Legislation

The four zombies of the supply-side apocalypse

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In this case, past performance probably is a guarantee of future results.

Those decades of free-market machinations are now paying off, as a quintet of Ronald Reagan administration alumni — Kudlow, Laffer, Forbes, Moore and David Malpass—united by undying affection for each other and for laissez-faire economics, have the run of Washington once more. Members of the tight-knit group have shaped Trump’s signature tax cut, helped install each other in posts with vast influence over the global economy, and are working to channel Trump’s mercantilist instincts into pro-trade policies. Blasted by their critics as charlatans and lauded by their acolytes as tireless champions of prosperity, there’s no denying that the quintet has had an enduring impact on decades of economic policy.

Predictably, we hear more from their acolytes than from their critics.

At some point, Forbes, Kudlow, Moore and Laffer became inseparable in the eyes of their peers.

“You could call them the Four Musketeers of the supply-side movement,” said Avik Roy, an editor at Forbes involved in some of the group’s advocacy. Or you could call them the “the supply-side Beatles,” as Moore does—or “the four amigos,” as anti-tax crusader Grover Norquist does. “There’s a fourness to them,” observed Jack Fowler, vice president of the conservative National Review.

“They’re a little rat pack,” one unnamed New York financial player put it, suggesting that it’s not Las Vegas showgirls that they’re chasing. “They get hard talking about tax cuts.”

Who knew being completely wrong—all the time, at every turn—could be such a turn-on?

Maybe it’s because Arthur Laffer (the supply-side godfather), Steve Forbes (the magnate-turned-candidate and flat-tax fraudster), Larry Kudlow (CNBC host converted into the director of President Trump’s National Economic Council), and Stephen Moore (author of such books as Bullish on Bush and now troubled Fed board nominee) have proven for over four decades that nothing succeeds like failure.

Long before it mastered the mass production of “fake news,” the Republican Party propagated its Ur-lie that “tax cuts pay for themselves.” Almost from the moment that Laffer first sketched his curve on that napkin in 1974, right-wing pundits, politicians, and propagandists have declared as an article of faith the belief that tax cuts incentivize so much economic growth that revenues to Uncle Sam will be at least as high as they would have been without the reduction in rates.

Unfortunately for the American people, four decades of supply-side snake oil have produced only mushrooming national debt and record-high income inequality. Far from paying for themselves, the Reagan and Bush tax cuts delivered a windfall only for the wealthy, while unleashing oceans of red ink from the United States Treasury. (Of course, the other objective of draining Washington’s coffers in order to add to the bulging bank accounts of the rich was to get government “down to the size where we can drown it in the bathtub.”) It’s no wonder that by 2015 even Keith Hall, the man hand-picked by the Republican majority on Capitol Hill to head the nonpartisan Congressional Budget Office (CBO), acknowledged the obvious: “No, the evidence is that tax cuts do not pay for themselves. And our models that we’re doing, our macroeconomic effects, show that.”

Hall has both history and math on his side. 

After all, to one degree or another, pretty much every major Republican tax cut scheme (Reagan in 1980, Dole in 1996, Bush in 2000, Mitt Romney in 2012, and Paul Ryan’s “Path to Prosperity” budget) has claimed that the hemorrhage of revenue from the U.S. Treasury from their gargantuan tax-cut windfalls for the gilded class would be offset by bigger collections from a supposedly surging economy. Without resorting to the sleight of hand that is “dynamic scoring,” these GOP budgets invariably produce red ink as far as the eye can see. That’s why the House and Senate Republican majorities in 2015 required that CBO estimates also use dynamic scoring to incorporate “supply-side assumptions about the growth-generating magic of tax cuts into official budget estimates, enabling conservatives to evade the deficit-boosting implications (and various congressional barriers that come along with them) of their pet proposals for reducing the tax burden of ‘job creators.'”

Most analysts have encouraged the Congressional Budget Office and other forecasters to tread carefully in their use of dynamic scoring for two very compelling reasons. First, there’s no consensus on how to model it, making the process ripe for manipulation and political chicanery. As Roberton Williams, the former deputy assistant director for tax policy at the Congressional Budget Office and current fellow at the Tax Policy Center, warned, “We really don’t understand the science well enough to do it right. The assumption built into the model determines, in large part, what comes out of the model. There’s going to be conflict unless there’s some agreement on what ought to go in.”

But it’s not just that “there’s a great deal of uncertainty” about “the right way to model things,” as the TPC’s Donald Marron put it. There’s also the matter of the historical record: For more than 30 years, bogus conservative claims about the revenue-increasing effects of tax cuts have been proven cataclysmically wrong.

Starting, it turns out, with Ronald Reagan. As most analysts predicted, Reagan’s massive $749 billion supply-side tax cuts in 1981 quickly produced even more massive annual budget deficits. Along with his rapid increase in defense spending, Reagan delivered not the balanced budgets he promised, but record-setting debt. Even his OMB alchemist David Stockman could not obscure the disaster with his famous “rosy scenarios.”

Forced to raise taxes 11 times to avert financial catastrophe, the Gipper nonetheless presided over a tripling of the American national debt to nearly $3 trillion. By the time he left office in 1989, Ronald Reagan more than equaled the entire debt burden produced by the previous 200 years of American history. It’s no wonder that three decades after he concluded “the supply-siders have gone too far,” former Arthur Laffer acolyte and Reagan budget chief David Stockman lamented, “[The] debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.”

Alternately, conservatives such as Trump ally and Heritage Foundation economist Stephen Moore have simply rewritten history. Moore, whose op-eds have been banned by the Kansas City Star due to his past misuses of data, proclaimed: “Contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation).”

