Ever since the Reagan administration, supply-side economics has been at the core of Republican economic philosophy. Every GOP candidate, at every level of politics, has to swear allegiance to the theory if he or she hopes to retain credibility with the party base.
In a post yesterday, we took a look at the theory as it illustrated in the Laffer Curve. Now it’s time to look at how the theory has worked in practice, focusing on the two separate experiments with supply-side economics that we’ve run in the past 30 years.
The first began with the Reagan tax cuts in 1981 and ran to 1993. The second began in 2001, with passage of the Bush tax cuts. And in between of course, we had the Clinton administration, which took a very different approach. In 1993, President Clinton pushed a major tax hike into law in order to close the deficit, the very antithesis of supply-side theory. And by the end of his term, the deficit had indeed been eliminated, if only temporarily?
So how do we gauge the effectiveness of supply-side theory in practice? I propose we look at three specific measures:
(Note: All data below have been adjusted to account for inflation.)
After the ‘81 Reagan tax cuts, private nonresidential investment over the next seven years grew at an annual rate of 2.8 percent.
After the ‘93 Clinton tax hike, private investment over the next seven years grew annually at 10.2 percent.
After the 2001 Bush tax cut, private investment grew annually at 2.7 percent.
(Data source: CAP/EPI study, Sept. 2008,, based on Bureau of Economic Analysis data.)
From 1981-1993, federal revenue increased by 20.7 percent over 12 years.
From 1993-2001, federal revenue grew by 46.6 percent over 8 years.
From 2001-2009, federal revenue decreased by 13.9 percent. (Even if you don’t include the deep recession year of 2009 — you might say we’re invoking the mercy rule — revenue increased just 3.3 percent over the eight years of Bush’s presidency.
From 1981-1993, real GDP grew by an annual average of 2.97 percent.
From 1993-2001, real GDP grew by an annual average of 3.56 percent.
From 2001-2009, real GDP grew by an annual average of 1.56 percent.
(Source: U.S. Bureau of Economic Analysis)
In conclusion, in all three categories central to the claim of supply-side proponents, the economy performed significantly better in the wake of tax increases than it did in the wake of major tax cuts.
Confronted with such data, the first word out of a supply-sider’s mouth is usually “But ….,” followed by a series of rationalizations for why the economy didn’t perform in real life as supply-side theory dictates it should have. Some of those excuses, such as the fact that the economy under Clinton benefited by the high-tech boom, are legitimate. Others, such as the claim that Bush had to deal with the economic fallout of Sept. 11, are not. There was no major economic fallout in the wake of the terror attacks.
And the excuses themselves, whether lame or legitimate, further undercut the lofty claims of supply-side advocates. If the economic benefit of major tax cuts is so weak that it can be washed away by larger trends, to the point that you can find no real evidence of it in the data, and if the economic damage of tax increases is so minor that it too can’t be found in the data, then what exactly is this supply-side theory about in the first place?
I mean, other than to serve as a handy rationalization for perpetual tax cuts.