« Update on CEO pay | Main | The Demand Side Politics of Supply-Side Economics »
How big is supply-side economics on the current Right?
Do read Matt Yglesias's interesting post (and here), but supply-side thinking simply isn't that influential anymore. To show this, the entry on supply-side economics from Conservapedia is neither fleshed out nor current. Conservapedia is not a reliable source but it is a information aggregator of sorts for what is an influential idea on the right.
Here is their painful (but also obsolete and undernourished) entry on the Laffer Curve. This claim boggles the mind: "In the Reagan era, the Laffer Curve demonstrated that tax cuts lead to a near doubling of federal tax reciepts ($500 billion to $900 billion)." Might Reagan's huge tax increase have had something to do with that?
I know one can find cites to supply-side economics by Giuliani, McCain and others, but the "starve the beast" theory -- rightly or wrongly -- is far more popular with the Right these days. Many people will use Laffer Curve claims to hide their real agendas but that is distinct from the Laffer Curve having much influence.
p.s. I do recognize that these Conservapedia entries may change very soon but they were underdeveloped when I went to visit them.
Addendum: Here is the former Jane Galt on said topic.
Posted by Tyler Cowen on September 6, 2007 at 01:16 PM in Political Science | Permalink
Comments
I thought the Laffer Curve was essentially a total revenue curve (strongly parabolic) where tax rates replaced prices. It peaks at a certain price level and is downward sloping in both directions from the peak.
Posted by: nelsonal at Sep 6, 2007 1:25:19 PM
Yglesias' piece strikes me as pretty ignorant. The claim that lowering a tax rate can increase revenue is conventional wisdom across right, left and center. Everyone has different priors on the issue but what separates intellectually honest economists from the right wing true believers is the fact that economists take an empirical approach to the problem while the true believers effectively take it as an article of faith that virtually all tax rates are in the prohibitive range of the Laffer Curve and can be cut painlessly.
Posted by: steve at Sep 6, 2007 1:30:13 PM
It is easy to pick a BAD article on the Laffer curve to criticize. Try this one.
Summer SSU Lesson 2: The Laffer Curve, Part I
By Polyconomics Staff
[In today's SSU lesson, Jude Wanniski introduces the Laffer Curve, which basically demonstrates the law of diminishing returns applied to tax policy. Along the Laffer Curve there are always two rates of taxation that produce the same amount of revenue, with the exception being where the rate is optimum. The concepts as Jude discusses them, are fairly straightforward. Still, as Jude wrote, "there have been tens of millions of words written about the Laffer Curve since I first watched Laffer scribble it on a cocktail napkin to demonstrate the idea for Vice President Dick Cheney, when Cheney was deputy chief-of-staff to President Gerald Ford in December 1974. But almost everything written has been wrong…" ]
http://www.wanniski.com/showarticle.asp?articleid=5105
Posted by: russ at Sep 6, 2007 1:46:07 PM
FYI, you can link to a wiki article at the time you saw it (not as it is now) easily. On any MediaWiki-powered site, click "history". You can use any of the URLs from the date/time column.
Posted by: Anthony at Sep 6, 2007 2:00:14 PM
Figuring out where on the Laffer Curve any given tax is is difficult, because even in the presence of natural experiments (tax cuts or increases), there are confounding effects. Most taxes have ways of sheltering some of what's being taxed, so an instantaneous tax rate change will first result in an instantaneous change in the use of tax shelters. As tax cuts frequently have costs (has anybody explored the opportunity costs of parking money in tax shelters?) a tax cut can bring a lot of money out of shelters, especially if there's a threat to eliminate the shelter in exchange for the lower tax rate. These changes are not always persistent.
There are also tax expectations - people will respond not only to the government's immediate tax changes, but also to preceived future tax changes - which means not just rate changes, but shelter changes, which will have a larger short-run effect.
The upshot is that one can increase revenue in the short run by lowering taxes, even when the tax rate is on the downside of the Laffer Curve.
Posted by: Anthony at Sep 6, 2007 2:00:20 PM
Hmm, isn't this just a case of replacing one discredited theory (supply side economics) with another (starve the beast)? Might not both theories qualify as "crank economics"?
