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Supply Side or Trickle down Economics

The elder Bush once aptly called "supply side" economics “voodoo economics.”  But it's much worse then that. Few people understand that Supply Side Economics is a variant of Generational Theft. The best description of  supply side or “trickle down” economics I ever heard was by JK Galbraith:

“trickle down economics is the idea that if you feed the horse enough oats eventually some will pass through to the road for the sparrows.”

There two main types of people in this camp:

• Stupid and disingenuous like Larry Kudlow
• Clever and disingenuous  like Greg Mankiw (who initially was a critic of supply side economics) and Arthur Laffer, the primary architect of Reagan’s debt bomb.

Bottom Line: Supply-side theory is nothing more than a rationale for greed. That's why it is very profitable to be a supply side economist.

This says it all about the Reagan years -- and the lingering schizophrenia that still lurks in the brains of most Republicans.

"Fiscal policy in the Reagan administration exhibited all the signs of schizophrenia that characterized most of its policies.

An expansionary fiscal policy, led by the militarization of the economy, was not the aim of the administration when it drafted its plan. The increases in national defense spending was supposed to be offset by reductions in the civilian sphere. Congress did not go along with the complete dismantling of the New Deal and the welfare state. Its resistance was bound to lead to trouble, for the administration did not have a mandate to eliminate all the social programs enacted in the past 50 years.

Reagan's victory led the conservatives to labor under the miscomprehension that the public was voting for a complete change in philosophy; what the public voted for was hope--hope that somehow there were easy answers to the economic woes that were besetting the nation. Reagan promised them that, and the voters responded."

Source: The Economy in the Reagan Years: The Economic Consequences of the Reagan Administrations by Anthony S. Campagna (1994).
 

Old News

"Supply-Side Economics, R.I.P."?

Economist's View

Bruce Bartlett says supply-side economics should "should declare victory and then go out of existence.":

Supply-Side Economics, R.I.P., by Bruce Bartlett: Today is the official publication date of my latest book, The New American Economy. In this post I'd like to explain a little bit about why I wrote it and how I arrived at my present state of mind, which seems to be confusing to many of my friends.

The book grew out of an op-ed I had in the New York Times back in 2007. In it I argued that supply-side economics (SSE) should declare victory and then go out of existence. Everything that was true about it had by then been fully incorporated into mainstream economic thinking and all that was left was a caricature. Continuing to maintain a separate identity for SSE only created unnecessary conflict with mainstream economists, I argued.

As a member of Jack Kemp's congressional staff back in the late 1970s, I had a front-row seat to the creation of SSE. ... I was the person on Kemp's staff whose job it was to actually draft and promote the Kemp-Roth tax bill, which was adopted by Ronald Reagan during the 1980 campaign and enacted into law in August 1981. It brought the top marginal income tax rate down from 70 percent to 50 percent, among other things. ...

I continue to believe that what the supply-siders did was good for the economy, good for the country and good for the advancement of economic science. The best economists in the country were pretty clueless about our economic problems during the Carter years. It was widely asserted that the money supply had no meaningful effect on inflation, that marginal tax rates had no incentive effects, and that it would take decades or another Great Depression to break the back of inflation.

As all economists now know, these ideas were wrong. All economists today accept the importance of the money supply--perhaps too much; during the recent crisis many asserted that fiscal stimulus was unnecessary because an increase in the money supply was the only thing necessary to restore growth. (How this would have been accomplished when interest rates were close to zero was never explained.) All economists now accept the importance of marginal tax rates to economic decisionmaking...

During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut." I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it. As a consequence, we now have a tax code riddled with ... schemes of dubious merit...

The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora's Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d'être. In particular, the idea that tax cuts will "starve the beast" and automatically shrink the size of government is extremely pernicious.

Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. ...[I]f, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year.

