Supply-side Silliness: Faith Based Economics Devoid of Reality

Louis Uchitelle has yet another article on how John McCain has adopted the religion known as the Laugher (excuse me – Laffer) curve. Louis starts well:

Since then, supply-side economics, as it was called — first with derision but then as a label embraced by its supporters — has become a central tenet of Republican political and economic thinking. That’s despite the fact that the big supply-side tax cuts of the 1980s and the 2000s did not work out as advertised, as even most supporters acknowledge.

But then he allows Kevin Hassett to get away with this:

But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year’s election campaign, in an amended form. What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.” Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues “rise dramatically” when tax rates are cut.

I’m not sure what Louis means by “broader economic benefits” since Kevin claimed – without citing the evidence – that real GDP grows faster with lower tax rates than it does without higher tax rates. It is beyond the reach of economic science to explain WHAT happens – Kevin? Let’s recap something we’ve written here many times and most students of economics know already. Real GDP, which had grown at an average rate of 3.5% per year from the end of World War II to 1980, grew by only 3 percent under Reagan-Bush41 and has grown by an average rate of 2.5% under Bush43. Yet during the higher tax rate Clinton years, it grew by 3.7% per year. Assuming Kevin Hassett is not a complete idiot (he’s not), he’s being very disingenuous here. Ah but Louis does present some data for us:

In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget. That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised. Since 2001, the annual per capita revenue from income taxes fell 1 percent under President Bush even though tax collections picked up sharply starting in 2005. The budget surplus Mr. Bush inherited turned into a deficit.

There’s two reasons why tax revenues grew faster during the Clinton years – higher tax rates AND faster real GDP growth. Alas – Louis fails to mention this second reason. And until the press learns to call the supply-side liars on their lies, what is the incentive for them to tell us the truth?