I appreciate the way your Substack and your channel remain relatively apolitical. It is sobering and a much needed break from all of the noise. However, in this particular case I do not think we can understand the MAGA movements preference for supply side policies without looking at the broader overtones of populism. Central to all populist movements is a perceived or actual battle between a “commoner” and an “elite”. In the case of MAGA that elite is often times portrayed as a hyper progressive intellectual elite that supposedly exercises undue influence in American culture. As such I think that the preference for supply side economics and specifically the incomplete sort that ignores education investment is in many ways a result of this broader populist narrative.
I realize there is some validity to the Laffer curve but it can be overstated. We need to look at the effective tax rate (which I believe is on the low side). And we tax to support spending. To your point, spending on education and healthcare is an investment in the future. Building another bomb doesn’t have the same rate of return.
Born in 1959 so I have seen and experienced a lot. People have no idea that before Regan the prime interest rate was around 18%, there was a full blown recession, people were begging for McDonald jobs, steel plants, coal plants were going under, industrial economy was giving way to computers and data. In the 1980 prime went to 8.5% was dropping because they wanted people to invest their dollars in the stock market, buying houses, cars, educations and vacations. I worked in a bank and one Monday all the calls were about refinancing their mortgages and our phone lines were slammed. This went on for weeks. Then home equity lines of credit were developed and marketed. It was marketed as a way to consolidate debt. Banking laws also became relaxed and I remember a big stock market correction, people went to banks for unsecured lines of credit. In the 1990s it was the stock market, debt, and spending it as quickly as you made it. McMansion, the personal computer and the internet. There really wasn’t a live below you means. It was crazy.
I left a rather long response to your question but I keep having to make a profile and upload it. Nope. I will say something here, since the 1970s we have been on a trajectory where middle class, and lower incomes have born the brunt of the societal changes, and economic ones. No rewards, debts, the ending of careers, pensions gone and families devastated by lack of support services to transition to better jobs. If we continue, we will be the rich class and everyone else trying to survive. Eventually a breakdown of family, society, and what makes us who we are. The grift is in
Great piece. I think we also have problems in the nomenclature around 'consumption' and 'investment'. Are programs like SNAP or Medicare consumption? Once could easily argue it's investment in human capital, especially when it impacts children.
Then any cuts to such programs could be framed as cuts to investment and growth.
Supply side economics/trickle down economics predates Reagan by many years. The great J K Galbraith criticized it in his work of 1958 The Affluent Society
I was alive in 1980 ;-). Laffer's curve was perfectly valid -- the only question is at what top marginal income tax rate does income to government start to fall? The top marginal rate in 1980, when Reagan was elected, was 70% -- he reduced it to 50%. Top marginal rate for capital gains was 28% -- this was about when the trend to paying CEOs with stock options really got going (and when the practice of CEOs manipulating stock prices became a problem). It is useful to remember that the top marginal rate when John Kennedy was elected in 1962 (I was alive then too ;-)) was 91% -- he reduced it to 70%. A consensus figure among economists for the top of the Laffer Curve (on the basis of evidence, not mere assertion) is 65 or 70%. Fill in the dots... Oh, and while we are on the subject, Alexandria Ocasio-Cortez' proposal for the top marginal rate is... 70%, including capital gains. Not that I am necessarily a proponent of maximum realistic income redistribution...
Thanks for sharing your memories of the "good ol' days". I appreciate the context on the marginal tax rate at that time. That itself deserves a post. I am intrigued by what t* is that will optimize revenue.
Hi Phillip, I'm starting a new monthly series that will feature a highlight of our Reader of the Month. I plan on highlighting you, unless you do not want that! I thought It would be best to ask for permission :)
A well done analysis. I appreciated the shout out to Romer. I have always wondered how the government could make policies that applied to a great number of people from the supply side. Like start up capital or something else. You definitely highlight some of the short comings of the methodology. It is like all other things in economics a trade off that need proper balance to be effective. Best Newsletter yet.
Can’t wait to read it. I am surprised by how much laffer curve still hangs around. Why are we so convinced that the current tax rate is higher than the optimal tax rate?
I'm not so surprised because it has a good story that's easy to follow logically. We have to rely on evidence, rather than logic, to disprove it, and people aren't as receptive to the evidence.
The same could be said for Keynesian economics. Macro theories are still evolving. Just as there are neo-Keynesian and post-Keynesian theories, not to mention augmentations to less comprehensive macro models like Solow, there needs to be updating of the simplistic version of supply side models. I would say that it isn't just logic that poses a problem here. Theoretically, the model is fairly sound (but remember as Homer Simpson said, "in theory, communism works). A further drawback for supply-side models is how linked it is with politics. Rarely are politicians good messengers. Reagan was an exception. You may not have liked his message, but he could deliver it well.
