Supply-siders take some lumps
Bush and others who believe that tax cuts pay for themselves are skewered by critics.
At his Sept. 21 press conference, President Bush declared himself a "supply-sider," that is, someone who stresses the ability of tax cuts to encourage people to produce more goods and services and use resources efficiently.
The reaction by pundits wasn't so dramatic as when President Nixon told ABC's Howard K. Smith in early 1971, "I am now a Keynesian in economics."
Mr. Nixon was explaining his plan to propose a new federal budget that would wind up in the red. It was a fiscal policy John Maynard Keynes, a famed British economist, would likely have urged to stimulate a lagging economy. But it shocked the conservatives of Nixon's day. They charged him with being a "liberal," almost a naughty word to them.
Mr. Bush's statement is probably no surprise to today's moderate conservatives. They know that Bush encouraged a Republican-led Congress to pass six major tax cuts in the past six years, using the supply-side argument that the result would be faster economic growth and a more rapid increase in federal revenues. But conservatives aren't happy with huge annual deficits that have piled up during his White House watch, pushing the total outstanding federal debt to $9 trillion.
After all, Bush, Vice President Dick Cheney, and the Senate Republican majority leader Bill Frist had held that the tax cuts would pay for themselves. In a speech last year, Bush said, "You cut taxes, and the tax revenues increase."
To Jonathan Chait, who writes the TRB column for The New Republic, the president's declaration was probably a delight. His just-published book attacks supply-side economics, and there is nothing like controversy to stimulate sales.
The book's title pounds home his vigorous position: "The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics." In it, Mr. Chait holds that the Republican Party, "the party of social and fiscal responsibility, was transformed into the party of class warfare." He goes on that this "small cult of fanatical tax-cutters … managed to get an iron grip on the ideological machinery of the conservative movement." Chait also calls supply-siders "cranks," "ideological fanatics," and "sheer loons."
As you might expect, supply-siders don't appreciate the attacks. "There's a lot of name-calling," says Brian Wesbury, chief economist with First Trust Advisors, which manages $32 billion of financial investments from Lisle, Ill. "It's almost vitriolic … hard to take seriously."
But the main charges in Chait's book – that the Bush tax cuts failed to boost the economy enough to rocket revenues higher, and that supply-side economics has taken over the Republican Party – are serious.
While I was writing this column, a reader called and then e-mailed seven pages that he had compiled of quotes from major economists – mostly conservatives, none liberal – who challenged the view that tax cuts pay for themselves.
For example, Gregory Mankiw, former chairman of Bush's Council of Economic Advisors (CEA), now at Harvard University and an adviser to Republican presidential candidate Mitt Romney, cowrote a paper declaring, "The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing." In the long run, the paper concluded, a capital-gains tax cut might stimulate the economy enough to bring in half the original cut in revenues.
Martin Feldstein, former chairman of President Reagan's CEA, in 1999 saw a favorable revenue feedback of about one-third for the lost revenues that resulted from Reagan cutting the top income-tax rate from 39.6 percent to 33 percent.
In the end, most economists don't believe tax cuts pay for themselves. In a telephone interview, Chait calls it "a preposterous belief."
But did the Bush tax cuts at least cover some of their revenue cost?
Bush thinks so. A supply-side economist regularly on CNBC, Lawrence Kudlow, writes in a commentary that Bush told him and other conservative economists at a White House meeting Sept. 19 that "Supply-side economics has worked." Then Mr. Kudlow notes that since the mid-2003 tax cuts, revenues have grown by 45 percent, almost 10 percent per year since 2003. But his calculation does not account for inflation or population growth.
With an economic recession depressing federal revenues at the start of this decade, revenues would normally bounce back with a recovery. In fact, the economic expansion has been below average relative to previous postwar expansions, calculates economist Aviv Aron-Dine at the Center on Budget and Policy Priorities in Washington.
Growth in nonresidential (business) investment has only matched the historic norm. Revenues have grown at below-average rates for the current business cycle, from 2001 to an estimate of revenues for fiscal 2007, which ended Sept. 30. That calculation does take population growth and inflation into account.
Harvard economist Benjamin Friedman says financial incentives do matter. But tax cuts across the entire population paying for themselves? "Surely not."