Supply-Side Economics is NOT a school of economic thought

When I first began teaching economics as a graduate student in the mid 1990s, I noticed that many of the principles-level economics textbooks talked about “Supply-Side Economics” as a school of economics. This was curious to me, because I was studying PhD-level economics and the concept had never come up in any classes or readings. So I did a search of the entire economic journal literature on Jstor for terms like “supply-side economics”, “supply-sider” and “supply-side economist” and I came up with only a handful of hits. They almost exclusively talked about politicians and popular conceptions of economics rather than any kind of academic school of thought.

Although there undoubtedly some academic economists who are sympathetic to supply siders, approximately zero economists have ever been willing to associate with that ideology in their published academic work. A poll by the conservative University of Chicago Graduate School of Business found that zero economists agreed with the supply-side idea that, “A cut in federal income tax rates in the US [in 2012] would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.”

Over a third of the economists surveyed in the poll thought that cutting taxes would boost GDP, but that doesn’t mean that they agreed with supply-side economics. In 2012 the unemployment rate was over 8% which is higher than it has ever been since the Great Depression with the exception of the two big oil-shock recessions in 1974 and 1981. During high unemployment, standard Keynesian economics also agrees that tax cuts will boost GDP. The difference between Keynesians and the supply-side politicians is, 1. The Keynesians realize that cutting taxes will increase deficits whereas the supply-siders don’t. And 2. The Keynesians don’t think that cutting taxes will automatically boost real GDP during economic booms when there is already full employment. There is a good probability that a tax cut would boost nominal GDP by raising inflation, but raising inflation is a bad idea at times like that.

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Posted in Public Finance

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