Supply-side economics

An exciting napkin!

Supply side economics — also known as "trickle down" economics, or "voodoo" economics, and sometimes "Reaganomics" — is based on the Laffer Curves, and excites conservatives more than sex. This has nothing, or at least not much, to do with Tinkle Down Economics, a horrifyingly bad (though disturbingly popular with conservatives) 80s fetish film that will not be mentioned again. (See tinkle down, golden showers and parachutes, warm rain, pee fetish, urology.)

Reaganomics became a popular term in the United States for supply side economics, due to the fact that Ronald Reagan was the first president in US history to adopt the idea and (try to) put it into action.

The basic idea is that when taxes are too high, people refuse to engage in economic activity. If taxed activity drops too low, then there are fewer transactions to collect tax from. This theory is sound only if the high point of the arc can be properly found. This curve is referred to as the "Laffer Curve," named for the economist who scrawled it on a napkin. It is accepted wisdom that when John F. Kennedy cut taxes, government revenue went up. However, despite what many conservatives believe, when Ronald Reagan did the same, tax receipts dropped precipitously. Likewise, under President George W. Bush taxes were once more cut and revenues dropped, showing that US taxes are not on the far end of the Laffer curve. In the contrary case, President Bill Clinton slightly raised marginal tax rates, the economy boomed, and the budget for the first time in memory showed a surplus.

Description of the scheme

Laffer curves

Laffer curves show that, under certain circumstances, a government's tax revenue can actually be increased by reducing tax rates. Often, as taxes increase, they may reduce income-producing activities, thereby yielding less tax revenue. Conversely, lowering taxes can actually increase tax revenue in the long term. Part of this falls under tenets called Say's Theory.

Laffer etymology

"Laff" is a cartoonish respelling of "laugh". For example, "As implemented, the Reaganomic twist on Laffer curves left the wealthy laffing all the way to the bank."

Laffer as implemented by Reaganomics

The problem with the Republican implementation of Reaganomics was that it reduced taxes on the wealthy, shifting more of the tax load onto the overburdened middle class, a perversion of the economic theories of the early French economist Jean-Louis Say. One of the main arguments used to justify this upward redistribution of wealth was "When was the last time a poor man gave you a job?", which ignored that this tax structure made it more difficult for poor and middle class to break into higher income brackets.

Black market

To apply the theory in the real world, first one must determine if conditions are appropriate. In general, the conditions are only appropriate if a large black market exists, that is funneling off much of what would otherwise be legitimate economic activity. If they are, the next step is to simultaneously reduce tax rates and cut spending so as to keep the overall budget in a similar condition of balance as it was. This brings on a (hopefully) brief period of austerity, since to cut spending, various government programs must be cut sharply. The ensuing economic activity due to the reduced tax rates (spurring both investment and consumer spending) will then in (hopefully) short order return to the government coffers greater revenues than would have been projected under the old tax rates. The populace that survives the austerity phase will then acclaim their leadership to be geniuses.

White market

According to the theories of Jean-Louis Say, tax increases result in a short-term bump of tax revenues, but a long-term decline. Since politicians are uneducated in economic theory, they tend to keep increasing taxes, feeding upon the short term bump.

Conversely, if taxes are lowered, revenues will increase over time. Say's "light touch" theory was intended to apply to the full economy, and not simply the wealthiest citizens, a situation that not only widened the disparity between rich and poor, but set in place conditions ripe for revolution.

Crumb theory

As a Reagan staffer once described it, tax breaks for the poor reward them for poor financial habits. "If you give tax cuts to the poor, they only spend it on food and shelter."

Instead, according to Reaganomics, if you feed the wealthy increasing amounts, they brush more crumbs off the table, feeding those below them. Hence, the term trickle-down economics.

Attempts to apply scheme and results

In many of the post-Communist regimes, a world drop in oil prices gave the appearance that trickle-down economics worked. Ukraine in particular increased tax revenue when the taxes were lowered, as it brought many economic activities out of the black market and into the legitimate economy.

