Supply-Side Mayhem


Supply-side economics is front-and-center this political year. Every presidential candidate who participated in the Republican primary debates preached the gospel of Supply-side economics, prompting this article, inquiring about its efficacy.

Supply-side economics is a flawed theory that does not provide for the prosperity of society at large, but it does precipitate a fragile nation-state subject to financial crises, cascading markets, and political disarray because it obliterates the middle class.  In this regard, the two biggest financial crises of the past 100 years, 1929 and 2007, tell a morose story of America losing its way as a result of disruptive Supply-side economic policies under presidents Coolidge, Hoover, Reagan, and Bush.

Supply-side is a macroeconomic school of thought (1970s) that claims economic growth performs best when the private sector of the economy is unshackled from government regulation and when barriers to produce goods and services are lowered, meaning lowering income taxes and capital gains taxes. According to the theory, the benefits trickle down to consumers by an increased supply of goods and services at lower prices. The historical evidence shows Supply-side does succeed by increasing productivity and enriching the rich; however, there is scant evidence the benefits trickle down to the broad middle class, quite the contrary. The truth is: The hard facts show the economy performs best when: (1) taxation policy is reasonably distributed amongst all of society and (2) strict governmental regulations limit the ‘reach’ of private enterprise, diametric to Supply-side theory.

Supply-side theory is not to be confused with Neoliberalism, which is an economic doctrine that advocates free trade, open markets, privatization of state-owned assets, deregulation of markets, and dependence upon the private sector for economic performance. However, over the course of time, Supply-side economic theory and Neoliberal doctrine have become intertwined and proffered by political actors like President Ronald Reagan.

According to an International Monetary Fund (IMF) study, Inequality, Leverage and Crises by Michael Kumhof, IMF and Romain Ranciere, Paris School of Economics, April 2011: “The United States experienced two major economic crises over the past century–the Great Depression starting in 1929 and the Great Recession starting in 2007. Both were preceded by a sharp increase in income and wealth inequality, and by a similarly sharp increase in debt-to-income ratios among lower and middle-income households. When those debt-to-income ratios started to be perceived as unsustainable, it became a trigger for the crisis.”

Both eras exhibited similar financial characteristics:  The market price of homes, land, and stocks climbed upwards like never before. Executive salaries ballooned, and Wall Street paid extravagant bonuses. However, during both eras, the middle class was increasingly left out of prosperity as governmental policy, and the tax code, regressively favored wealth over work.

According to Robert L. Heilbroner and William Milberg, The Making of Economic Society, Prentice Hall, 11th Ed., 2001, “An economy always creates enough potential buying power to purchase what it has produced… There can, however, be a very serious maldistribution of the income… Returning to the economy in 1929, we can now see what was perhaps the deepest-seated reason for its vulnerability… What we see here is an extraordinary, and steadily worsening, concentration of incomes.”

Eighty-three years ago in 1929 America was the shining star of the world economy. During the Roaring Twenties, manufacturing output was up 49%, mining output was up 43%, and corporate profits were up 300%. “Get-rich-quick” was part of the lexicon of the day. However, under the surface, not everything was booming. Production steadily increased but employment languished; the level of total employment in 1929 was nearly unchanged from the year 1920 and average annual earnings of workers stagnated throughout the decade. By 1929, the distribution of income was so badly imbalanced that the top 15,000 incomes exceeded the bottom 6 million families (Heilbroner, Ibid.) This maldistribution of income effectively removed a large segment of consumers from purchase of the nation’s products.

Andrew Mellon served as Secretary of the Treasury from 1921 to 1932 under Republican presidents Warren Harding, Calvin Coolidge, and Herbert Hoover. He significantly lowered the maximum tax rate from 73% down to 25% and lowered estate taxes on the theory the rich would invest their money and stimulate the economy (this is Supply-side economics, par excellence, but not named/identified as such in the 1920s.) Ultimately, his theory caved in on itself with the Market Crash of 1929. Historians blame Mellon’s policies of favoritism for the wealthy, squeezing out the middle class, as one of the major causes of the Great Depression.

Identical to Treasury Secretary Andrew Mellon, President George W. Bush dramatically cut taxes in 2003 in favor of the rich. Furthermore, Bush and Mellon’s advocacy of Supply-side principles on the national stage worked against wage growth for workers.  Nevertheless, eerily, and ominously, both men accomplished major tax cuts for the richest Americans five years preceding the largest, most devastating financial meltdowns of the past 100 years.

As an antecedent to Bush’s horrendous 2008 financial meltdown, real wage growth during his term was even worse than the 1920s. According to the U.S. Commerce Department, from 1923-29 real wage growth was 5% compared to real wage growth of 4% on Bush’s watch. In contrast, a few decades ago 10-year gains in real wage growth exceeded 25%. Under ‘W’, maldistribution of income once again squeezed the middle class, leading to the Great Recession.

Maldistribution of income forces the middle class to borrow to maintain lifestyle. According to an IMF study (Dec. 2010), the ratio of Total Household Debt to Income doubled during both the Roaring Twenties and over the past decade, with the ratio reaching 139% a couple years ago, a much higher absolute level than the 1920s. This is compelling evidence of severe financial strain in the current Great Recession well beyond what occurred 83 years ago.

