Supply Side Economics… Vindicated?


Some tedious budget stuff. Recently, the Congressional Budget Office released a report noting that, thanks to an unexpected revenue surge, the deficit wouldn’t be nearly as bad this year as last expected, or as bad as last year. Not surprisingly, Stephen Moore jumped all over this in the Wall Street Journal, arguing that the CBO’s numbers proved the Bush tax cuts “worked” and are boosting economic growth. Supply-side magic!

Fine theory, it’s just not true. The Center on Budget and Policy Priorities breaks down the increase in revenues. First, they are not due to higher-than-expected economic growth—which would have at least suggested that the Bush tax cuts are “boosting” the economy—since growth has not been unusually rapid or stronger than projected. Second, many of the factors that did cause the increase are temporary. About $50 billion of the increase came because of the expiration of a business tax cut—in other words, more revenues were raised because of a tax hike. Surprise, surprise. Most importantly, the recent revenue boost hasn’t come close to making up for the massive loss of revenue caused by all of the tax cuts since 2000, which is what needs to happen for “Reaganomics” to work. For more on this, see Angry Bear here and here.

Tax cuts do not pay for themselves. The deficit is much, much larger than it would be without the Bush tax cuts. In some ways, who cares? As James K. Galbraith argues in Mother Jones this month, deficits don’t seem to matter all that much. The last four years have certainly skewered the argument that deficits “crowd out” investment and kick up interest rates. More to the point, if Congress repealed all of the Bush tax cuts and spent the money on health, education, and public infrastructure instead, that would be perfectly fine by me. Borrowing money to invest in the future is how good corporations operate, and it’s a sound way for the country to operate. But we’re not doing that. And that’s a problem, because persistently high deficits mean that eventually borrowing costs will mushroom faster than the economy can grow, and fiscal Armageddon will descend upon us. It will come down to taxes versus letting retirees pick through garbage on the street, and seniors, I’m told, don’t much like garbage. The numbers are inexorable, and supply-side hand-waving doesn’t change the basic problems at hand.

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