You Say Goodbye, I Say Hello – The Supply Side Debate

Last month at NationalReview.com Kevin Williamson, deputy managing editor of National Review, and Alan Reynolds, a senior fellow with the Cato Institute, traded opinions on the state of supply side economics. Reynolds’ article was in response to Williamson’s, and his tone seems to suggest that he’s arguing against Williamson. But an analysis of both columns reveals that the two are surprisingly in agreement on all points.

Williamson wrote the first column. He argued that tax cuts are merely tax deferrals unless they are accompanied by corresponding spending cuts. If taxes are cut and spending continues, he contends, then eventually taxes will have to be raised. The past 30 years is a sad confirmation of Williamson’s main point.

Williamson also called attention to the false belief held by too many people that tax cuts pay for themselves and often result in increased revenues. Williamson contended that tax cuts don’t pay for themselves despite popular opinion.

Reynolds writes his column in an attempt to argue against Williamson. He starts off taking Williamson’s quotes out of context and attacking arguments that Williamson never made which is forgivable because evidently the law requires conservative columnists to do this. He claims that Williamson implies that “it makes no difference whether the budget is balanced by curbing spending or increasing taxes”. Williamson never implied this. To the contrary, the theme of Williamson’s article is the damaging economic effects of irresponsible government overspending.

Reynolds adds a reference to a 2002 study that found that the surest way to make economies boom is through deep cuts in government spending. This affirms part of Williamson’s argument, that overspending is the problem that should be addressed. Reynolds goes on to admit that the deficit reduction in the 1990s was mainly because of cuts in defense spending.

Both Williamson and Reynolds are in total agreement that irresponsible government overspending is detrimental to economic growth.

They’re also in agreement over the effects of tax cuts. Both agree that tax cuts don’t “pay for themselves” but that a portion of the lost revenue is made up by increased revenues from economic growth as a result of tax cuts. Williamson cited a study that estimated the effect to be between 1 and 32 percent (depending on the type of tax cut and the extent). Reynolds cherry picked an analysis that cited 40 percent. So the two are in agreement over the stimulating effects of tax cuts; they only differ on a few percentage points of the effects.

Where they differ is on a point mentioned by Williamson regarding the exaggeration of the effects of tax cuts. One example is a comment by Reynolds. Reynolds claims that most of the revenue gains in 1997–2001 were the result a decrease in the capital gains tax rate of 8%. Notice the period chosen by Reynolds. It’s not uncommon for hack economists to conveniently choose a period that supports their pre-drawn conclusion, I find. Reynolds chose the period of the dot com bubble when capital gains tax revenues skyrocketed. He did not extend that beyond 2001 when the bubble burst and capital gains tax revenues tanked. Reynolds uses this to prove his contention that reducing capital gains tax rates by 8% results in a windfall of capital gains tax revenue.

Williamson named names: George W. Bush, John McCain, Rush Limbaugh, and even Steve Forbes, Williamson claims, have regurgitated the incorrect statement that reducing tax rates results in increased tax revenue. It started by politicians campaigning on tax and spending cuts. We got the tax cuts, but we never got the spending cuts. The deficit grew. It’s to the point now where they’re trying to tell us that cutting tax rates actually increases revenue. Vote for me, they say. The national debt continues to grow.

Now we’re in a hole. We are in such a hole that it’s going to take not years but decades of serious belt tightening to get ourselves out of this, and some people like Reynolds and Larry Kudlow wish to continue with the same policies that got us into this mess. Encouraging though are people like Williamson and Bruce Bartlett who recognize that the policies of the past 30 years were wrong.