there no evidence that is difficult to square with the theory of evolution?  Again, of course not.  That is why the theory itself evolves, because new evidence needs to be taken into account.  But many Republicans want to point to such evidence as proof that the biblical account of creation is either true or on an equal footing with evolution, so that science classes should "teach the controversy."

Was there no evidence challenging the conclusion that cigarette smoking causes cancer?  For decades, certain scientists sold their integrity (and their souls) to try to say that the jury was out, although in that case they often did simply make up data.

The point is that the existence of people, even supposed experts, who can point to evidence and "studies" to support a crackpot theory does not make the theory true.  And to make it all the more insulting, these purveyors of scientific nonsense have lately taken to calling what they disagree with "junk science."

As I noted in a recent column, believers in supply-side economics ought to be able to point to some outstanding examples of cases where the world obviously worked in the way that their theory predicts.  Yet when the four most prominent supply-side "experts" recently penned an op-ed for The New York Times, they could do no better than cite one cooked study from a right-wing think tank and then invoke the Kennedy and Reagan tax cuts.

Again, however, the test of supply-side economics is not: "Did the economy grow or shrink after a tax cut?"  Tax cuts can stimulate demand (although regressive tax cuts even do that poorly), and other sources of demand can also explain subsequent growth.  The Kennedy and Reagan tax cuts, we should recall, were both passed during huge defense spending binges and in the face of favorable monetary policy.

What we do not have is evidence that even those purportedly successful tax cuts had actual supply-side effects.  That is, even now supply-side devotees are still left with the faith-based belief that tax cuts must surely encourage business managers and workers to change their decisions.

One might still object, however, that my blanket rejection of the economic case for supply-side ignores the experts on the other side.  Are there not people with professional credibility on both sides, so that we should assume that the continued existence of supply-side economists lends credibility to the theory that they support?

This understandable notion, however, confuses what counts as credibility in political debates with actual credibility.  Appearing regularly not just on Fox News but even on non-conservative talk shows is not proof of a man's professional credibility.  It is proof that a producer who wants someone to take the Republican side knows that that man is a reliable combatant.

Take those four extreme supply-siders whom I mentioned above, and whose arguments I ridiculed in my most recent Verdict column.  Only one, Arthur Laffer, ever had any serious credibility in economics departments, and he has long since squandered that credibility.

It was, after all, people like Laffer and his co-authors whom conservative economist Greg Mankiw famously dismissed as "charlatans and cranks" in an early edition of his introductory economics textbook.  The truest believers were always political animals, and everyone knew it.

That is not to say that being respected within economics departments is the one true measure of credibility (or even an accurate measure at all).  Mankiw himself, along with other reliable Republican economic conservatives like Robert Barro, Glenn Hubbard, Martin Feldstein, and Casey Mulligan are big deals in academic circles, almost as accomplished as liberals like Paul Krugman and Larry Summers.

Yet those conservative economists themselves cherry-pick evidence (or, as so often happens in Mankiw's case, simply assert that the real world must surely match their theory) to support trickle-down, regressive tax cuts.  Their intellectual honesty has been rightly questioned on more than one occasion.

The point is that defending a theory by saying that some big-name people support it might -- might -- make sense in something like climate science, although even there a person can become a big name simply by being a naysayer.  But in economics, where Republicans and their business backers richly reward economists for saying what they want to hear, the state of the discipline is sufficiently unscientific to allow them to continue to deny reality.

So how do we know what reality is?  In a famous 1983 article called "Let's Take the Con Out of Econometrics," the economist Edward Leamer surveyed empirical studies of the possible deterrent effect of the death penalty.  Some studies did, indeed, find such an effect, but others did not.  Leamer was able to show, in fact, that an arguably better reading of the evidence supported the opposite of a deterrent effect.

Leamer's conclusion was that we should not deem a result in social science research to be true simply because one, or even a handful, of studies seems to support it.  We need to study the same question from a variety of different angles, using multiple research techniques, and then reach tentative conclusions as a clear picture emerges.

And when it comes to the supposed growth-inducing effects of tax cuts -- especially tax cuts for the rich and businesses -- the overwhelming weight of the evidence continues to undermine supply-side economics.  But Republicans need not worry, because they have faith.


Shag from Brookline said...

The "proof" of supply side economics is that it attracts the money to finance political campaigns of politicians claiming the trickle down benefits of supply side economics. And much, most of that that money comes from the .1% in wealth, contributors who would end up with substantial savings, especially with tax cuts for the rich; these supporters vote their pocketbook disproportionally compared to the 99+%.

Perhaps Trump's base felt they were voting their pocketbooks in voting for the populist Trump. President Trump and the Republican-controlled Congress so far seem more interested in accommodating the .1% than Trump's base.

el roam said...