Posted by: Scot at Sep 6, 2007 2:00:37 PM
Of course, while the "starve the beast" notion has rhetorical popularity in the GOP these days, it is hard to find any elected Republicans who have actually sought to engage in said starving (certainly not recent Republican congresses, nor the sitting President and his medicare drug benefit, not to mention spending on the war).
Posted by: Steven Taylor at Sep 6, 2007 2:09:29 PM
But.. but.. hardly *anything* on Conservapedia is fleshed out or current!
If you foncy some diversion, go to talk.originson Google groups and search on "Conservapedia" there.
Posted by: Jennifer Brien at Sep 6, 2007 2:17:19 PM
After reading the Jude Wanniski piece, it is clear that most attacks on the Laffer Curve miss the time element - because much of the effect of changing tax rates is caused by changes in investment, it can take years for the full Laffer-Curve effect of a tax change to show up, by which time other changes might have obscured it. It's very hard to measure effects which take years to show up, because so much else happens in that time.
Posted by: Anthony at Sep 6, 2007 2:26:14 PM
Tyler, and everyone,
Conservapedia is not much of an information aggregator for any topic, including conservative thought or political philosophy. A quick source review reveals hidden authorship, and less than 50 active editors (only 11 of whom have made over 40 percent of the posts). As a raw measure of information value it fails to meet basic community size standards (less than half a Dunbar number). It doesn't come close to a diversity value rating with about a dozen members posting the vast majority of it's shallow content. It's average article length is tiny (based on just under 17,000 entries).
Based on a snapshot look at this site I'd be surprised if you found something of value here at all.
Posted by: Eric at Sep 6, 2007 2:31:00 PM
Oh, a post about comedypedia. Is that a real site? I have yet to be convinced it is so, since every other article on there seems to be intentionally hilarious.
Posted by: perianwyr at Sep 6, 2007 3:02:25 PM
The Laffer Curve is something I would expect a wealth maximizing kleptocratic ruler to use when designing tax policy. The mean Emperors (Democrats) would move to the right, accepting a lower amount of wealth but much greater relative to the size of the economy in order to maximize power, while the wealth maximizing Emperor would try to hit the peak (Republicans). Taxpayers, on the other hand, almost always want to see lower rates (probably stopping around 13-15% of GDP), because it maximizes their wealth immediately and in the future through higher growth.
Politically the Laffer Curve was palatable when the government could get a free lunch. Lunchtime's over. But it doesn't mean the tax cutting will stop.
Posted by: 8 at Sep 6, 2007 4:06:30 PM
I feel like I'm reading an impeccable translation of the thoughts of an alien species here. The second Yglesias post you link to in your first sentence is a thorough refutation of all the sentences that follow.
He's saying "who gives a hoot what your tribe of intellectuals think; this is what is happening in the world we live in." You appear to be saying the opposite: specifically that the major Republican candidates for president are not "the Right." I find this jaw-dropping.
Posted by: Sam Penrose at Sep 6, 2007 4:14:57 PM
Sorry Tyler (and Megan). The supply-side idiocy is widely believed and quoted on the right, as numerous commentators on McArdle's post have shown. it's not just a question of "finding cites." It's a fact that all top Republicans vigorously endorse the idea.
I know it's embarassing, but there it is. Facts are facts.
Posted by: Bernard Yomtov at Sep 6, 2007 4:49:11 PM
I could not disagree more.
or maybe its just my definition of Supply Side economics.
I equate supply side economics as the attempt to provide incentives to maximize savings and thus accumulate investment capital to drive growth.
Bush (and Clinton) have pushed policies in this direction. various tax free savings accounts, lower taxes for the wealthiest tax bracket, lower capital gains taxes, the Bush attempt to end dividend and estate taxes, etc....
Posted by: thehova at Sep 6, 2007 5:03:19 PM
I agree that supply-side economics in principle is about moving the aggregate supply curve.
But in policy discussions it's about the revenue implications of tax cuts. I find it plausible that you could be at a point where cutting taxes would raise revenues, but doubt that is the case with current rates.
