They just don’t get it. Or more accurately, it doesn’t meet their needs. The political left and their fellow travelers cannot seem to grasp the logic and historical success of supply side economics, particularly as it relates to fiscal policy that gives priority to marginal tax rate cuts. To supply side guru Art Laffer it’s pretty simple: There are two income tax rates that result in zero tax revenues–100% and 0%–and the reason should be clearly obvious. The policy issue is to determine the optimum marginal rate to maximize economic growth, and this is the key–it must be scored on a dynamic basis, meaning giving effect to the adjustments in human and economic behavior induced by changes in marginal rates. The implementation of this concept in national fiscal policy has worked every time to spur economic growth and job creation.
A few months ago, I was inspired to respond to an essay in The Houston Chronicle by my friend Bill King (far from a leftist, by the way), who wrote “a look at the data indicates that since World War II, there has been no positive correlation between lower tax rates and stronger growth”. My response was in part as follows:
Economic facts have the unique ability to support lots of differing opinions, particularly when they are used in ways that don’t control for dependent factors, so I won’t get into the details of a number of instances in which mitigating circumstances prevent isolation of tax policy for purposes of evaluating its impact. Suffice to say that tax rates at the margin have always had an enormous impact on the myriad of incentives which drive economic growth. Supply side economics works, and has done so each time it has been employed, from the Pharaohs to Kennedy to Reagan to Bush, and in the particular case of Reagan was primarily responsible for the longest sustained period of economic growth in U. S. history. For further confirmation, examine the comparison of the recovery from the 1981-82 recession to the lame recovery from the recent recession. For the authoritative work on this phenomenon, I recommend The Way the World Works, by Jude Wanniski, and of course the work of Arthur Laffer.
Laffer emphasizes that “all economic problems are about removing impediments to supply, not demand”, and it has been a constant source of amazement to me that we have allowed the evidence of the success of policy founded on this principle to be so discredited by the failed Keynesians and their acolytes like Paul Krugman, and that the leadership of the party whose most recent success has been fueled by supply side policy has found it so difficult to defend.