Thanks for that interesting post , the respectable author of the post , seems to be quite obsessed with Tax cuts and its derivatives and implications . Yet , instead of explaining in simple words , and in economic terms , what is wrong with it , he is complicating things with :

narrativisation ( narrative ) and re- narrativisation , crediting and discrediting figures from the past ,criticizing Methodologies , and anti methodologies . The only substantial part , which makes sense and is really effective , was indeed as follows :

" We need to study the same question from a variety of different angles, using multiple research techniques, and then reach tentative conclusions as a clear picture emerges."

End of quotation :

Different angles , is not sufficient , this is good , not sufficient !! One needs not only build up or construct theory and understanding , but also , try hard , to refute it , and , negate its validity at the same time . That is how , things are cut , fundamentally cut . Different angles, is too weak too pale, leaving the observer yet, in subjective domains and perception.


Shag from Brookline said...

Speaking of complicating things, just trolling along ....

David Ricardo said...

Let’s do this a simple as possible.

Economic growth is driven by investment. In order for investment to take place there must be demand for the higher productivity and increased capacity that investment generates (demand side economics) and there must be a sufficient supply of capital to fund the investment (supply side economics). Supply side economics was appropriate for the industrial revolution from about 1830 to 1920, when the constraint on investment was sufficient savings. This constraint was ameliorated by large profit and wealth generation for individual investors. Yes they were robber barons, but they built steel mills, railroads, the oil industry etc.

But starting early in the 20th century the development of capital markets and financial institutions lead to the aggregation of individual savings and corporate savings (profits) in sufficient amount to provide sufficient funds for investment. So starting around the 1920’s the constraint switched to demand. There was more than sufficient funds for investment, all that was needed was the demand for investment. The Depression of course painfully illustrated what happened when demand for investment was insufficient to grow the economy. After 1936 we all became Keynesians, and we who are intellectually honest still are.

Things have not changed from the early 20th century. Today the constraint on investment and growth is demand, not supply. So increasing the supply of capital has little effect on investment when there is already a glut of capital, as the last 8 years has shown. Business has sufficient access to capital markets and substantial internally generated capital in the form of idle cash on their balance sheets. Large personal wealth has also re-appeared to fund investment. A case might be made that small business is limited in its access to capital markets, but that is a problem created by lack of access. Cutting their taxes will not help.

So cutting taxes and allowing corporations to repatriate cash with little or no taxes to create a greater supply of capital is useless; as Mr. Dorf has pointed out the only benefit is an increase in consumer demand that is very weak when the tax cuts are highly regressive which is the character of Republican policy.

So why is Supply Side economics championed if it does not work? Simply put it provides a rationale (false) for tax cuts for the wealthy. In fact, what seems to have happened is tax cuts for the wealthy came first and then conservatives had to search for an economic theory to support them, and that’s when Mr. Laffer put forth the appropriately named Laughter Curve. So no, Mr. Buchanan it is not and has not been too hard on Supply Siders and their tax cuts. In fact, it may be impossible to be too hard on these charlatans.

As for Shag, we love you man.

Joe said...

I support the first and last sentences of the last comment.

The middle is a bit too complicated for me. Economics is not quite my thing.

Shag from Brookline said...

Yes, economics is complicated. Stephen Mihm's NYTimes "What Caused the Depression? A New Overview Spreads the Blame" reviews Charles R. Morris' "The Great Crash and the Global Depression: 1929-1939" demonstrates how complicate economics is even with so many years of hindsight. Being born in 1930, I lived through most of those years without realizing the impacts of the Great Depression as my parents made sure our family's needs were provided. Since coming of age - Pearl Harbor attack? - I started to lear of such impacts. With the improvement of the pre-WW II economy beginning in 1939, more seemed available to our family, as my mother started to work making uniforms for the military. With rationing and price controls, despite the hell of war, comforts improved. After the war, there was the GI Bill that covered my older brother and made it easier for my parents to help finance my college and law school educations that led to a successful career practicing law. I don't intend to review the intervening years to date. But I'm thinking of Donald J. Trump, now 70 years old and President, and his theme of "Make America Great Again." Trump was born on third base. I don't recall his ever stating when he thought America was great. His base buying into his campaign, when did they think America was great? Presumably both Trump and his base thought that America was great during their lifetimes. (I should note a middle-aged commenter at another blog has repeatedly claimed that The Gilded Age of the late 19th century were America's best days.) Having lived through the lifetime of Trump and perhaps most of his base, I'm curious as to when Trump - and his base - thought America was great. If I had some idea, I could focus on that time to explore how great America was - and for whom. Yes, economics is complicated.