My turn, Eric R. Hake: Is America better because of supply-side economics?

Published 12:00 am Sunday, June 30, 2019

By Eric R. Hake

On June 19, President Donald Trump awarded economist Art Laffer the Medal of Freedom, the highest civilian award. This award gave economists an opportunity to talk about the U.S. budget, our national debt and what we have done to improve economic growth and prosperity in our country.  

Laffer helped popularize an approach to economic growth during the 1970s and 1980s called supply-side economics. The name “supply side” means this theory is an approach to thinking about the economy from the point of view of suppliers and producers. 

Categorizing theory as either supply-side or demand-side is useful. A successful and thriving economy must have both supply and demand. If the economy isn’t working, is it the supply side? Is it the demand side? 

In the 1970s — with high inflation and unemployment (stagflation) — many people thought the economy suffered from too much government regulation and that U.S. businesses were being stifled by high taxes and red tape. Therefore, the economy was unable to compete effectively on the global market. This belief was the foundation of the Reagan Revolution — a very successful bid for the presidency and probably the most successful U.S. political agenda of the postwar era.

The key to fixing this problem was to grow the supply side. As businesses expanded, the rest of the economy would pick up, people would have more goods to buy and our standard of living would improve. To initiate this growth, we would cut taxes on the wealthy and business owners (the upper income brackets), they would engage in investment and we’d be off to the races.

Laffer’s theory — the Laffer Curve — explained how tax cuts for the wealthy paid for themselves. Normally, lower tax rates cause lower tax revenues and budget deficits, but not so with this theory. Because the tax cuts would lead to massive economic growth, the Laffer Curve explained how we could cut taxes, increase our tax base and increase our total tax revenues. We could keep a balanced federal budget, even while massively cutting taxes on the upper income brackets.   

As immortalized in the hit movie “Ferris Buehler’s Day Off,” President George H.W. Bush referred to this theory as something called “voodoo economics.”  After Bush was selected as Reagan’s running mate, he stopped using this phrase. 

Unfortunately for Laffer, the reality is Reagan’s Economic Recovery Tax Act of 1981 did not pay for itself. 

During the 1980s, the national debt tripled. The same was true in the 1990s, 2000s and 2010s. While many have kept the faith, none of the tax cut plans since 1981 paid for themselves or created a balanced budget. The economists who explained how budgets balance themselves now use the national debt they created to cut government services. 

Looking at 2019: Do we still suffer from a lack of supply? 

Over the past 40 years, we have boosted supply while cutting demand. As we cut taxes, 80% of households have seen their share of income fall and, for many, real incomes have actually fallen. In order to keep demand up with supply, we have been working longer hours, more individuals in every household are working, and households have increasingly used debt, borrowed purchasing power, to keep up with the Joneses. 

What happens when you have growing supply and stagnant or falling demand? Growing income, wealth inequality and falling average prices. Does that sound like the last 10 years? The Great Depression? Anyone?

While the dominant economists continue to propose tax cuts on upper incomes, capital gains and business write-offs, it appears the supply side is actually being hurt by not having enough demand. The current model is bad for demand and bad for supply.

The problem, of course, is that we can never change the minds of the economists who are running our economy; the only solution we have is to not mind changing our economists. 

This is our “new normal.” Supply-side economic theory and the Laffer shuffle have been the dance craze of the decades. Our society has become accustomed to an asset bubble and debt-fueled binge party.

Our current solution is to gird ourselves for a more repressive political system, where social and economic tensions are pressurized until they explode. Talk about a road to serfdom. 

Will freedom from taxes solve our social and economic ills? It all depends on what you think is the problem — the supply side or the demand side. For those who focus on the demand side, we need a tax system that makes sure there is enough demand for all the supply. 

Taxes, as one wag put it, are the price we pay for civilization. As we’ve now realized, freedom isn’t free and neither is civilization. 

Eric R. Hake is interim dean at Catawba College’s Ketner School of Business and the Elias B. Saleeby professor of business.