My book is an effort to close Pandora's Box and explain to people why I believe that SSE should go out of business--or declare victory and go home, if that makes the idea easier to accept. To the extent that it has any valid insights left to inform policymaking they should be used to design a tax system capable of raising considerably more revenue at the least possible economic cost. Going forward, I believe that financing an aging society and a permanent welfare state is the biggest economic problem we face. ...

As I thought about the cycle that SSE had gone through from a response to the failure of Keynesian economics in the 1970s to triumph in the 1980s to caricature in the 2000s, it occurred to me that SSE and Keynesian economics had a lot in common. Each had been developed in response to serious economic problems that the existing orthodoxy was incapable of dealing with, both struggled for acceptance but were ultimately implemented to great success, both were then misapplied in inappropriate circumstances, thus leading to them becoming discredited.

So basically the book is about the rise and fall of Keynesian economics followed by the rise and fall of SSE. Although the Keynesian part of the book was originally intended to flesh out my model of the rise and fall of economic theories, it turned out to have very valuable lessons for today. Indeed, the circle appears to have come around to where Keynesian theories are now the best ones we have for dealing with today's economic crisis. ...

The General Theory, I think, was really just Keynes' way of making some relatively simple ideas look scientific in order to make them more acceptable to policymakers. The first idea is that deflation was the central economic problem. Second is that it was impractical to cut money wages to reduce unemployment and restore equilibrium. And third is that monetary policy was impotent because the economy was in a liquidity trap. ...

Economist Irving Fisher added an additional component ... by showing that the zero-bound problem is a very serious impediment to monetary policy... Fisher also explained that deflation magnified the real value of debt, which became a crushing burden on both households and businesses that reduced spending and growth.

What both Keynes and Fisher said was that when the economy is in a deflationary depression the collapse of private spending had to be compensated for by public spending, because that was the only way to get money circulating and make monetary policy effective. While monetary policy would drive the recovery it needed fiscal policy in order to work.

When the economic crisis hit in the fall of last year, I was very grateful for having studied the Great Depression and absorbed the work of great thinkers like Keynes and Fisher because, as Yogi Berra might have said, it was déjà vu all over again.

It seemed obvious to me right from the beginning that there was a close parallel between the causes of the Great Depression and the current crisis. The principal difference is that the former was caused by a collapse of the money supply resulting from the closure of many banks and the disappearance of their deposits, while the latter was caused by a fall in velocity resulting from a sharp decline in consumer spending following bursting of the housing bubble. (Because GDP equals the money supply times velocity, a decline in velocity has exactly the same effect as a decline in the money supply--nominal GDP must shrink, which causes both prices and output to fall.) ...

[M]y ... analysis led me to support a large fiscal stimulus. Without public spending on goods and services I didn't see any way for monetary policy to be effective... I was disappointed that so little of the February stimulus package went to the purchase of goods and services, which drives spending, and so much into economically ineffective transfers, which don't. But I understood that time was of the essence and that taking the time to design a better package would have required even more effort to overcome the economy's inertia, not to mention the political obstacles.

In researching my book I saw many points early in the Great Depression when a little bit of the right monetary and fiscal stimulus might have turned things around and made it just a run-of-the-mill recession. But as effective action was delayed year after year, more and more effort was needed to get the economy off a dead stop. It was only when all constraints on spending and money growth were cast aside during World War II that the Great Depression really ended.

I believe that relatively modest action early last year could have forestalled the current crisis or at least mitigated it substantially. I think the tax rebate was wrongheaded and a complete waste of money, and that the money would have been better spent cleaning up the housing mess. ...[B]ut the Bush administration's obsession with tax cuts as the sole cure for every economic problem--even when they involved nothing more than mailing out government checks--blinded it to alternative policies that might have nipped the housing problem in the bud and prevented the banking system from imploding.

By September, it was obvious to me that substantial government funds would be necessary to bail-out the financial system and prevent a systemic collapse that would have cost vastly more and imposed vastly greater economic hardship. I thought this argument was pretty straightforward and been well accepted by economists ever since the time of Walter Bagehot in the late 18^th century. ...