As a counterbalance to a strapped public, the U.S. is a very wealthy country but with severe limitations to widespread use of this wealth because it is tied up in few hands. The offset to debt is wealth, and according to the Federal Reserve Bank, America’s wealth, the value of tangible assets and financial assets, is approximately $60 trillion. Therefore, America is not broke by a long shot; however, it is the distribution of the country’s wealth that is broken. A capitalistic economy cannot function properly within a political democracy when the country’s wealth is concentrated in too few hands.  This only works with authoritarian governments, like the old monarchies, not democracies.

It is fair to postulate that unless, and until, America’s income & wealth are more equitably distributed, and not concentrated in a few hands, the economy will continue to exhibit extreme vulnerability accompanied by increasingly dire financial shocks, panicky market sell-offs, and ultimately, the end of democratic capitalism as a functioning nation-state. The next financial crisis will be worse than the last… ad infinitum…down the rabbit hole to nowhere until chaos reigns supreme.

In point of fact, Supply-side economics has never registered well with the American economy. Under President Reagan, the prophet of Supply-side, the country experienced its second biggest-ever tax cut, dropping the top marginal tax rate from 70% to 28%. As a result, it was on his watch that America became the world’s biggest debtor nation. Reagan took the government’s debt up an unprecedented 189% during his presidency for a whopping average annual increase of 13.8% (in-line with Obama’s performance.) Reagan has the worst record of debt creation by any president since WWII. As a result of Reagan’s policy, the wealthy received a huge tax break and were greatly enriched… at the expense of ordinary taxpayers. Reagan’s tax policy is equivalent to the richest people dining out at NY Five-Star restaurants, paying the tip, but leaving the bill for ordinary taxpayers.

Thanks to President Reagan’s lesson to the country in Starving the Beast 101, we have documented proof of the horrific economic dislocations associated with Supply-side economics. Even Reagan’s positives were mediocre, e.g., non-Supply-siders handily outperformed his inferior annual rate of job creation: FDR +4.25%, LBJ +3.90%, Clinton +2.40%, Reagan +2.1%, and Supply-sider George ‘W’ +0.00%. With ‘The Great Communicator’ in charge, U.S. debt exploded to all-time highs every year, year-after-year, because of a shortfall in federal tax receipts whilst the top 10% of society’s income/wealth gushed upwards to new record highs, leaving the average taxpayer responsible for all-time record government debts.

Thereafter, there was no relief from Reagan’s draconian policies until President Bill Clinton took office; he grew GDP at a 3.9% annualized rate (a better performance than either Reagan, 3.5% or Bush, 1.7%.) He corralled national debt problems, slowing debt creation down to a manageable rate of only 4.4% by taking the top marginal tax rate up to nearly 40% in direct opposition to the Reagan/Bush Supply-side theory. Remarkably, he turned the Reagan/Bush Supply-side legacies of annual budget deficits into a budget surplus. The ‘Come Back Kid’ proved the economy performs well when governmental policies are reasonably well balanced.

There is no better proof of the glaring discrepancy in economic performance between Supply-siders and big government Keynesians than President Johnson’s administration in the 1960s. The LBJ economy grew at a robust 5.0% annualized rate (vs. Reagan’s modest 3.5% and W’s measly 1.7%), and the top marginal tax rate under LBJ was 70%, double the tax rate under Reagan and Bush. With LBJ, federal debt grew at a very modest 3.18% rate (vs. Reagan’s 13.8% and W’s 11.1%.) President Johnson’s ‘reverse Supply-side’ record makes a mockery of the Supply-side presidents Reagan and Bush.

{As an aside, President Eisenhower, a Republican, who was non-Supply-sider, had a better GDP growth rate (2.5%) than did Supply-sider George W Bush (1.7%). The top marginal tax rate was 91% under Ike, who created jobs and cut government debt versus ‘W’, who created zero jobs and increased government debt, which begs the question: What does Supply-side economics really accomplish?}

The only solution for a struggling economy, like today’s, is what history demonstrates works, i.e., the opposite of Supply-side principles… which is massive big government (Keynesian) intervention as demonstrated by Democrat FDR, to wit: When FDR took office in 1933 the nation had suffered three years of economic freefall under Republican President Hoover, from 1929-32 Gross National Product plunged 25.6%. FDR’s first 100 days saw fifteen major legislative proposals pass into law. Henceforth, private interests were subordinated to public policy. The results: FDR set the all-time best record for job creation, and he rebuilt the infrastructure of the country.

Under FDR Gross National Product steadied in his first year, 1933, thereafter GNP skyrocketed, to wit: (1) 1934-GNP +10.8%, (2) 1935-GNP  +8.9%, (3) 1936-GNP +12.0%. Thus, by 1936 the economy under FDR had completely recovered to where it was before 1929. No subsequent president has ever matched the remarkable growth of FDR’s first term.

Based upon historical fact, the solution for America’s economic woes, and the survival of its democratic future, is avoidance/cancellation of Supply-side economic policy and a return to big government/Keynesian policy, like FDR, who grew the economy like a weed and added massive numbers of jobs when top marginal tax rates were 58%-to- 68%, antithetical to Reagan and Bush.

Reagan’s famous rhetorical “Get Big Government Off Our Backs” needs to be restated to: “Get Abusive Private Interests Off Our Backs.”

However, if Supply-side economics remain in play, democratic capitalism will be gone forever, and, over time, America will atrophy into a retrograde Banana Republic serving only aristocratic interests. For democratic capitalism to survive, America needs strength of big government, not a weak government serving only select private interests.

Supply-side theory is how democratic capitalism fails, not how it succeeds. The proof is in the historic record books of presidential economic performance… look it up!




Robert Hunziker earned an MA in economic history at DePaul University. He lives in Los Angeles.

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