I appreciate the way your Substack and your channel remain relatively apolitical. It is sobering and a much needed break from all of the noise. However, in this particular case I do not think we can understand the MAGA movements preference for supply side policies without looking at the broader overtones of populism. Central to all populist movements is a perceived or actual battle between a “commoner” and an “elite”. In the case of MAGA that elite is often times portrayed as a hyper progressive intellectual elite that supposedly exercises undue influence in American culture. As such I think that the preference for supply side economics and specifically the incomplete sort that ignores education investment is in many ways a result of this broader populist narrative.
Thanks. I appreciate your take on this and see how it makes a lot of sense to me.
I realize there is some validity to the Laffer curve but it can be overstated. We need to look at the effective tax rate (which I believe is on the low side). And we tax to support spending. To your point, spending on education and healthcare is an investment in the future. Building another bomb doesn’t have the same rate of return.
Born in 1959 so I have seen and experienced a lot. People have no idea that before Regan the prime interest rate was around 18%, there was a full blown recession, people were begging for McDonald jobs, steel plants, coal plants were going under, industrial economy was giving way to computers and data. In the 1980 prime went to 8.5% was dropping because they wanted people to invest their dollars in the stock market, buying houses, cars, educations and vacations. I worked in a bank and one Monday all the calls were about refinancing their mortgages and our phone lines were slammed. This went on for weeks. Then home equity lines of credit were developed and marketed. It was marketed as a way to consolidate debt. Banking laws also became relaxed and I remember a big stock market correction, people went to banks for unsecured lines of credit. In the 1990s it was the stock market, debt, and spending it as quickly as you made it. McMansion, the personal computer and the internet. There really wasn’t a live below you means. It was crazy.
Thanks for sharing your personal experience. Do you think there was a time that was better or worse in economic history?
I left a rather long response to your question but I keep having to make a profile and upload it. Nope. I will say something here, since the 1970s we have been on a trajectory where middle class, and lower incomes have born the brunt of the societal changes, and economic ones. No rewards, debts, the ending of careers, pensions gone and families devastated by lack of support services to transition to better jobs. If we continue, we will be the rich class and everyone else trying to survive. Eventually a breakdown of family, society, and what makes us who we are. The grift is in
Great piece. I think we also have problems in the nomenclature around 'consumption' and 'investment'. Are programs like SNAP or Medicare consumption? Once could easily argue it's investment in human capital, especially when it impacts children.
Then any cuts to such programs could be framed as cuts to investment and growth.
Supply side economics/trickle down economics predates Reagan by many years. The great J K Galbraith criticized it in his work of 1958 The Affluent Society
Thanks for your comment and clarification. Very helpful
I was alive in 1980 ;-). Laffer's curve was perfectly valid -- the only question is at what top marginal income tax rate does income to government start to fall? The top marginal rate in 1980, when Reagan was elected, was 70% -- he reduced it to 50%. Top marginal rate for capital gains was 28% -- this was about when the trend to paying CEOs with stock options really got going (and when the practice of CEOs manipulating stock prices became a problem). It is useful to remember that the top marginal rate when John Kennedy was elected in 1962 (I was alive then too ;-)) was 91% -- he reduced it to 70%. A consensus figure among economists for the top of the Laffer Curve (on the basis of evidence, not mere assertion) is 65 or 70%. Fill in the dots... Oh, and while we are on the subject, Alexandria Ocasio-Cortez' proposal for the top marginal rate is... 70%, including capital gains. Not that I am necessarily a proponent of maximum realistic income redistribution...
Thanks for sharing your memories of the "good ol' days". I appreciate the context on the marginal tax rate at that time. That itself deserves a post. I am intrigued by what t* is that will optimize revenue.
Hi Phillip, I'm starting a new monthly series that will feature a highlight of our Reader of the Month. I plan on highlighting you, unless you do not want that! I thought It would be best to ask for permission :)
A well done analysis. I appreciated the shout out to Romer. I have always wondered how the government could make policies that applied to a great number of people from the supply side. Like start up capital or something else. You definitely highlight some of the short comings of the methodology. It is like all other things in economics a trade off that need proper balance to be effective. Best Newsletter yet.
Supply side economics would be the first chapter in next book, "Lies Your Economics Teacher Taught You"
Can’t wait to read it. I am surprised by how much laffer curve still hangs around. Why are we so convinced that the current tax rate is higher than the optimal tax rate?
I'm not so surprised because it has a good story that's easy to follow logically. We have to rely on evidence, rather than logic, to disprove it, and people aren't as receptive to the evidence.
The same could be said for Keynesian economics. Macro theories are still evolving. Just as there are neo-Keynesian and post-Keynesian theories, not to mention augmentations to less comprehensive macro models like Solow, there needs to be updating of the simplistic version of supply side models. I would say that it isn't just logic that poses a problem here. Theoretically, the model is fairly sound (but remember as Homer Simpson said, "in theory, communism works). A further drawback for supply-side models is how linked it is with politics. Rarely are politicians good messengers. Reagan was an exception. You may not have liked his message, but he could deliver it well.
Brian, so many good quotes here! I appreciate your take, and I agree with Reagan being a great communicator.