Monday, June 06, 2005

Supply Side Economics

What’s going on with the economy? President Bush says things are going great, while others say we’re doing terrible. Who’s right?

Ronald Reagan was a proponent of a theory called ‘supply side’ economics. Here’s some background from The Ronald Reagan Years: The Real Reagan Record:

"[A] drastic reduction in the deficit...will take place in the fiscal year '82." - President Reagan, news conference, quoted in The New York Times, March 6, 1981. (In fiscal 1982, the first full year of Reagan's presidency, the government ran up a record budget deficit of $128 billion.)
Early in his presidency, Reagan chose as his economic advisors a group that espoused a radical economic theory called "supply-side." The supply-siders told Reagan that if he gave tax cuts to the top brackets (the wealthiest individuals) the positive effects would "trickle down" to everyone else. Tax cuts, they argued, would produce so much growth in the economy that America could simply outgrow its deficits. Reagan bought into supply-side theory, which is why in 1981 he predicted that there would be a "drastic reduction in the deficit."


However, Reagan soon discovered that his supply-side advisors were wrong. Tax cuts, instead of reducing the deficit, had increased the deficit, drastically. After 1981, Reagan made no more rosy predictions regarding the deficit.

"Reagan's theory was really 'trickle down' economics borrowed from the Republican 1920s (Harding-Coolidge-Hoover) and renamed 'supply side.' Cut tax rates for the wealthy; everyone else will benefit. As Reagan's budget director David Stockman confided to me at the time, the supply-side rhetoric 'was always a Trojan horse to bring down the top rate.' Many middle-class and poor citizens figured it out, even if reporters did not."- William Greider, magazine article, "The Gipper's Economy"

This is in sharp contrast with one of the Republicans’ favorite Saint Ronnie of Reagan myths; that is to say, that his tax cuts triggered unprecedented prosperity. As a matter of fact, federal income and payroll taxes were higher when Reagan left office than they were at the beginning of his 8 years in office.

George W. Bush is also a supply-sider, but unlike Reagan, he has not learned from his mistakes. Former Treasury Secretary Paul O'Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion in fiscal year 2002 alone-posed a threat to the economy. Cheney cut him off. "You know, Paul, Reagan proved deficits don't matter," he said. This explosion of ignorance is typical of the Bush administration’s ideology-before-reality mindset.

In early 2001, the President's Council of Economic Advisors (CEA) announced that if the first round of Bush's $2.1 trillion income tax cuts were passed quickly, it would result in the creation of 800,000 additional jobs by the end of 2002 due to the tax cut alone.

And, once again, in February 2003 the President's CEA assured that the adoption of a second round of Bush tax cuts would create 1.4 million additional jobs - 510,000 in 2003 and another 891,000 for 2004 - all solely attributable to the tax cuts.

All total, that amounts to a Bush promise of 2.2 million jobs created between 2001 and 2004 as a direct consequence of passage of the $2.1 Trillion tax cuts mostly for the rich.

Based on his own goals, how has Bush’s plan worked? David Lazarus recently wrote an excellent article that helps us find the answer to this question.

At a May 31 news conference, Dubya said, "Our economy is strong. I say it's strong because we've added over 3.5 million new jobs over the last two years, and the unemployment rate is 5.2 percent.”

But this president hasn't been in office for just two years. He's been in the White House more than four. Since January 2001, when Bush took office, the U.S. economy has added only about 800,000 jobs, according to the Labor Department. To put that in context, about 2.1 million jobs were added to the economy annually over the previous two decades, including intervals of recession. During Bush's tenure, just a tenth of that number of jobs has been created each year.

And I’m not impressed with his chest thumping about the 5.2 percent unemployment rate. It was at a 30-year low of 3.9 percent when he took office.

Do the math. Where are the other 1.3 million jobs Bush promised? Why can’t he meet his objective of 2.2 million jobs over a 4 year period, when average growth was 2.1 million per year over the past 20 years?

The answer is clear: Supply side economics don't work. The theory has never been anything more than an attempt to find moral justification in stealing from the poor to give to the rich.

This is what’s going on with the economy, and how we’re really doing.

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