Supply-side economics still needs its day in court, proponent says
Boston — 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.
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.
Mr. Roberts maintains his contacts with Reagan administration insiders - and still joins in the intellectual fray, strongly criticizing those who oppose some of his views, such as Martin Feldstein, chairman of the Council of Economic Advisers, or David A. Stockman, director of the Office of Management and Budget. He blames Mr. Stockman for not delivering sufficient spending cuts sought by the administration in its first years in office. And he lambastes Mr. Feldstein for drawing attention to the huge deficits by terming them a cause of high interest rates.
After searching the economic literature for three years, Mr. Roberts says he has not found ''a shred of evidence'' that federal deficits affect interest rates or that borrowing to finance a deficit is worse for the economy than raising taxes to reduce that deficit.
Noting that Rudolph Penner, head of the Congressional Budget Office, has made similar charges about the budget deficit (even though, according to Mr. Roberts, some of his own staff spoke to him of the lack of evidence), Roberts asked: ''How do they get away with it?''
Asked for a report card on Reaganomics, Mr. Roberts reviewed its four main elements, what Murray Weidenbaum, Mr. Reagan's first chairman of the Council of Economic Advisers, called ''the four pillars of wisdom:''
1. Reduce the growth of government spending below the growth of the economy to reduce the burden of government on the economy gradually. However, government budgets would continue to grow in absolute terms year after year.
With the recession, notes Mr. Roberts, President Reagan ''lost control of economic policy'' and was unable to cut spending any further after 1981. Any cuts since then have actually been boosts in spending subsequently cut back in size.
2. Stop the tax burden from growing faster than people's income, which it had been for at least a decade. Also, stop the confiscation of business assets through insufficient depreciation allowances.
Mr. Roberts maintains the government had more success here than with any other ''pillar.'' Though eroded by inflation and social security tax increases, the 25 percent cut in personal income taxes at last reduced real tax rates in 1983. Further, business got some needed tax cuts in 1981, though these were trimmed back a year later.
Nonethless, tax revenues as a percent of gross national product remain under President Reagan above their average levels in the 1960s and 1970s. ''I would certainly never agree that we had any huge tax cuts,'' says Mr. Roberts.
3. Curtail the rate at which regulations stream out of the bureaucracy - ''they stream out so fast nobody knows what the law is,'' said Roberts.
The administration had ''some successes,'' but then it ran into political difficulties and the Bush commission on deregulation just ''declared victory and closed up.''
4. Beat inflation gradually with a steady, slow reduction in the nation's money supply.
Mr. Roberts says ''monetary policy is a total failure.'' The Federal Reserve System first of all tightened money too much, creating a serious, long recession that created huge deficits, and ''put the President on the defense.''
Moreover, monetary policy has continued on an even steeper roller-coaster ride. The Fed creates money at a rapid pace for six months, opening the door for inflation, and then tightens money for six months, threatening recession. ''The monetary policy the Fed delivered had nothing to do with the one we requested,'' he recalls.
Supply-sider Roberts still clearly favors the Reagan administration. But he hasn't given its economic policies a good report card.