The Obituary of Supply-Side Economics

Morning   Click for larger version of chart

By Patricia L Johnson and Richard E Walrath

Dr. Bernanke, Federal Reserve Board of Governors Chairman, testified before the U.S. House Budget Committee this morning [October 20, 2008] and was asked to answer with a simple ‘yes’ or ‘no’  whether or not the United States is in a recession.  Bernanke stated he could not answer the question with a yes or no.

Why not?

Dr. Bernanke is a former member of the Business Cycle Dating Committee so he certainly knows what it takes to determine whether or not we’re in a recession, but it’s not his determination to make. 

Members of the National Bureau of Economic Research, Business Cycle Dating Committee, are the people that determine when a recession begins and when it ends.  They do not wake up one morning, read the NYT. and determine over coffee the US is in a recession.  That determination is made only after considerable research indicating a significant economic decline lasting more than a few months in specific areas.

The normal state of our economy is expansion.  The period from a "trough"  to a "peak" signifies the beginning and the end of an expansion.   Declines in the following economic indicators over a period of months are used to determine the beginning and ending of the business cycle peaks and troughs:

  • GDP
  • Real income  (personal income less transfer payments)
  • Employment
  • Industrial production
  • Wholesale-retail sales (volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes).

Real GDP is the single best measure of the economy for determining peak and trough dates, therefore considerable weight is given to real GDP issued by the Bureau of Economic Analysis of the Department of Commerce.   BEA estimates are only available quarterly; therefore monthly real GDP estimates prepared by Macroeconomic Advisers are also taken into consideration.

Is it any wonder the economy of this country is failing?   Our President received a Master of Business Administration from Harvard Business School, yet he will probably go down in the record books as the only president in the history of our country whose economic policies have created two terms with a recession in each. 

How did this happen?

Jean Baptiste Say, a French economist, came up with Say’s Law, a hundred years ago which states simply "Supply creates its own demand".

President Bush believes in supply side economics aka ‘trickle down economics’ as indicated during a September 20, 2007 press conference:

"I’m a supply-sider.  I believe in supply-side economics, when properly instituted, enables us to achieve certain objectives.  One, people find work and there’s hope in the economy.  Two, that supply-side economics yields additional tax revenues.  And, if we’re smart about how we manage the fiscal budget, it leads to balance, and that’s what we have done…"

Republicans point to the back-to-back terms of President Ronald Reagan as a huge success for supply-side economics. Reagan received much applause from supply-siders because of his tax cuts for the rich, and big business, of course.

The fact of the matter is “Reaganomics” was a dismal failure for this country. Yes, revenues did increase by $474.1 billion dollars during the Reagan 8-year term of office, but each and every year resulted in a budget deficit and by the end of his 8-year term Ronald Reagan had increased the federal debt by almost $1.7 trillion dollars – 3.5 times the amount the revenues increased.

Historically, the national debt has risen in periods of war when the costs of war have generally been financed by borrowing rather than raising taxes. The entire Reagan presidency was during peacetime so there was not any war costs involved.

Yet, the debt, as a percentage of GDP ballooned from 26.1 percent of GDP when Reagan took office, to a whopping 40.6 percent of GDP when he left office.

The majority of working men and women in this country know little, or nothing, about economics.  It’s a complicated subject that’s extremely boring so we tend to ignore the numbers and allow the media to interpret the numbers for us.   What happens when the media distorts the truth?

The following was written by Stephen Moore for the Wall Street Journal

"In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion".

Ronald Reagan signed The Economic Recovery Tax Act of 1981 (PL 97-34) into law on August 13, 1981. PL97-34 contained 300 tax provisions and took three years to implement. Tax laws are extremely complex and simply stating the highest personal income tax rate was cut from 70% to 28%, without listing the lowest and highest tax bracket or tax base, is somewhat misleading.

Stating federal tax receipts almost doubled from $517 billion to $1,032 is not accurate. Stephen Moore is using the beginning tax receipt number from 1980 and the ending tax receipt number from 1990, a 10-year period. You cannot use 9-years of tax data for an 8-year term of office.

Reagan was the best shot supply-siders had.  It was "Morning in America" then, if you believe the Reagan PR machine which was a good one.  The Reagan myth will be around for a long, long time because we are not getting the kind of reporting from the media we deserve.

The people in this country have absolutely no one to blame for the economic mess this country .  We’re lazy and don’t want to be bothered finding out what is going on in the political arena. 

© 2008 Patricia L Johnson and Richard E Walrath

Richard E Walrath is a former budget analyst and resides in central Ohio with his family.  Patricia L Johnson is a former special assignment writer/photographer.  Johnson and Walrath are co-owners of the Articles and Answers News and Information sites.

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