If you believe tax cuts are generally good for the economy, you are probably not as smart as Jonathan Chait. You may even be off your rocker. Sound hyperbolic? Well, Chait has written a new book dedicated to this proposition. An excerpt published in the New Republic, where Chait is a senior editor, opens with the claim that American politics has been “hijacked” by “right-wing economic extremists, some of them ideological zealots, others merely greedy, a few of them possibly insane.”
The result has been to transform the United States into a Third World oligarchy over the objections of the American people and even most right-thinking Republicans and conservatives, all to serve the quasi-religious visions of thinly credentialed madmen wearing ugly ties. At least this is the narrative that Chait will be pushing relentlessly all over the web this week, in a big push to publicize The Big Con.
His target in the chapter TNR excerpted is the “crank doctrine” of supply-side economics, which Chait defines as the belief that “cutting taxes for the very rich is the best response to any and every economic circumstance,” advanced by a “cult” that seeks to “turn the most rapacious and self-interested elements of the business lobby into essentially an arm of the federal government.” If this framing isn’t tendentious enough for you, Chait dwells at length on the real and imagined personal eccentricities of Arthur Laffer, Jude Wanniski, and George Gilder in an effort to prove that conservative economic views and the people who influenced them are bonkers.
Nowhere does Chait acknowledge that supply-side policies were actually formulated to address a specific set of economic circumstances — namely, the “stagflation” of the 1970s and early '80s that had proved impervious to traditional Keynesian nostrums. In fact, many Keynesian ideas — the superiority of fiscal policy to monetary policy; the macroeconomic undesirability of personal savings; the notion that inflation was caused by low unemployment — were among stagflation’s most significant causes.
Influenced by Nobel Prize winning economists like Friedrich Hayek, James Buchanan, Robert Mundell, and Milton Friedman (not just guys scribbling on cocktail napkins), the original supply-siders believed that you could simultaneously reduce unemployment and inflation while accelerating economic growth. They thought that output — supply — had been overlooked in favor of aggregate demand and that the best way to focus on the supply side was through changes in then-staggering marginal tax rates.
Far from being the work of a “tiny coterie of right-wing extremists,” the shift toward supply-side thinking was bipartisan. Although they didn’t agree with every specific detail of Kemp-Roth or the Reagan tax cuts, Democrats Lloyd Bentsen, Russell Long, and Sam Nunn endorsed many of the key macroeconomic premises. President Reagan’s 1986 tax reforms were drafted with the help of liberal Democrats Bill Bradley and Dan Rostenkowski.
Given the disappearance of stagflation and the failure of the Reagan tax cuts to live down to the more dire liberal predictions, a pretty good case can be made that these policies worked. The U.S. economy grew by a third, unemployment was cut in half between 1982 and 1989, and inflation returned to the single digits, where it has remained under three subsequent presidents of both parties. There have only been two mild recessions, totaling 16 months, in the last 23 years.
Chait’s rejoinder might be, “So what?” He points out that a fairly impressive postwar economic expansion was possible despite stupefying marginal tax rates, with the top bracket reaching 91 percent until 1964 and 70 percent until the Reagan era. He doesn’t acknowledge, however, that government was in many respects smaller back then or that the tax code was riddled with loopholes making effective rates lower. He also neglects the fact that economic growth, frequently anemic in the high-tax 1950s, accelerated each time rates were pared down.
Besides the revelation that some supply-siders were weirdoes, Chait does score real points. Conservatives have made some implausible claims about tax cuts (Brendan Nyhan lists several Bush administration pronouncements along these lines) and were wrong to predict that the Clinton tax increase would cause a recession (although liberals frequently exaggerate that tax hike’s deficit-shrinking powers). Tax cuts seldom “starve the beast” or “pay for themselves.”
All of these points are less devastating than they at first appear, however. There is substantial evidence (pdf) that revenue losses due to pro-growth tax cuts are short-lived. That certainly was the nation’s experience after major tax cuts in the 1920s, 1960s, 1980s, and this decade. Sure, Reagan signed tax increases. But he was also a net tax cutter, the top rate was just 28 percent when he left office — and revenues were 99.4 percent higher. Those tax cuts didn’t pay for themselves, as early supply-siders have made clear, but they didn’t emaciate the federal government either.
Even Chait, a smart writer when he’s not being a smart aleck, occasionally seems to grasp how limited his case really is. He concedes that postwar economic growth occurred “despite” rather than because of confiscatory tax rates. He allows that the Reagan tax cuts may have “contributed around the margins” to the 1980s boom and the Bush tax cuts may have “enhanced” current growth.
What we have here is the beginning of a nuanced argument against tax-cut utopianism advanced by an author who would rather contend that Republicans are deliberately trying to make the rich richer and the poor poorer. To paraphrase Chait’s assesment of the supply-siders, he has taken the germ of a decent point and stretched it, beyond all plausibility, into a monocausal explanation of the political world. Too bad.
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