What's Left Of The Supply-Side? The movement's leaders seem more concerned with defending their dogma than with affecting policy.
(FORTUNE Magazine) – This should be a time of renaissance for supply-siders--that band of economists, pundits, and policy wonks whose credo is "Lower Marginal Tax Rates" and whose golden age was the Reagan Administration. After the dark age of Bill Clinton, one of their guys--George W. Bush--is in the White House. The Administration's top economist--Larry Lindsey--wrote The Growth Experiment, a canonical book of the supply-side movement. The new Administration's first priority was enacting a $1.6 trillion tax cut that lowered marginal rates across the board, and its new budget calls for still more tax cuts.
But supply-siders are a pretty sullen bunch these days. They damn Bush with faint praise, and support his policies grudgingly when they support them at all. The tax bill was flawed, they say, because it phased in rate cuts too slowly; Lindsey is a turncoat, and other Republican policy officials should resign.
The congregation of the supply-side faithful has dwindled since the 1980s, though its leaders still control some prominent pulpits, including the editorial pages of the Wall Street Journal, the National Review, and Forbes. They seem more concerned with defending the purity of their dogma than with affecting policy, and their disdain for the Administration's thinking is matched by their lack of input into its policy. (They complained about the stimulus plan; they didn't help shape it.) The result is that they're making themselves irrelevant.
When supply-side economics was ascendant in the late 1970s, it forced the policy establishment to confront the fact that tax rates have incentive effects on human behavior. While economists understood this in theory, they had long ignored it, and politicians had acted accordingly: The top marginal rate on personal income stood at 70%. The supply-siders argued that lowering marginal rates would encourage entrepreneurship and economic activity.
Politicians eventually listened. At the start of the Reagan Administration, Congress lowered the top marginal rate on personal income to 50%; in 1986 Reagan went further, rewriting the tax code and slashing the top rate to 28%. Economists' assessments of the Reagan tax revolution vary (the supply-siders credit it with everything good that's happened since; most other economists give it mixed but not necessarily negative reviews). But nobody except a small number of outright leftists wants a return to 70% marginal tax rates these days. Hardly anyone even argues for 50%. Bill Clinton pushed the top rate back to almost 40%, but once admitted he'd gone too far.
As the policy establishment absorbed the supply-side lesson and moved on, however, the supply-siders themselves stayed put. They warned that Clinton's tax increases would ruin the economy, and they were proved wrong. Since then they've prescribed tax-rate reductions for whatever has ailed the economy. Tax-rate reductions, in fact, are the only economic policy tool of which they seem to approve. In an editorial attacking the thinking behind the original Bush stimulus plan in October, the Wall Street Journal ridiculed the very idea that the government could do anything to boost the demand side of the economy by, say, increasing government spending. "What spell has come over White House economic adviser Larry Lindsey," they wondered, who "once wrote a good book" about the benefits of Reagan tax cuts but now just seems confused?
Asked recently about such criticism, Lindsey says, "I don't think my views have changed at all" since The Growth Experiment. That analysis of the effects of the Reagan tax cuts, he points out, measured both its supply-side and demand-side impacts, and found that they were about equal. "I still think that's right," he says, noting that both the Bush tax bill last year and the original stimulus plan had about the same mix.
Lindsey is disappointed that the stimulus bill died. Though he expects the economy to recover this year nevertheless, he thinks the forecasts of most mainstream economists--that GDP growth will be three-quarters to a full percentage point lower without the stimulus plan--are about right.
Don't bother telling that to the supply-siders, of course. They have as little use for mainstream forecasts as they do for Lindsey or for anyone else they see as an apostate.
Long after World War II, the odd Japanese infantryman would emerge from a cave somewhere in the South Pacific, still armed and ready to fight and die in a war that had long since ended. Like those soldiers, the supply-siders have been in their caves too long. Guys, you can come out now. The war's over--and you actually won. But the world has moved on.
ROB NORTON, a former FORTUNE executive editor, is a freelance writer, editor, and consultant in New York City. He can be reached at email@example.com.