I remain incredulous that serious economists not only opposed TARP, but also argued that tax cuts were the only fiscal stimulus the government should have engaged in--if it did anything at all. ... I really don't understand how tax cuts would have done the slightest bit of good when millions of people had no income because they were unemployed, when businesses had no profits to tax, and investors had huge capital losses that will offset all of their gains for years to come. Given such economic conditions--resulting from a lack of demand, not supply--it's nonsensical to think that tax cuts would have helped. Indeed, one can make a case that the tax cuts included in the stimulus bill were its least effective element.

Many of my friends believe I have abandoned supply side economics and become a Keynesian. ... But as I try to explain in my book, my views haven't changed at all; it's circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don't understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it's simply become dogma totally disconnected from reality.

Nor do I understand the conservative antipathy for Keynes, who was in fact deeply conservative. He developed his theories primarily for the purpose of saving capitalism from some form of socialism. Same goes for Franklin D. Roosevelt, whose biggest economic mistake, I believe, was not that he ran big budget deficits, as all conservatives believe, but that he didn't run deficits nearly large enough until the war forced his hand. ... People can judge for themselves if I prove my case. ...

I'm between classes so I don't have time to add much, but the op-ed linked above that Bartlett says motivated him to write the book sparked a long, detailed, and intense discussion here when it was first published among Bruce Bartlett, Paul Krugman, Brad DeLong, Jamie Galbraith, and Lawrence White among others (I weigh in too, but I would not write it the same way today). See:

• Supply-Side Economics: Paul Krugman Responds

• Brad DeLong: How Supply-Side Economics Trickled Down...

[Sep 29, 2009] The Side He Picked in Economics was an Odd One

Economist's View

David Warsh on Irving Kristol:

The Straw That Stirred the Drink, by David Warsh: Irving Kristol, who died earlier this month at 89, meant many different things to many different people. One way to remember him is as the editor who, with his friend and City College of New York classmate Daniel Bell, founded The Public Interest in 1965, at just the moment the phenomenon known as “the counterculture” was beginning to grip the popular imagination of the West.

... ... ....

The side he picked in economics was an odd one. A 1975 issue featured a pair of articles: “The Social Pork Barrel” launched the career of a young Michigan Congressman, David Stockman, who would become budget director for Ronald Reagan; and “The Mundell-Laffer Hypothesis – a New View of the World Economy,” by Wall Street Journal editorial writer Jude Wanniski, introduced the world to economists Arthur Laffer and Robert Mundell, and their newly-invented brand of “supply side economics.”

The striking thing about Wanniski’s article was its anti-establishment tone, anti-Chicago as well as anti-Cambridge, Mass. The new hypothesis might be as transformative as the Copernican Revolution, he averred – or at least that of John Maynard Keynes. Mundell and Laffer’s enthusiasms for a gold standard, fixed exchange rates, large tax cuts and tight money were picked up and greatly amplified by the editorial page of The Wall Street Journal. The Republican Party was divided – insouciant economic populists in one wing, sober technocrats in another.

In the neo-conservative firmament, the stars of ordinarily first-magnitude conservatives Milton Friedman and Martin Feldstein dimmed, while Laffer and Wanniski brightened. The success of The Way the World Works, Wanniski’s 1979 book for editor Midge Decter, nearly ripped apart the boutique social science publisher Basic Books, where Kristol worked as an editor as well.

By then The Public Interest was losing its force. As James Q. Wilson wrote the other day in The Wall Street Journal, “It began to speak more in one voice and the number of liberals who wrote for it declined.” Daniel Bell quietly resigned, in 1980. It didn’t matter. The Republicans were in power; and Kristol was ready for a second act. He would become widely known as “the Godfather” of neo-conservatism, dispensing favors and advice as a political activist operating out of the American Enterprise Institute in Washington.

