Three days ago I posted on part of Bruce Bartlett's excellent chapter, "The Rise and Fall of Supply-Side Economics," in his book, The New American Economy. I promised to get to the fall part.
First, though, there's more interesting content on the "rise" that gives context to the "fall" part.
On deadweight loss from the the tax system, he cites work by Marty Feldstein and Ian Parry that finds a 30+ percent deadweight loss.
On taxation more generally, he documents the increasing consensus among tax economists in favor of lower marginal tax rates, elimination of special tax provisions that bias investment decisions, lower or zero taxes on capital, and a shift toward taxing consumption. My Hoover colleague and friend Ken Judd, a tax economist who's a registered Democrat, told me that he was at a meeting of tax economists at the Treasury which many of the leading tax economists in the country attended, and you couldn't tell from people's comments whether they had an R or a D after their name. Bartlett also quotes my favorite quote from Bob Lucas on the subject:
The supply side economists, if that is the right term for those whose research we have been discussing, have delivered the largest genuinely free lunch that I have seen in 25 years of this business, and I believe we would be a better society if we followed their advice.
Even the Laffer curve, which Paul Samuelson ridiculed, has become "a generally accepted analytical device." Bartlett also points to studies by the IMF confirming its relevance for tax rates on incomes and on trade.
There's now agreement that hours worked are more responsive to marginal tax rates than economists used to think. Bartlett doesn't mention this but this is especially true for married women, who tend to make all-or-nothing decisions about hours worked for pay.
Bartlett even quotes Paul Krugman in 1995 pointing out that the idea of "dynamic scoring," that is, taking account of the effect of changes in tax rates on the size of the base being taxed, is reasonable.
The consensus on the damage done by high marginal tax rates even carries over to politicians and policy makers. As I put it in a 1989 article, "Are We All Supply-Siders Now?" in Contemporary Policy Issues, "a supply-side revolution has occurred in tax policymakers' thinking."
In the footnote in which he backs his claim that the Laffer curve is a generally accepted analytical device, he quotes work from Austin Goolsbee, now with the Obama administration. But I seem to recall Goolsbee, in a CNBC interview during the 2008 presidential campaign, pooh-poohing the negative effects of Obama's proposed increase in marginal tax rates.
Now to the fall of supply-side economics. Bartlett's case is two-fold. And half of it makes sense.
The part of it that makes sense is his argument that supply-side economics is so much a part of mainstream thought that it doesn't need to be thought of as a separate school of thought. Although he doesn't put it in these words, my words for his thought are, "Supply-siders who continue to push the term are simply engaging in product differentiation and trying to pick fights instead of taking yes for an answer."
The part that doesn't make sense is his example of George W. Bush as a person who oversold supply-side economics. Bartlett's own facts show that Bush missed the fundamental insight about supply-side economics, which is the importance of getting marginal rates down. As Bartlett notes, "Bush himself was responsible for watering down the supply-side elements." Doubling the child credit, in particular, is the opposite of a supply-side policy. Bartlett writes, correctly, "the vast bulk of Bush's tax cuts in dollar terms involved rebates and tax credits that had no supply-side effects whatsoever."
I agree with Bruce that Bush watered down supply-side economics and falsely claimed both that his tax cuts were mainly supply-side and that they would increase revenues. But all that means is that Bush was a lousy exemplar and a charlatan. That's hardly an argument against supply-side economics. To take an example not entirely at random, if a new president is elected who says that he wants to get the U.S. out of Iraq, and then fails to do so, is that an argument that getting out of Iraq is a bad idea?