RE: Supply-side economics

["Max Sawicky" <sawicky@xxxxxxxxxxxxxxxx>]

Like all economic theories, supply-side is hard to test because there are so
many economic variables.  Probably the best test case for supply-side was
the individual tax rate cuts in the early 1980s.  Supply-siders were the
only ones I am aware of that accurately predicted: (1) growth would
increase, (2) tax revenues would not be reduced, and (3) inflation would not
increase. . . .

mbs:

ah, the oldies but goodies.  I expect I'll be trotting
this out quite often now.

Problem 1:  in '81 taxes on investment were drastically cut,
and the 80's was a terrible period for investment and
savings growth; in the 90's the return on assets has
been unprecedented, and savings tanked.
Problem 2:  taxes on the wealthy were cut, and they
worked less; taxes on the poor increased (payroll
tax), and they worked more; state sales tax was
disallowed as a deduction (making it more expensive),
and instead of switching from sales to income, states
switched from income to sales; see Burtless and Bosworth
in the Brookings Review.

S-siders had no monopoly on predicting growth would
continue, nor that revenues would grow absolutely.
Revenues grow almost all the time, except during
recession, and the U.S. was coming out of recession
when the '81 cuts were taking effect.  The only expected
effect of a tax is to make them grow more slowly, if
that.  There is no question the '81 cuts had a reducing
effect.  Supply siders protest bitterly now if you
say they ever suggested that rate cuts would
"pay for themselves."  The WSJ had a whole
apoplectic series on this.  I saw Martin Anderson
practically jump on Jamie Galbraith when this came
up in a conference.

It is illogical in the context of non-supply-side
models to say that no growth plus inflation
was expected by others; typically growth would be
expected to be associated with inflation.

". . . The Keynesians certainly thought that the tax cuts would be
inflationary.  Unlike Keynesians and other demand-side economists,
supply-siders think the Phillips Curve is a hoax and  accurately predicted
that a decrease in unemployment would not cause an increase in inflation.
Supply-siders disagree with Alan Greenspan and do not believe that growth
causes inflation. In general, inflation is viewed strictly as a monetary
phenomena.
I hope this partially answers your questions.
David Shemano

mbs:
There is no contradiction between a phillips curve
and supply side notions.  For a given point on the
PC (inflation and unemployment rate), one would
expect an improvement in incentives to boost
non-inflationary employment.  The PC like any
other simple model assumes other things equal.
If incentives change, other things are not =.

Presently President Cheney is trying to hijack
keynes by suggesting a change in incentives is
the right response to a business cycle dip.
This is idiotic.  An improvement in incentives is
appropriate any time.  The response to a cycle
dip is to jazz up consumer spending, with
appropriate coordination with the Fed. Don't
hold your breath.

In general any tax economist expects a higher
tax rate to discourage, and a lower one to do
the opposite, broadly speaking.  This is trivial.
The whole question is how much.  In s-s theory, the
key question is what is the revenue maximizing
rate.  If you don't know this, then you don't
know whether a rate change will do what you
want, or the opposite.  So then, of what use
is the 'theory'?

mbs