The Great Supply-Side Economics Hustle

I think the original proponents of Supply-Side Economics truly believed it would work. During the 1980 Republican primaries President George Bush rightly called it voodoo economics and it turned out he was right. At the same time, I believe President Ronald Reagan honestly thought it was a valid economic position. History has shown over and over again that it is really fool’s gold.

What is Supply-Side Economics? Supply-Side Economics is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation, by which it is directly opposed to Demand-Side Economics. The idea that the wealthy and corporations will produce more if they have additional capital, ignoring whether there is additional demand for products and services, is where it completely falls apart. Where Demand-Side Economics states that economic growth is created through increased demand for goods and services. Corporations and other businesses will expand when needed to meet additional demand. Demand has shown to be the real driver of economic expansion.

How do these theories overlap into tax policy? According to Supply Side "theory," tax cuts should go to the wealthy for only they can afford to use the extra income to invest in the economy -- to increase its capacity to "supply" goods. Demand Side Economics, says that if taxes are to be cut, they should go to those who earn lesser amounts of money as they will spend the majority of additional revenue thus stimulating the economy by creating additional demand.

We saw the starkest example of the fallacy of Supply Side Theory immediately following the tax cuts by the Trump Administration. A small amount of the savings went to workers, mostly in the form of one-time bonuses. The vast majority of the corporate tax cuts were held as additional cash, used for acquisitions (which usually end up with fewer employees when completed), used for cost associated with initial offshore outsourcing (again reducing US jobs), and stock buybacks that increase the value of stock and stock options. Very little of it went to increasing supply because the wealthy have plenty of money already for their day to day living and corporations do not increase supply unless there is additional demand. Giving the wealthy more does not increase demand or if so only slightly.

Now some will say wait just a minute, look at how unemployment dropped in President Reagan’s second term and look at how low unemployment is in President Trump’s first term. Both those statements are true and have nothing to do with the tax cuts. The US was coming out of a recession at the end of President Reagan’s first term and the beginning of his second, so of course employment would increase. If government policy helped with the recovery it was much more the huge increase in deficit spending that served as the stimulus. The economy and job creation have actually slowed down in Trump’s first term compared to the last 30 months of President Obama’s last term. The massive tax cut clearly did not have a positive effect on the overall economy and has once again pushed annual deficit spending over a trillion dollars. The final example I will give is the economy during President Clinton’s two terms. President Clinton increased taxes, got the deficit under control leaving office with a surplus, and had the best economic and employment growth of any President since WWII.

So, if Supply-Side Economics clearly does not work, why do the Republicans keep doing it? They do it for three reasons; They want to cut taxes for the wealthiest among us (that is truly their core constituents), they want to cut regulations across the board which is supported by the large corporate and libertarian wings of the party, and they want to cut all non-defense related government spending, Medicare, Medicaid, Social Security, programs for the poor, education, etc.

They accomplish this by continuing to cut taxes (which increases the wealth of their core constituents) and running up huge deficits. They do this knowing that at some point they can use the guise of out of control government debt as an excuse to cut the programs they despise. Their thinking is that once taxes are cut there is no appetite to raise them again, thus creating a fiscal emergency with the deficit ballooning out of control that they can exploit.

They have had some success chipping away at all of these programs including Social Security and Medicare using the deficit as an excuse. You have heard the statements, “we do not want to cut these programs, hate to do it, but we just do not have the money”. You see the results today with retired people having to take part of their already reduced Social Security to use on supplemental Medicare plans to cover things that have been cut from the program.

Here lies the problem in their plan. While their core constituents are the wealthiest Americans, their core voting block are middle and working class whites, along with older whites. The faux populist rhetoric, racism, xenophobia, bigotry, and adherence to fundamentalist evangelical Christian values only gets you so far. When you start cutting their Medicare and Social Security even those hardcore Republican voters will toss out a congressman or senator.

President Trump is still claiming that he would never cut Medicare, Social Security, and protections for pre-existing conditions. But his proposed budget for 2021 does all of that and more. The proposed budget cuts Medicare by $756 billion, Medicaid by $920 billion, and Social Security by 24 billion. This budget also increases defense spending once again while we continue to spend as much on defense as the next 7 countries combined. His Justice Department is also currently suing to remove the protections for pre-existing conditions.

It is a con and a long running one. They simply swap out the con-man at the top running the confidence trick. They were almost busted in 2008 but used the tea party and attacks on the first black president to distract. Then Candidate and now President Trump has used faux populist rhetoric, racism, xenophobia, bigotry, and overall daily chaos to distract some more.

So, this puts Republicans in congress between a rock and a hard place. Can’t raise taxes because they have demonized them so much, can’t cut defense because the donors and lobbyist will be very upset if they lose that government cash, can’t address cost in medicine to help with Medicaid and Medicare again because the lobbyist for the medical industry will be upset, and they can’t cut the largest social services because they will be tossed out of office.

So the crazy reliance on a failed economic theory to further enrich the wealthiest Americans is leading us quickly into an economic crisis almost solely of the Republicans making. Can they conjure up another tea party miracle when it happens? Or will we finally be done with the Supply-Side Reagan revolution and swing back toward the more sane FDR Democrats and Eisenhower Republicans actually working together for America?

Time will tell and that time is not far away.