Starve the beast is not a theory of economics, but a theory of political economy. And one that doesn't seem to be particularly realistic.
Posted by: david at Sep 6, 2007 7:37:23 PM
I agree that supply-side economics in principle is about moving the aggregate supply curve.
But in policy discussions it's about the revenue implications of tax cuts. I find it plausible that you could be at a point where cutting taxes would raise revenues, but doubt that is the case with current rates.
Starve the beast is not a theory of economics, but a theory of political economy. And one that doesn't seem to be particularly realistic.
Posted by: david at Sep 6, 2007 7:38:08 PM
If you want to link to a wiki article at a particular moment in time, click no the "history" tab at the top, and click on the link of the time and date of the most recent revision you're looking at.
The current one on Supply-side economics, for instance, can be documented for posterity from this link.
Posted by: Adam at Sep 6, 2007 9:29:00 PM
Tyler, I do not see how you could link to Matt's post and still dispute supply-side's influence with today's GOP.
Guiliani is currently the most likely Republican to become president. We have repeatedly seen him explain that lowering taxes raises revenues. As Matt noted, he even said this during a presidential debate.
Conservapedia is not a serious website. It is not edited by a large number of people and many of its entries are poorly maintained. Citing it is an absurd way to refute actual examples of GOP leaders clearly stating their belief in supply-side principles.
Posted by: eerac at Sep 7, 2007 12:23:36 AM
I think everyone is missing the real issue. Why should maximizing government revenue be a goal?
Posted by: rob at Sep 7, 2007 2:56:36 AM
Perhaps the conflict lies in choosing when to listen to the politicians in question. In the above Guliani quotations, he is giving a campaign speech, not engaging in a policy-making session. It is incontrovertible fact that politicians overstate benefits, underestimate costs, and generally lie their tongues black when trying to sell their pet policies.
It's easy to imagine how the sensible estimate of 10-20% supply-side compensation (Mankiw's estimate, I believe, but don't hold him to it on my word) for the current tax cuts metamorphosed into "the tax cuts pay for themselves" when it came time to sell it to the hoi polloi.
One can, we hope, assume that the GOP is merely playing politics- considering that a number of top GOP economic advisers have come out denying the importance of supply-siderism in decision-making, I'm inclined to take them at their word and assume that stump-speach Laffer curves all just so much hot air.
Is it dishonest? You bet, but having seen democrats assert that minimum wage hikes increase employment and that the best answer to high gas prices is a savage price-gouging investigation, it can hardly be said to be unique to the GOP.
As far as I'm concerned, as long as they're pursuing rational economic policy, politicians can use whatever smoke and mirrors they need when selling it to the Great Unwashed.(although that shouldn't be taken as a necessary endorsement of THESE specific cuts)
Posted by: ChinaK at Sep 7, 2007 3:26:24 AM
You appear to be saying the opposite: specifically that the major Republican candidates for president are not "the Right." I find this jaw-dropping.
Seconded.
Posted by: Anderson at Sep 7, 2007 9:36:53 AM
"Starve the beast" is idiotic. Sell government services for below cost and people will demand more government services. Continue to sell government services for below cost and even more people want more government services. Simple basic 101 econ. It is just a way for big government Republicans to justify tax cuts without having to work the other side of the equation and reduce spending. It is not that I am against tax cuts, I am for government to show what it truly costs, demand taxation for those costs and then drive down demand like any other business.
Posted by: Murphy at Sep 7, 2007 10:45:58 AM
Bush cut income tax rates and revenues are at record levels. They went up!
What am I missing? I realize that I'm basing that statement on a silly,
empirical observation but the concept seems well-founded. Yes, we also have a
deficit but that's because spending has increased even faster than revenue.
Is the argument against supply-side theory that you can't cut any tax by
any amount and increase growth and therefore revenue? I could buy that.
Posted by: Craig at Sep 8, 2007 1:24:55 PM
I come from asia, injoy 室內設計,work in a 搬家公司,other enjoy isecosway和科士威,good see U。
Thanks.
Posted by: jack at Jan 7, 2008 1:29:07 AM