In its obituary last week, The Economist summed up this second act of Kristol’s career: “American conservatism, before he began to shake it up, was dour, backward-looking, anti-intellectual and isolationist, especially when viewed from the east coast. By the time Mr. Kristol … had finished with it, it was modern and outward looking, plumped up with business-funded fellowships and think tanks and taking the lead in all policy debates.”

Success profoundly changed the game. The Cold War ended. The discipline and sense of fair play seemed to go out of civic life. There hasn’t been anything like The Public Interest since. But for fifteen crucial years in the late ’60s and ’70s, Kristol’s editing was the straw that stirred the drink.

I'm running short on time, so I'll leave the commentary to all of you, but I will note this:

Irving Kristol explains where the economics articles he published in The Public Interest came from:

Among the core social scientists around The Public Interest there were no economists.... This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority - so political effectiveness was the priority, not the accounting deficiencies of government...

Comments

prufrock:

The final quote is to remind that the stuff has been a pure ideological deal made by no-idea much-smartmoney people? Why could they go ahead?

ken melvin:

I think slimeball the more fitting.  

bakho:

What is so odd about it? It takes a lot of money to enrich the publisher of a publication that has a very small readership. There is always a synergy with the Sugar Daddies. Free lunch- low taxes and government dole are what the monied special interests wanted and those Sugar Daddies on K Street are willing to bankroll a political party that delivers those favors. 

bakho:

"economics is above all the science of limits, a great nay-saying enterprise."

As in "Nay free lunch"?

As in support for the public interest means saying nay to the special interests?

Modern US conservatism is all about benefitting the special established interests against the public interests.

[Sep 28, 2009] Is Arthur Laffer Setting Up Another Debt Bomb  by One Eyed Guide

Seeking Alpha

Arthur Laffer, the primary architect of Reagan’s debt bomb that we are currently trying to defuse, has now executed a complete 180° turn from his monetary policies that gutted the Midwest industrial base in the 1980s. In a WSJ article on September 22, 2009, he claims the problems of the Great Depression are not caused primarily by tight monetary policy but rather tariffs and taxes. While he gets the facts he mentions right, he ignores the timing of taxes and deficits, tariffs and balance of trade.

He’s right that talk of tariffs may have been the trigger that started the Great Depression. However, we are in a recession now so new trade restrictions are obviously not going to cause it, which was his first timing error. As the actual tariffs were relatively modest by historical standards and did not apply to most products, the tariffs are not considered the most important factor in the collapse of trade during the Great Depression. Laffer’s characterizing tariffs as tax increases is obviously self-serving as they were not intended to primarily generate revenue but to protect domestic industry.

The situation with the balance of trade is what makes restrictions in trade acceptable today when it was stupid in 1929. In 1929 the USA was a net exporter of manufactured goods while today we are net importers (even excluding oil). The fact that our trading partners exercise unfair trading practices is long established and the United States will continue to decline if nothing is done about it.

Laffer is also correct that increases in taxes made the Great Depression worse. However he leaves out the factor of timing to make his point that we should have no tax increases to balance the budget. The budget was balanced by tax increases from 1929 to 1932 while the economy was declining that so that there was no net stimulus from government spending increases during this period. The conservative economist and icon Murray Rothbard detailed these mistakes in his America’s Great Depression.

Hoover’s mistake was in balancing the budget during a time of economic decline. Rothbard claims that without the distortion of this government reallocation things would have been better but there still would’ve been a significant recession and unemployment. Keynes proved that during times of recession the government can run deficits that will minimize the decline in the economy and employment. A key tenet of Keynesian thinking is that during times of full employment the government must not run deficits or it will cause inflation. This is accomplished by a cutback in government stimulus spending and tax increases. The tax increases of the 1990s showed that careful tax policy can increase taxes without slowing growth.

Below is a chart of the budget deficit and GDP growth from 1929 to 1940. From 1929 to 1931 the budget was basically balanced and the economy continued to decline. Recovery started once a significant deficit was started in 1932. In 1938 the budget was again balanced, primarily through the reduction in stimulus spending and the economy dipped into a short but severe contraction. During the Great Depression, tax policy had relatively little effect on overall economy activity as long as a deficit and loose fiscal policy was maintained .

