Last week, Howard Gold ofMarketWatch wrote a widely read column called “It’s Time to Bury Supply-Side Economics.” Here’s how the argument went, Gold’s words:
“Supply-side economics held that reducing marginal tax rates would spur economic growth, create jobs and even generate tax revenue for the government….But [its advocates] rarely mention the 1990s or the 2000s. Maybe that’s because those two decades were almost a perfect controlled experiment that shattered their pet theories: President Bill Clinton raised marginal tax rates and the economy boomed and jobs were plentiful. President George W. Bush cut them and we got only modest job growth.”
Gold went on to cite the numbers on job growth, 20 million new ones under the Clinton tax increase and 8 million under the W. tax cut. Gold also said some things about tax cuts and increases having no effects on the 1920s and 1930s, and that the rich didn’t “work more” in the 1980s as supply-side economics said they should have.
Let’s fact-check, in particular the definition. What’s supply-side economics again?
There is a canonical statement. It was made by the founder of supply-side economics, the future economics Nobelist Robert A. Mundell, in 1971. Here it is, and you bet the italics are original: “The correct policy mix is based on fiscal ease to get more production out of the economy, in combination with monetary restraint….The increased momentum of the economy provided by…a tax cut will cause a sufficient demand for credit to permit real monetary expansion at higher interest rates.” By the way, the fiscal ease of which Mundell spoke referred to marginal tax cuts.
All advocates of supply-side economics over the years, whether Mundell, the historic Congressman Jack Kemp, the influential Wall Street Journaleditor Robert L. Bartley, Arthur Laffer, Alan Reynolds, Jude Wanniski, Larry Kudlow, whoever, tightly followed Mundell’s lead from 1971.
The main thing being that there is a policy mix. This is two things, not one, by definition. There has got to be tax reduction in combination with strong currency policy. Maybe we should put it in reverse so people get the picture: there has to be strong currency policy in combination with tax cuts. How about italics: there has to be strong currency policy in combination with tax cuts.
No “policy mix,” no supply-side economics—OK? In the Reagan years, there were tax cuts, real nice ones, on the income tax, down at the top from 70% to 28%, in the context of strong-dollar policy and a low, stable gold price. Not perfect monetary policy, to be sure, in that Paul Volcker’s Fed, in 1981-82, did not heed the last portion of Mundell’s definition for “real monetary expansion at higher interest rates” in the wake of a money-demand inducing tax cut, and hence a recession, but pretty close all the same after 1982.
The Clinton years? You had strong dollar policy, some of the most heroic of the entire fiat-currency era. And guess who talks about this all the time—Larry Kudlow, whom Gold inexplicably called out in his piece for being silent on the Clinton boom and the Bush mediocrity. Clearly Gold does not listen to Kudlow’s essential Saturday morning radio show, where this stuff is a refrain. You’ve never heard Kudlow go on about “King Dollar?”
Moreover, there was a serious tax cut in 1997, when the capital gains rate went down by eight points. And there was a major spending reduction in the wake of the income-tax increase Clinton is famous for, with the budgetary surplus implying future tax cuts. Of course the stock market went up, and all consistent with supply-side economics. Supply-siders don’t talk about this? Alan Reynolds and Arthur Laffer sure do.