Much of the recent discussion about supply-side economics has focused on its purported failure to reduce the deficit.
Such criticism is misplaced for many reasons which I'll discuss over the coming weeks. But today I want to discuss what supply-side economics is, what it says about the economy, and its track record.
Like every school of economic thought, supply-side economics is centered on prescriptions for fighting recession and unemployment.
Unlike the Keynesian and monetarist schools, both of which focus on raising consumption (i.e. demand) via either government spending or monetary stimulus, the supply-side model centers on production. Hearkening back to the classical economics that dominated from the 1700s to the 1930s, supply-side economics argues for sound money, ideally fixed in value against a stable commodity such as gold, and for removing barriers to production such as excessive tax rates, tariffs or regulation.
As a school of thought focused on fighting recession, supply-side economics is agnostic on the question of government spending. On its own terms, SSE has a very good record of reducing unemployment, cutting inflation, raising stock values, and increasing GDP.
A byproduct of those successes has been a general rise in government revenue over the past 30 years.
If your objective was to "starve the beast," the 30-year run of supply-side economics has been a colossal failure. Government revenue has poured in, almost without fail, despite lower tax rates.
So why are deficits still a problem?
Obviously, spending is a factor. But my primary answer is economic mismanagement.
You'll note in the chart above two big divots, coinciding with the recessions of 2001-03 and 2008-10. When the economy contracts, revenue falls. And, governments tend to spend more during contractions, so the deficit catches it coming and going.
These big revenue dips coincided with increased deficits, erasing the 2000 surplus and spiking again after 2007.
In this sense then, deficits are a symptom; recession is the disease.
The question isn't, why hasn't supply-side economics eliminated deficits? The question is, if SSE is so good at spurring growth, why have we had two sizable recessions this decade?
My answer in a future post.
A footnote: In the latter chart, note the deficit's fall from 2004-2007 after the big 2003 tax cut. While the subsequent recession blew the deficit to kingdom come, to the extent that tax cut spurred growth, it helped bring down the deficit.