 

Laffer also makes the claim that there was significant inflation during the middle of the Great Depression, though this appears to be simply to allow him to tip his hat to Friedman by once more stating that “inflation was strictly a monetary phenomenon.” I’m sure Laffer’s numbers on inflation from 1933 to 37 were correct (though I couldn’t figure out exactly where they came from, all of mine are from US Government sources) but they ignore the fact that prices had declined below the cost of production from 1929 to 1932 and had to recover. Below is a chart on Inflation versus GDP Growth. While there was some inflation after growth started in 1932 it did not begin to offset the deflation that occurred from 1929 to 1932.

Finally, Laffer made some comments on gold buying that ignored the fact that banks were collapsing due to the deflation in asset prices. Rothbart recognized this and concluded that Roosevelt had no choice in closing the banks. Gold was nationalized after trust in banks was reestablished by the introduction of FDIC. Gold was taken out of circulation and then increased in price to devalue the currency versus other nations and reestablish international trade. Because gold was no longer used in domestic exchange there was minimal inflationary impact inside the United States.

Mr. Laffer’s final statement: “My fear is that they will misinterpret the evidence (of the Great Depression) and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits” seems to imply that taxes should never be raised to balance a deficit. Running deficits during times of full employment is what got us into this mess and will simply lead into another debt bomb.

Perhaps he’s just not able to say that the current Democratic administration is correct in trying to hold off budget balancing until after the economy is fully recovered. If this is the case, Mr. Laffer is correct in being concerned because a key lesson of the Great Depression is that balancing the budget during a time of economic downturn will have serious negative consequences.

Disclosures: none for this article

[Sep 23, 2009] Hale Bonddad Stewart Supply Side Economics and Generational Theft

"Republicans are wrong to talk about generational theft since they are big generational thieves."  

February 23, 2009

Sometime over the last few weeks Republicans started to use the phrase "generational theft" to describe the stimulus bill. I found this particularly interesting considering supply-side economics started the idea of massive government debt issuance.

Let's start with Reagan. According to the Congressional Budget Office, he never balanced a budget -- despite the fact he was a "fiscal conservative." As a result, total debt outstanding increased from $1.2 trillion in 1981 to a little under $3 trillion in 1989 (the year of his last budget). Here's a graph of total debt outstanding under Reagan's leadership:

 

Bush I continued the trend. He was a "fiscally responsible" Republican. He never balanced a budget. And total debt outstanding also continued to increase. It increased from 3.2 trillion to 4.4 trillion at the end of fiscal 1993 (the last Bush I budget). Here's a graph of total debt outstanding under Bush I's leadership:

And then there is Bush II -- another "fiscally responsible" Republican. He never balanced a budget. And according to the Bureau of Public Debt, total debt outstanding increased by $500 billion/year starting in fiscal 2003:

09/30/2008 $10,024,724,896,912.49
09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

So when we hear Republicans talk about generational theft, well, they know of what they speak.

 

Read more at: http://www.huffingtonpost.com/hale-stewart/supply-side-economics-and_b_169054.html

Matthew Yglesias » Supply-Side Weirdness From Greg Mankiw

Gren Mankiv is very clever and extremely disingenuous

David Leonhardt and Geraldine Fabrikant write:

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Greg Mankiw links to this approvingly under the banner “We Are All Supply-Siders Now.” And it’s true that this is Piketty pointing to a “supply side” effect. On the other hand, the distinctive contention of the supply-siders is that lower taxes on the rich are the key to economic growth. In reality, economic growth was much stronger in the 30 postwar years than in the past 30 years of the low-tax era.

