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.