The horse and trickle-down economics
Thursday, March 23, 2017 10:12 AM
By Bruce Lachney
In economics, "it appears we are doomed to repeat the failed policies for contrived political benefits," says Bruce Lachney.
There's an old theory in economics: If you feed a horse enough oats, some will pass through to the road to feed the sparrow. This is a less than elegant way trickle-down, or supply-side economics, has been described.
Supply-side argues that if you lower the barriers to production, prices come down, consumption increases, and the economy expands. For supply-siders, the main barriers to production are taxes and regulations.
Intuitive as it may seem, supply-side economics never held up to analysis.
Ronald Reagan made supply-side the cornerstone of his economic policy. During the presidential Republican primary in 1980, George H.W. Bush labeled this “voodoo economics.” Though ardent supply-siders credit Reagan for breaking the inflationary cycle in the 1980s, most academics credit Paul Volcker, former chairman of the Federal Reserve, for tightening the money supply and squeezing inflation.
Unfortunately, supply-side is back. Congress, in hoping to find a way to alchemize lead into gold, is promoting “dynamic scoring.” Dynamic scoring tries to forecast relative benefits from a policy change. More simply, dynamic scoring tries to predict the economic benefit from a tax cut. The problem is the math. If you cut $100 million, can you really get $150 million in economic benefit?
Essentially, some are promoting a perpetual-motion machine for economics: You get more out than you put in. Here's why there's a problem. Say you cut $100 million of tax revenue. There may well be some undetermined economic benefit, but as a country that runs a deficit, the tax cut also increases the need to borrow. Dollars borrowed increase interest payments; any magical economic reward is quickly erased.
The real problem for supply-side is that it becomes a tax cut for the wealthy. The assumption is that the wealthy will spend.
This is where classic economic theory runs headlong into behavioral economics. The ultra-wealthy have options to spend. That second home happens to be in Bermuda, the Ferrari is made in Italy, and that vacation is in Paris – dollars spent somewhere other than here. Whereas those of lower income spend almost every dollar, and spend it locally, the wealthy have choices.
So why the rebranding of supply-side (trickle-down) to dynamic scoring? It is certainly not for the benefit of the Democrats. The Republican leadership is embarking on a campaign to make a proposed tax cut palatable for deficit hawks within their own party. Many a hawkish member of their caucus is squeamish about increasing the deficit without corresponding cuts. They understand how lower revenues leads to greater government borrowing and erosion of the GDP. Still, trickle-down has a cult following; it's easy to proselytize, cut taxes, make everyone happy. Unfortunately, macroeconomics is incredibly difficult to understand, and followers of the supply-side cult cannot be bothered with things like facts.
The Reagan-era policy of supply-side economics failed. David Stockman, chief supply-side architect for Reagan, became one of its most ardent opponents, recognizing the economic flaws.
Unfortunately, it appears we are doomed to repeat the failed policies for contrived political benefits. When you feed the horse oats, it's not the only thing that will pass to the road.
Bruce Lachney is an Eatonville-area resident, a former Marine Corps pilot, and currently a member of the Clover Park Technical College Board of Trustees.