The Supply-Side Fraud: Republican Economics Don't Work

Republicans are enamored by "supply-side" economics. Frankly, I have to admit it's a very easy sell. Think about it. "Cutting tax rates stimulates the economy to such a high level that tax revenues increase." However, there are several problems with this theory. The first is Republicans have not implemented the other side of "supply-side economics" -- a corresponding cut in government spending. This has ballooned the federal debt to dangerous levels under their economic stewardship. In addition, the projected increase in government revenues really haven't materialized as projected. In other words, supply-side economics is a great marketing concept, but in reality is a poor national policy.

First, let's get some administrative issues out of the way. I will be using data from the Congressional Budget Office's historical data the Bureau of Economic Analysis, the St. Louis Federal Reserve and the National Bureau of Economic Research

Reagan was the first person to implement supply-side economic policy. According to the NBER, the primary expansion under Reagan's leadership occurred between November 1982 (the fourth quarter of 1982) and July 1990 (the third quarter of 1990). According to the BEA, the median quarterly percentage change in GDP over this period was 3.85 percent. That's a very good number.

But let's look deeper into the numbers. First, there was a mammoth explosion of government debt during this expansion. Here's a chart from the St. Louis Federal Reserve of total government debt outstanding.

In other words, this was financed growth; the U.S. borrowed heavily to achieve this growth rate. The primary reason for this explosion in debt is Reagan never balanced a budget; he continued to increase government spending. Here is a chart of federal revenues and expenditures from the St. Louis Federal Reserve. Notice first the scale on the right side of the chart is lower than the left side of the chart. Then notice that federal receipts were always lower than federal expenditures.

Let's now turn to receipts from personal income taxes. According to the Congressional Budget Office's historical budget data, tax receipts from individuals totaled $297 billion in 1982 and $466.9 billion in 1990. That's an increase of 57.20 percent. Over the same period of time the GDP price deflator increased from 63.866 to 82.053, or an increase of 28.476 percent. In other words, the increase of tax revenue from individuals really isn't that impressive after adjusting for inflation.

Let's stop here and make a few observations.

1) The overall rate of growth was very good. A 3.85 percent median quarterly rate of GDP growth is a very good number. 2) But the economy was grown on credit. And the rate of growth in total government debt was very high. 3) The high growth rate in total government debt outstanding was caused by a continuing increase in government spending at a rate higher than government revenues. 4) After adjusting for inflation, the growth in receipts in personal income taxes isn't that impressive.

Let's fast-forward to Bush II:

According to the National Bureau of Economic Research, the current expansion started in November 2001. Since then, the median rate of quarterly GDP growth in 2.7 percent and the average (mean) is 2.74 percent. While this isn't the most impressive median GDP growth number we could expect, it certainly isn't the worst either. This falls into the "fair" category.

But like Reagan, the expansion has been grown on credit. Reference the total government debt outstanding chart from above and notice the upward trajectory the chart takes. Here is a report from the Department of the Treasury of the total federal debt outstanding at the end of the last six federal fiscal years:

09/30/2006 $8,506,973,899,215.23