Supply-side economics still needs its day in court, proponent says
Some establishment economists have written, in effect, obituaries for supply-side economics. They regard this economic school, with its emphasis on factors affecting the supply of goods and services, as a strange creature that thrived briefly in the early days of the Reagan administration and then faded away.Skip to next paragraph
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But that's far from the case, says Paul Craig Roberts, who as assistant Treasury secretary for economic policy was a leading supply-sider in the administration. He maintains that supply-side economics is having a ''permanent'' impact on national economic thinking.
Mr. Roberts has the intense eyes of a man convinced of his views. Indeed, he probably sees it as his duty to convert the nation to his vision of economic reality.
As a professor, then an editorial writer for the Wall Street Journal, next at the Treasury, and now back again at the Center for Strategic and International Studies at Georgetown University (writing on the side a column for Business Week), Mr. Roberts has always been an enthusiastic advocate. While explaining his supply-side opinions, he frequently asks: ''Do you see what I'm saying?''
Offering evidence of the continued vitality of supply-side economics, Mr. Roberts points in two directions.
First, he argues that the administration and Congress, in making decisions about taxes, are showing more sensitivity to supply-side effects than ever before.
''It is now taken for granted by all economists that when you change taxes you also are affecting the behavioral response of people in the economy in terms of savings rates, willingness to invest, taking risks, work attitudes,'' he said in an interview.
Supply-side economics, he says, stands behind the strong resistance in Washington to raising marginal tax rates - that is, the tax rate on the last dollar an individual earns. Congressmen are concerned that such tax hikes would damage incentives to produce.
If taxes are raised in the current efforts to shrink the federal deficit, Congress will try to do it in a way ''that inflicts the least adverse effects on the economy,'' he said.
Moreover, Mr. Roberts figures that the decision to tax equally both earned and unearned income (that is, income from wages and salaries, as vs. income from savings and investments) will remain permanent. Early in the Reagan administration, Congress cut the maximum tax on unearned income (initiated by Democrat congressmen, says Mr. Roberts) from 70 percent to 50 percent, same as for earned income. Another supply-side victory, he says, will be the introduction next year of indexation in the income-tax system, largely ending bracket creep.
Further, those who put together the major econometric models for forecasting the future of the economy ''make efforts to have the supply-side effects in them that they used to say didn't exist.''
Second, ''a whole new generation'' of younger economists in the universities are researching supply-side topics. Students searching for dissertation subjects for their doctorates find that most subjects especially relevant to older economic schools, such as the Keynesian or monetarist schools, have been exhausted.
So, says Mr. Roberts, supply-side economics has become the ''wave of the future.'' He went on: ''I get letters from young scholars all the time explaining what they are doing. This is a permanent change that will last at least a couple of decades. Anything that is fruitful in academic research becomes the orthodox.''
In his view, the attacks on supply-side economics often have been unfair. However, he admits that at other times supply-siders have shot themselves in the foot with extreme positions that have not held up. Mr. Roberts, for instance, is not a backer of the Laffer Curve, named after West Coast supply-sider Arthur Laffer, which maintains that in some circumstances tax cuts could so stimulate the economy that they would produce more government revenues - not less. Today's huge deficits have, to many economists, discredited that theory. Or at least they show that the tax burden in the United States is not so great that it discourages individual effort so much that government revenues would bounce even higher with a tax cut.