Here are is an interesting blog post from the Financial Times' Martin Wolf that debunks supply side economics. It is worth reading, especially in light of the pending expiration of the Bush tax cuts. Here is an excerpt:
True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).
Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,
Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).
No one likes paying taxes and I want the tax cuts that are set to expire to be extended. Politicians need to get serious about spending cuts, but this is an issue neither side of the aisle wants to deal with. The areas that need cutting are too popular with voters. Wolf argues that this is what's so seductive about supply side economics, "Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue." It's too bad the theory has not worked. It is my opinion that the economy is too weak to absorb any tax increases, so I'd be surprised if the Bush tax cuts are not extended.
Rick Santelli, a CNBC on-air editor, was on NBC's Meet the Press yesterday. He is a huge deficit hawk and stated that he was still against TARP and the stimulus package, and pretty much any government economic assistance that adds to the deficit. Rick has valid point and his opinions are well known to anyone who watches CNBC. (I feel that TARP was hugely beneficial in preventing a larger financial meltdown, and that the ultimate cost will be small as most TARP recipients have repaid their loan.) I like Santelli, he is smart and has excellent analysis, especially on credit markets and interest rates. I wanted to know his opinion on the expiring tax credits, but Meet the Press host David Gregory chose not to ask Santalli the question, opting instead to ask it to some former Obama administration communication person. Gregory was obviously turning an economic discussion in a potential political gotcha moment. The former Obama official gave some convoluted, non-response response, about what you'd expect.
Gregory failed in not questioning Santelli on the tax cut extensions, especially after asking Santelli his opinion on government spending. Gregory was practicing political theater, not journalism. Santelli's opinion on extending the Bush tax cuts is important. If he is as serious a deficit hawk as he comes across, his answer should be clear - let the tax cuts expire to allow for deficit reduction. I would have been shocked if Santelli had not given a supply-side answer about the need to extend the tax cuts to allow more money into the economy, and therefore more tax revenue.