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
2 comments on “Supply-Side Economics is NOT a school of economic thought
  1. john windley says:

    You use the phrase “The Keynesians realize that cutting taxes will increase deficits whereas the supply-siders don’t” This fails to acknowledge that in supply side economics there is a point of diminishing returns and then a reversal. The language and terms you use are deceptive to your ends. You take the outliers of the tax rate and use it as a standard.

    the second problem is “The Keynesians don’t think that cutting taxes will automatically boost real GDP during economic booms when there is already full employment.” Again this is deceptive because the use of the U3 as a standard for full employment is the Keynesian thought.

    It should not be surprising that we currently see continued GDP growth, tax revenue increases, decrease in unemployment beyond the statistical U3 full employment and a corresponding increase in labor force participation. All of which are described in what you lambaste. This article reads more like an article written for undergrads that secretly love Marxism and don’t understand valid sourcing or statistics.

    • ” in supply side economics there is a point of diminishing returns and then a reversal.”
      Sure, standard econ recognizes that lower income tax rates could bring in more revenues, so it is a question of empirical evidence. The difference is that people who identify as supply-siders see the free lunch of lowering taxes bringing in more revenues in nearly every tax cut such as the recent corporate tax cut whereas standard academic economics can’t find empirical evidence that we have been near the reversal of diminishing returns for any income taxes. There is even empirical controversy whether we were there when the top income tax rate was at 90% (where it was for two decades in the 40s and 50s).
      If you like another measure of unemployment, I’m happy to use others. No one measure gives a complete picture, but they generally move in tandem, so my point holds that when employment is low (whether or not you want to use the label “full employment”) like it is now, a tax cut is more likely to boost inflation than boost real GDP. Of course, the recent corporate tax cuts have made the Fed more likely to raise interest rates more to keep inflation in check which will tend to further put the brakes on whatever stimulus the tax cut might have provided if unemployment had been high right now.
      I do try to write for a college-level audience, so I’m glad you agree that I’m hitting my target level, but Marxism pretty much died as an ideology back in the 1980s, so it is kinda funny to see red-baiting nowadays! I hope you’ll feel reassured to know that college students nowadays find it about as appealing and interesting as the Vietnam War.

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