Selected Comments

1. Mattyoung Says:
   August 22nd, 2009 at 9:04 am

   Government supplies stuff also, a problem that supply siders have never grappled with. So they have a very difficult time being taken seriously when they only do studies on 65% of the economy, the private sector. It is like adding a 35% uncertainty in all their economics from the get go

A Political Comeback- Supply-Side Economics - New York Times

 By LOUIS UCHITELLE

When Ronald Reagan ran for president in 1980, he promised to cut taxes in what seemed, at the time, a magical way. Tax revenue would go up, not down, he said, as the economy boomed in response to lower rates.

Alex Wong/Getty Images. President Bush, at right, meeting with Martin Feldstein, a Harvard economist, in 2003.

Associated Press

David Stockman, left, Donald Regan and Mr. Feldstein before testifying on President Reagan’s budget in 1984.

Readers' Comments

"Bottom Line: Supply-side theory is nothing more than a rationale for greed."

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 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.

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.

“If you are cutting taxes without offsetting the cuts through reductions in spending, then all you are doing is increasing the debt and postponing the taxes,” said Jason Furman, director of the Hamilton Project at the Brookings Institution, and also a policy adviser to the Democratic presidential candidates.

Circumstances vary across the decades, of course, and it is difficult to sort out all the various influences on the economy and tax revenues. But when Mr. Reagan and his supply-side advisers first pushed through a range of tax cuts, they applied their logic to the broad mass of taxpaying workers. They argued that the incentive from lower rates on additional increments of income would prompt people to work that extra day or get more education to qualify for a better job.

Similarly, a spouse might take a new job, encouraged to do so by the promise of more take-home pay. The family’s taxable income, and the nation’s, would grow, the theory suggested, producing more tax revenue even at the lower rate.

That was before so much more of the national income flowed to upper-end households, and before the actual tax collections of the last three decades undercut the supply-side argument. Now the supply-siders single out the wealthiest Americans and argue that because they have so many ways to shelter their money from taxes, the incentive to declare more taxable income is much greater when tax rates are lowered than it is for the less well-to-do.

“The supply-side argument these days really applies to upper-income people,” said Robert M. Solow, a Nobel laureate in economics who served in the Kennedy administration. “They are portrayed as the golden geese, and you don’t want to discourage them from laying their eggs.”

By contrast, Mr. Solow says, “the Democrats are convinced they’ll lay their eggs anyway, without tax cuts as an incentive.”

Senators Hillary Rodham Clinton and Barack Obama, contending for the Democratic presidential nomination, reflect that point of view. They say that they have no intention of undoing the Bush tax cuts on families earning less than $250,000 a year. Married couples with incomes above that level, however, would once again be taxed by either candidate at up to 39.6 percent — the top rate reached during Bill Clinton’s presidency.

President Bush pushed through legislation in 2003 that cut the top rate to 35 percent, but only until 2011. Senator McCain wants to extend the 35 percent rate indefinitely and his camp increasingly cites as justification the supply-side effect on upper-income families.

Having once voted against the Bush cuts, Mr. McCain has reversed position and now has even enlisted Mr. Laffer as a special adviser. “McCain is on the right track,” Mr. Laffer said.

While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical. Martin Feldstein, a Harvard economist who was the first chairman of President Reagan’s Council of Economic Advisers and now supports Senator McCain, estimates that a 10 percent tax cut would in fact reduce tax revenue — but only by 3 to 5 percent.

“It is not that you get more revenue by lowering tax rates, it is that you don’t lose as much,” he said.

Not since Mr. Reagan ran in 1980 have supply-side tax cuts been so central a campaign issue. George H. W. Bush and Bill Clinton each ended up raising taxes, ignoring the supply-side thesis, which the elder Mr. Bush once called “voodoo economics.”

Now his son argues that his tax cuts strengthened the economy. Growth resumed after Mr. Bush pushed his tax cuts through Congress, but that position, critics say, is harder to maintain now, given that the election campaign is unfolding in the midst of a credit crisis and an incipient recession.

Jason Furman of the Hamilton Project, advises Democrats.

Arthur B. Laffer helped establish supply-side economics.