Attempts to apply half the scheme and results

Ronald Reagan ran for president of the United States in 1980 partly on a folksy version of what is now known as "supply side economics" and partly as your friendly grandfather, and subsequently won the election. He brought to the White House budget director David Stockman, who helped Reagan engineer the part of the scheme he wanted, tax cuts for the wealthy. Reagan then didn't bother to cut spending (and actually increased military spending), partly due to lack of political capital, and partly due to mendacity. Mr. Stockman quit in disgust.

The economy went into a tailspin, and didn't recover until the military deficit spending "trickled down" to the economy at large, producing a great economic bubble, and a subsequent bust worse than anything since the Great Depression.

The trickle down in action

The results of the massive tax cuts "trickled down" to the state and local level, as federal funding for many projects dried up. This threw most American state and local governments into fiscal crises cyclically, forcing them to raise local taxes in order to provide services people actually wanted– or needed.

The religion takes root

As a result of this tremendous success, American radical conservatives trumpeted a mantra of "cut taxes" as often as Muslims pray.

Plan W

President George W Bush, never one to believe evidence of failure, re-doubled and quadrupled efforts to prove Reaganomics could just maybe perhaps possibly work. In doing so, he dismantled not only every reform of the Clinton era, but reforms dating back to the 1930s intended to prevent another Great Depression.

Bush cut taxes on the rich, eliminated the inheritance tax for wealthy people too stupid to consult with a financial planner, gave away bribes called tax incentive packages, sought and got an $800 billion bailout package (which he called $700 billion bailout), and paid for it all with a Chinese credit card.

During this same period, the dollar slipped against world markets, losing so much ground that some nations chose to no longer peg their currencies to the US dollar. Once at par with the euro, the US dollar lost a third of its value. When Bush junior entered office, the Canadian dollar was worth about 65¢. By January 2008, the Canadian dollar exceeded the value of the US dollar for the first time since 1976, although it has since receded to about 80¢, due in part to governmental intervention , and falling oil prices.

Other schemes

During Bill Clinton's two terms in office, taxes were raised slightly, the budget balanced, and the country's longest ever peacetime expansion occurred. The subsequent recession was mild, even after George W. Bush's negligence allowed the 9/11 attacks (on his watch) to rock the already weakened economy.

Coining money

Reaganomics cut spending to increase demand rather than using subsidy. It also cut taxes with the hope of increased supply, selling, profits and tax revenue. Reaganomics also deregulated the market, so stores could charge whatever they could. While the inflation increased tax revenue, the government got billed larger amounts because of the inflation and deregulation.

Coining money, on the other hand, could enable the government to pay its bills without taxes. Coins can be considered of value because they are both a product and service, and also because the government making them sets their value. Coins worth a trillion dollars could be made and deposited into government accounts.

Since the government would not be borrowing, it would never need higher taxes or perhaps any taxes at all. The government could pay its bills without any bonds or taxes. It could provide state aid to school districts and local governments and subsidy to businesses and welfare to people.

In fairness

Supply side economics is a valid economic theory, and there is a place for it in a modern economy. However, as with any complex matter, it is not the only solution to an economic problem, and its counterpart demand side economics must be employed to find the optimum on the Laffer curve.

Quotes

Reaganomics worked. This is the crown jewel in Rush’s crown of bullshit. This is the big lie – the one he desperately needs the working-class members of his audience to believe. If Reaganomics worked, Rush is a straight-talking champion of the little guy on a populist crusade to take the country back from those pointy-headed liberals who think they know what’s good for everybody and are drunk with the power of sending out welfare checks. If Reaganomics didn’t work, Rush is the carnival clown hired to distract the crowd while paramedics carry the mangled bodies from a derailed roller coaster. He does a little juggling, pulls some flowers out of his hat, and when the crowd begins to get a little anxious about the rising body count, he starts shrieking hysterically that this never would have happened if it weren’t for those goddam liberal safety inspectors.- Al Franken, Rush Limbaugh Is A Big Fat Idiot (p. 124)