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Supply-side economics and the growing deficit

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Jonathan Chait cites the compromise between former president George H.W. Bush and Senate Democrats to increase taxes and cut spending as conservatism's 'one success' in the past few decades. While this may be a somewhat harsh assessment of conservatives' political successes, I think Chait makes a good point on the merits of the senior Bush's tax compromise. As the chart below shows, the increased tax revenues, coupled with spending cuts, led not only to smaller government, but also to a more balanced budget than this country had seen since 1969:

Essentially, President Bush struck a deal with the Democrats to increase the top marginal tax rate from 28% to 31%, and the Democrats agreed to a package of spending cuts outlined by the president. As you can see in the above graph, for a very brief period of time following this compromise, revenues outpaced spending. This allowed the next president, Bill Clinton, to continue to balance the budget during his presidency.

This ties in to an article written by National Review's Kevin Williamson this past April. In it, Williamson dismantles the current 'magical thinking' being touted by supporters of supply-side economics and the Laffer curve. The notion behind supply-side economics is essentially that tax-cuts can be offset to some degree by the additional revenue brought in from increased economic productivity. As Williamson notes, the originators of this concept never believed that tax cuts would make up entirely for the lost revenue, but would offset about 30% of the total cuts. The rest would need to be made up for by cuts in spending. Those cuts never really materialized, and the narrative on supply-side economics evolved to the point where its backers believed (or at least said they believed) that increased productivity would offset 100% or more of the lost revenue – a claim that has never been well substantiated.

As you can see in the graph above, the supply-side theory actually led throughout the Reagan years to spending outlays far exceeding revenues. Republicans and Democrats alike were unable to slash spending in proportion to their tax cuts. This was replicated again in the Bush years, and continues today. The only time this country had even the rumor of fiscal sanity was following Bush's tax hike and spending cuts compromise.

Conservatives should take a long hard look at the above graph and let the implications sink in a bit. Supply-side economics, or at least the modern myth of supply-side economics, can actually do quite a bit more harm to our nation's fiscal predicament than plain old-fashioned common sense governance.

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A modest increase in taxes coupled with a comprehensive package of spending cuts might be the only way out of our current fiscal nightmare. Either that or we leave the whole mess for our children and grandchildren to sort out.

There are many great reasons to keep taxes low and economic productivity high, but unless the political will to severely cut spending – including defense spending – materializes, then we should keep compromises like the one President Bush made on the table.

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