Supply-side Crapola

Just about every week now I’ve been appearing on Larry Kudlow’s CNBC TV show, talking about the economy. I rather enjoy it. I debate Steve Moore, from the editorial board of the Wall Street Journal. Larry is a card-carrying unrepentant supply-sider who still believes low taxes lead to faster economic growth, which trickles down to everyone. Unfortunately for Larry, supply-side economics is one of those rare economic theories to have been tried in practice (the Reagan administration was the last full-fledged experiment)and failed miserably. By the end of the Reagan years, the federal budget deficit had ballooned and the only thing that trickled down was debt. The first George Bush was forced, finally, to raise taxes (despite what people may have read on his lips) because the bond markets were in full-scale revolt. By the time I got to Washington at the end of 1992 as head of Clinton’s economic transition team, the U.S. budget deficit was $300 billion a year as far as the eye could see. Alan Greenspan made it quite clear that unless we raised taxes, cut spending, and brought the deficit under control, he and the Fed would keep interest rates high to avoid inflation. The rest is history. Clinton reduced the deficit, Greenspan cut interest rates, and the nation enjoyed the longest and most powerful economic expansion in history, including 22 million net new jobs and wage hikes for almost all Americans.

But now little Bush is doing another Ronald Reagan. He has cut taxes, especially on the wealthy. As a result, the deficit has exploded, median wages are stuck in the mud, the Fed is now busy raising rates, and we’ve had the most tepid economic expansion in thirty years. But none of this seems to dampen supply-siders enthusiasm. Every time I’m on the show, Larry claims all is well with the economy and urges Bush to cut taxes even more. I admire anyone who can stick to his guns when the guns are aimed at his foot.

Larry is a nice fellow and I enjoy sparring with him. Steve Moore is also a decent man even though he’s associated with the most right-wing editorial page in modern American history. Whenever I want to test the wisdom of my thinking, I check out the Wall Street Journal’s editorials and comments. Only when I see they are in complete disagreement with me do I have confidence I’ve got it exactly right.