"Bottom Line: Supply-side theory is nothing more than a rationale for greed."

Still, even in hard times, the incentive from a tax cut is particularly strong among the wealthy, supply-siders say. A drop of four or five percentage points in the top tax rate of these households saves them tens of millions of dollars. Above all, the supply-siders say, less money will be wasted on accountants and lawyers hired to find ways to dodge taxes when the rates were higher. These outlays will be put to more productive use.

The supply-siders also argue that at the corporate level, lower tax rates, which Senator McCain favors, prompt companies to hire more workers and to invest in new equipment, generating more output and more taxable income.

The Democrats, and many economists who describe themselves as nonpartisan, have a different perspective. Tax incentives might indeed increase labor supply and output, they acknowledge, but what good is that if there is insufficient demand for the additional labor and for the goods and services that are produced?

The Democrats are quick, as a result, to support the $160 billion stimulus package, with its rebate checks that millions of Americans will be encouraged to spend, supporting demand. They also are prepared to raise taxes to introduce more equity into the tax system and as a means of shrinking or eliminating a large budget deficit.

The excessive borrowing required to finance the deficit, they say, acts as a drag on the economy, pushing interest rates higher than they otherwise would be, adding to the cost of business investment.

Gene Sperling, an economic adviser to Bill Clinton during his administration and now to Mrs. Clinton as a candidate, said that supply-siders vastly exaggerate the incentive effect of relatively small changes in tax rates while ignoring the benefits of bringing government revenue more closely in line with spending.

“The supply-siders predicted in the 1990s that raising rates, even for deficit reduction, would lead us to recession,” Mr. Sperling said. “What followed instead was the longest recovery in history, and the people whose tax rates went up had exceptional income gains.”

The tax issue, for all its importance, does not yet have a prominent place in the campaign. That is mainly because Senators Clinton and Obama are still struggling with each other on issues other than taxes, on which they generally agree. A winner has not emerged to cross swords with Senator McCain.

“When there is finally a candidate,” said Austan D. Goolsbee, chief economic adviser to Senator Obama, “then we’ll debate taxes and the flaws in the supply-side argument.”

Supply side clown

Lawrence Kudlow is a former Reagan economic advisor, a syndicated columnist, and the host of CNBC’s Kudlow & Company.

Does any editor at National Review read Larry Kudlow's columns? Does Larry Kudlow read Larry Kudlow's columns?

Does Larry Kudlow even remember that three months ago he was treating two-month short-term movements in monetarist indicators as dire warning signs of the utmost seriousness?

And has he forgotten that monetary policy is carried out not by the U.S. Treasury but by the Federal Reserve?

October 21, 2003: Some economic research services have stirred up the worry pot over recently sluggish money-supply growth.... But this monetarist view hugely overstates the issue and misinforms the analysis.... Far more important than short-term swings in money measures like MZM is the recent and honest statement by Treasury Secretary John Snow that rising economic growth will bring higher interest rates during the next year or two. Not only did he seize the political high ground by linking an expected interest-rate rise to stronger capital formation -- rather than budget deficits -- he is also signalling acceptance of a stable or even stronger U.S. dollar as part of economic recovery...

July 27, 2003: What we needed from the Fed this week was shock-and-awe-level accommodation — in the form of a 50-basis-point cut of the fed funds rate.... We didn't get it.... Overall monetary trends remain disappointing.... The monetary base -- the basic money-supply measure controlled by the Fed through its net purchases of U.S. Treasury securities -- has increased over the past two months by about 5½ percent at an annual rate. But that's way down from the 11 percent base-money growth we were enjoying in the two months ending in April...

The most likely scenario is that neither Larry Kudlow nor the editors of National Review care about looking like real idiots to whatever small number of National Review readers know that monetary and interest rate policy is made by the Federal Reserve's Federal Open Market Committee in the Eccles Building rather than by the Treasury Secretary and his staff in the... why doesn't it have a better name than "Main Treasury" anyway?