is a macroeconomic theory put forward in the late 1970's by Jude Wanninski
based on the teachings of University of Chicago
economics professor Arthur Laffer
and the Laffer Curve
. Ronald Reagan adopted it as his economic policy in the 1980's and during the 1980 Republican primaries George Herbert Walker Bush
referred to it as voodoo economics
Economists have always recognized that tax cuts can be used to help stimulate economic growth. In traditional Keynesian economics tax cuts and/or increased government spending are the prescribed remedy in times of recession to kickstart the economy. But economists also recognize that tax cuts reduce government revenues and increase budget deficits - so that these tax cuts can only be temporary.
The supply-siders maintained that tax cuts could be across the board and permanent. That economic growth would pay for itself - essentially a free lunch.
The experiment with Reaganomics saw the United States go from the world's largest creditor nation to the world's largest debtor nation in less than 10 years. The huge deficits became a drain on the econmomy. Eventually, George H. W. Bush decided to raise taxes - breaking his Read My Lips pledge. The government's deficits started to decline.
But breaking his pledge cost Bush politically. Bill Clinton was able to defeat him in the 1992 presidential election. The supply-siders were out in force as Clinton submitted his first budget. The howls were heard across the country as he reversed America's course and took aim at the deficits - mainly through tax increases.
Dick Armey, Phil Gramm, Jack Kemp, and Newt Gingrich - all in the supply-side camp - made their predictions: If the Clinton budget was passed doom and gloom would sweep the land. The country would go into recession, perhaps depression, unemployment would skyrocket and inflation would rise. Forbes magazine urged readers to get out of the stock market to avoid the inevitable crash. The Wall Street Journal editorial page had no doubts that Clinton's tax increases would sharply increase the deficit instead of reducing it.
The supply-siders were wrong. Completely and totally wrong. Clinton's economic plan wiped out the deficits. The economy surged. Markets soared. Unemployment was lower than economists thought statistically possible. Inflation never became a factor.
And yet, some cannot believe their own experiences of the past twenty years - Reagan's tax cuts and huge deficits, Clinton's tax increases and reduced deficits. There are still a few who put faith in supply-side economics. Marginal fringe elements, true, but still they're out there. Very few economists believe in it though. The experiences of the past twenty years are exactly what they predicted.