Believers hailed its reduced tax rates and deregulation as springboards for economic miracles under the leadership of President Ronald Reagan and British Prime Minister Margaret Thatcher. Critics dismissed the very same ideas as so much trickle-down hocus-pocus and voodoo.
It’s been most of three decades since debate over “supply-side” economic policies was at the center of U.S. politics. But for the moment, talk of conservative economic ideas that were as central to the story of the 1980s as Michael Jackson’s moonwalk and the first MacIntosh personal computer is back. Why? A pair of its leading proponents have returned to the headlines.
Memories of economic days gone by were rekindled last week when David Stockman, Reagan’s budget director, unleashed a scathing attack on years of decision-making by U.S. leaders, including his former boss. It continued this week, when Thatcher’s death on Monday prompted recollections – some fond, others not so much – of how the Iron Lady imposed her will on a long-stagnant British economy.
The confluence of events got economists waxing about what the past means for today, although there’s disagreement on how much supply-side’s ideas have been abandoned in the U.S. or are just awaiting their moment of return. In the meantime, there was Arthur Laffer, the U.S. economist often called the father of supply-side, back on television three times Monday, recalling a warm friendship with Thatcher that highlighted a time when prevailing wisdom on taxes, deficits, and the roles of government and individuals was very different.
“We’re back in the time machine,” said Yoram Bauman, a Seattle economist who makes a living doing stand-up comedy about the dismal science – and who has long opened with a joke or two about supply-side to test the depth and endurance of his audience’s knowledge.
Supply-side economists argued that reducing taxes through lower rates would encourage work, saving and investment. Early supply-side theory promised that the reduced tax rates could pay for themselves by raising tax revenues. Under Reagan, the government lowered tax rates and reduced government regulation as the Federal Reserve worked to rein in inflation. The administration’s focus on lowering tax rates for the wealthy, labeled “trickle-down economics,” reflected the belief that these gains would encourage the rich to spend and invest more to create jobs for others.
Now that theory – and Bauman’s comic material, for that matter – may have found its moment, but it’s not clear how long it will last.
It began last week when Stockman wrote a lengthy opinion piece in The New York Times, followed by interviews, to build awareness of his new book, “The Great Deformation: The Corruption of Capitalism in America.” He used the forum to go after everyone from Richard Nixon to Federal Reserve Chairman Ben Bernanke, Presidents Barack Obama and George W. Bush for decades of decisions that he said have left government bloated and swimming in deficits and the economy on a fault line.
Along the way, Stockman also lambasted Reagan – whom many Republicans embrace as an economic hero – for the “destruction of fiscal rectitude” inherent in running up big deficits. The criticism by Stockman, who resigned from the administration in 1985 over disagreement with those policies, was labeled as a rant by some economists. But there was little doubt that, if only briefly, it revived memories of the economics of the 1980s – and pointed out how much the landscape has changed.
“I think to the extent that anyone is thinking about supply-side anymore it’s nostalgically. It’s not with an expectation that it’s going to make a comeback,” said Ed Yardeni, president and chief investment strategist for Yardeni Research
“In many ways, Stockman’s book is just a scathing indictment of how the supply-side revolution has been taken apart by a counter-revolution, by the promoters of big government,” he said.
With Washington focused on gun control, immigration reform and other issues, attention to the economics debate as embodied by Stockman might not have lasted. But Thatcher’s death Monday unearthed memories of the economic malaise that saddled both Britain and the U.S. through the early 1980s. It was characterized by high inflation, weak financial markets, multiple recessions and, in Britain’s case, the sense of “an economy that was producing goods that nobody wanted to buy,” said Brian Domitrovic, author of “Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity.”
In obituaries and recollections, observers recalled how Thatcher cut back on regulation, cut taxes and reduced government’s role in enterprise, to recast the British economy. In doing so, she adopted some tenets of the economic gospel preached by Laffer. According to Washington legend, he had introduced the basics of supply-side to Nixon-era officials Dick Cheney and Donald Rumsfeld during a 1974 lunch at a restaurant not far from the White House by drawing, on a cocktail napkin, a curve showing the tradeoff between tax rates and revenue.
To Domitrovic, the revived debate over old economic ideas is a sign that people have not forgotten the crises of the 1970s or the way the Reagan and Thatcher administrations wrestled with them.
“When these great names come up, there is a sense of impressiveness and a kind of awesomeness,” said Domitrovic, chair of the history department at Sam Houston State University.
Laffer, who runs an economic consultancy in Nashville, said there are still many believers in supply-side ideas, which he maintains are just as applicable to the huge deficits and economic sluggishness of today as back then.
“I don’t think it’s Thatcher’s death that brought it back or Stockman’s resurrection,” Laffer said. “I mean, do you think the economy is doing well?”
Even now, the legacy of 1980s economics is quite vibrant, he said. Despite Obama’s quest to raise taxes on the wealthy, no one in Washington would consider returning to the policies inherited by Reagan, who lowered the top tax rate from 50 percent to 28 percent, Laffer said. And in states like Kansas and Wisconsin, many governors, most of them Republicans, are working to cut taxes and reduce the size of government, he said.
Others, though, say memories of 1980s economic ideas have largely faded. Their prediction: Even the current turn in the spotlight will be brief.
Bauman, the economic comedian who billed a 2008 series of performances as his “Supply Side Tour,” points out how much times have changed. Stumbling on such old economic policies now, Bauman says, is like rummaging through a pantry and finding a bag of chocolate chips with an expiration date from long, long ago and realizing that something once delicious might now be better to leave out of the recipe.
On stage, he introduces himself as a supply-side economist who does standup and lets the jokes trickle down, a line that wins knowing chuckles. But during frequent performances on college campuses, he notices that a joke about the Laffer Curve often brings groans or simply blank stares.
To get the joke about the economics of the 1980s, Bauman said, it helps to have been there.