Supply-Side Economics Never Made Sense

Dr. Errington Thompson

by Errington Thompson, M.D.

As we watch the collapse of Wall Street – takeovers and buyouts of AIG, Bear Stearns, Merrill Lynch, Washington Mutual, Lehman Brothers, and even North Carolina’s own Wachovia – we all must wonder what happened. We have been told that our economy was strong, yet within the last seven to eight months we’ve seen 19 banks collapse and the stock market exhibiting the kind of volatility that makes us all queasy.

Within a generation, we went from being the most prosperous nation
on the earth to the nation carrying the most debt. Personally, I think
we have to look back to the 1980s for the reasons why. This was the age
of the so-called “Me Generation.” It was all about nicer clothes, nicer
cars, and the biggest house in a gated community. It didn’t matter if
you obtained all of this through credit cards, six mortgages and a loan
from Guido down the street. The bottom line was it was all about “Me.”
This thinking came from supply-side economics.

The theory behind supply-side economics is simple, and
simplistic: tax cuts for the wealthy and for businesses would free up
capital; the wealthy would spend more money; businesses and the wealthy
would hire more people. This prosperity would trickle down to everyone.
On the surface, this makes a lot of sense, but upon further reflection
we see it as a magician’s trick.

Before we get the hard data, let’s just think about this. If
you’re a wealthy businessman who makes $10 million a year, for
argument’s sake, you pay 40% of what you make in income tax. This comes
to $4 million. With tax cuts, your tax rate is changed from 40% to 35%.
You take home an extra $500,000. What are you going to do to spur the
economy? You already have a new car – or maybe two or three. You have a
house, or two, or seven. You already have a maid, and someone to cut
your grass. You have all the disposable income you need. Likely enough,
you will do what most multimillionaires would do, which is to invest
that $500,000.

The logic for business is about the same. Businesses don’t hire
people just because there’s extra money lying around. Extra money from
tax cuts can be paid out as bonuses (upper management is very fond of
bonuses and stock options), or distributed as increased dividends to
stockholders. Therefore, in this example, it appears that supply-side
economics lines the pockets of the rich.

With President Bush, President Clinton, and President Reagan, we
are able to look at two eras of supply-side economics, with a more
traditional economic approach squeezed between them. During President
Reagan’s term we had a growth in real investment of 2.8%. President
Bush has had a growth of 2.7%. In the non-supply-side period of
1993-2001, real investment grew by 10.2%.

Another measure of economic growth is Gross Domestic Product,
which increased at an average annual rate of 3.9% during the era of
President Clinton. The Reagan and Bush eras had rates of growth of 3.9%
and 2.5% respectively.

For me, the most important indicator of how we are doing is real
average annual median income. Reagan’s presidency, with major tax cuts
in 1981, spurred an increase of 1.4%; and under President Bush, with
even larger tax cuts in 2001, the increase was only 0.3%. Clinton and
the Democratic Congress increased taxes in 1993, and during Clinton’s
presidency, real average annual median income grew at a rate of 2.0%.
That’s 50% higher growth than during Reagan’s terms, and almost seven
times the rate of Bush’s.

There are multiple excuses that true supply-side believers will
give us as to why supply-side economics did not work. They will claim
that any change in the economy takes years to make an effect. This
plainly contradicts the father of supply-side economics, Arthur Laffer,
who stated that we would see changes in our economy “before the ink is
dry” on the legislation for tax cuts. They will also argue that
government didn’t cut spending enough.

There’s further data to support a more traditional economic
approach. This approach includes higher wages and higher rates of
employment and results in decreased federal deficits. Such was the case
during Clinton’s years in office, as compared with either supply-side
era. In spite of all this data, though, some still advocate tax cuts
for the rich. Why? Why indeed!

Supply-side economics simply does not work for America. Maybe
this “Me first, everything else second” mentality helped cause the
craziness that we’re seeing on Wall Street? I’m just askin’.