Thursday, June 3, 2010

Thursday items.

The Democratic Leadership Council analyzes the Reagan years and supply-side economics.

While Europe drowns in debt, Switzerland is
cutting taxes and enjoying a surplus.

Via Bloomberg, Steve Hanke
says Estonia, Lithuania and Bulgaria shouldn’t rush to adopt the euro.

At The San Francisco Examiner, E.D. Kain
cites supply-side economics critic Jonathan Chait, who argues tax increases lead to balanced budgets.

A few quick points in response.

A) President Bush 41's 1990 tax increase contributed to a recession that caused tax revenue to decline from 1990-93.

B) Tax revenues did then rise above the average revenue trendline around 1994, as the economy recovered and President Clinton's tax increases took hold. Nevertheless, GDP growth in 1993-94 was sluggish compared with previous recoveries.

C) Despite the tax increase's bearish effect, the economy did expand, due in large part to President Clinton's decision to maintain the Reagan sound money policy. The dollar/gold price was stable near $350 from about 1987 to the late 1990s, a tremendous boost for U.S. and world markets.

D) Clinton's passage of NAFTA, another supply-side measure, provided a boost too, as did the fall of the Berlin Wall.

E) The second and more robust leg of the Clinton boom began around 1996, as markets anticipated a 28 percent capital gains tax cut the following year. The bull market that ensued flooded government with revenues.

E) Unsurprisingly, Kain/Chait ignore the politics of tax hikes. President Bush 41 was, of course, defeated in 1992, due in large part to his tax hike. Clinton raised taxes in 1993 and his party in Congress was routed the following year.

Politicos, be careful who you listen to.


  1. How do you think demography plays a role in ex-Soviet bloc nations like Estonia? That is, do the rules of supply-side economics require growing population. No economy, from what I can gather, benefits from shrinking or aging populations; but do different economic strategies work better than others under such conditions--which an aging and shrinking Europe are facing?

    I put it to you. Probably needs a post of its own, but I ask it here.


  2. I think David Goldman and Reuven Brenner are very smart about demographics. If you have a First Things subscription, see their piece, "The Needle's Eye." Some of the content can befound at:

    The point is, the only closed economy is the world economy. If a nation, say Estonia, is aging and shrinking, it needs to send its capital abroad to younger nations to seek a good return on investment in order to retire. Much of Europe and Asia (Japan and China) fits this category.

    The problem is, they won't invest in the Global South, as Goldman/Brenner call it, where most young people are, because currency fluctuations and fiscal policy are too uncertain.

    So,despite its problems, the USA has been their best bet for 30 years. This largely explains their huge appetite for US debt and equities.

  3. To add to what Sean has written, supply side actually allows an optimiztion of an economy. Other systems tend to distort the use of scarce resources and create waste through malinvestment.