Sadly for Moore, the numbers show that federal tax receipts grew faster both before and after Reagan. As Paul Krugman explained, “Real revenue growth 36 percent in the 8 years before Reagan, 26 percent under Reagan, 28 percent in the years following.”

The history of the George W. Bush years, too, shows that the arc of the Laffer curve is short but bends toward fiscal catastrophe.

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As CNBC summed it up, tax cuts only pay for themselves “in fairyland.”

Inheriting a federal budget in the black and a CBO forecast for a $5.6 trillion surplus over 10 years, Bush quickly set about dismantling the progress made under Bill Clinton. In 2001, Bush signed a $1.4 trillion tax cut, followed by another $550 billion round in 2003, the first war-time tax cut in modern American history. (It is more than a little ironic that Paul Ryan at the time called the tax cuts “too small” because he believed the estimated surplus Bush would later eviscerate would be even larger than predicted.) In keeping with Republican orthodoxy that “tax cuts pay for themselves,” Bush confidently proclaimed, “You cut taxes and the tax revenues increase.”

As it turned out, not so much.

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Inflation-adjusted tax revenue fell after the Bush tax cuts of 2001 and 2003.

Federal revenue did not return to its pre-Bush tax cut level until 2006. As a share of American GDP, tax revenues peaked in 2000—that is, before the Bush tax cuts of 2001 and 2003.

Analyses in 2010 by the Center on Budget and Policy Priorities concluded (see charts) that the Bush tax cuts accounted for half of the deficits during his tenure, and, if made permanent, over the next decade would cost the U.S. Treasury more than Iraq, Afghanistan, the recession, TARP, and the stimulus—combined. By the time he shuffled out of the Oval Office in January 2009, Bush bequeathed a $3.5 trillion budget deficit and a $1.2 trillion annual deficit to his successor, Barack Obama.

The biggest factor in the debt added during the Bush years? Tax cuts.

Republican leaders were warned, but they persisted. “It’s not the marginal tax rates,” future House Speaker John Boehner declared in 2010, “That’s not what led to the budget deficit. The revenue problem we have today is a result of what happened in the economic collapse some 18 months ago. We’ve seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes.”

And as the Republican Party waged its all-out attack in 2010 to preserve the Bush tax cuts for the wealthy, the GOP’s No. 2 man in the Senate provided the talking point to help sell the $70 billion annual giveaway to America’s rich. “You should never,” Arizona’s Jon Kyl declared, “have to offset the cost of a deliberate decision to reduce tax rates on Americans.” For his part, Senate Minority Leader Mitch McConnell rushed to defend Kyl’s fuzzy math: “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.”

But Republican agreement on that myth didn’t—and still doesn’t—make it true.

Current conservative economic propagandist and former John McCain economic adviser Douglas Holtz-Eakin couldn’t make the dynamic-scoring alchemy work for the Bush administration, either:

In 2003, Doug Holtz-Eakin was appointed by Republicans to lead the CBO during the Bush years, and he came under intense pressure to use more dynamic analyses. But studies he commissioned found that dynamic scoring was devilishly complicated and wouldn’t lead to drastically different estimates. As he explained in a 2011 hearing before the House Ways and Means Committee, “it is unlikely to change the bottom line very much over the budget window.”

Despite the bitter experience of the Bush years, Mitt Romney made the same GOP shell game part of his tax plan in 2012. As Ezra Klein suggested in his Washington Post column “The dynamic dodge in Romney’s budget,” Romney’s scheme once again resurrected David Stockman’s “magic asterisk.”

As a matter of theory, stronger economic growth could make Romney’s plan work … if Romney really could double or triple the pace of economic growth, it would be much easier to make his numbers add up …

The technical term for the secret sauce that Romney is using in his budget projections is “dynamic scoring.” The idea is that tax cuts make the economy grow faster. They make people work harder. They persuade rich people to stop hiding money away. And thus they don’t cost as much as a “static analysis” — one that didn’t take into account all these effects — would suggest.

As it turns out, Romney’s 20 percent tax cut plan was basically the same one Bob Dole ran on—and lost on—in 1996. And the architect of that debacle, former Reagan Treasury official Bruce Bartlett, has long since recanted his support for the “dynamic scoring” at the heart of virtually every Republican tax plan. As Bartlett put it in 2012:

As the budget deficit increasingly inhibits Republicans’ tax-cutting, they are planning ahead for tax cuts that they will insist are costless because they will so massively increase growth. But for that approach to work, the C.B.O. and the Joint Committee on Taxation, Congress’s official budget and tax estimators, need to be forced to play along. …

My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting. … In other words, it is an issue of credibility. Republicans don’t really care about accurate revenue estimates; they just want them to show that tax cuts pay for themselves, so they can pass more of them without constraint.

Constraints, that is, such as the facts, the truth, and the unchangeable principles of basic math. That’s why Paul Ryan wanted to rename the new math he and his GOP friends demanded the Congressional Budget Office use beginning in 2015:

He also noted that he prefers the term ‘reality-based scoring’ over ‘dynamic scoring.’

Of course, there was nothing reality-based about the tax plan the Trump administration rolled out in April 2017, which, with changes, ultimately became the Tax Cuts and Jobs Act that December. Treasury Secretary Steve Mnuchin unveiled the Trump administration’s tax plan by proclaiming the fiscal equivalent of saying the sun rises in the west and sets in the east. Six days after first announcing “the plan will pay for itself with growth,” Mnuchin told the White House press corps, “This will pay for itself with growth and with the reduction of different deductions and closing loopholes.”

Needless to say, Arthur Laffer strongly supported the plan. “It’s a slam dunk,” Laffer cheered. “It’s a no-brainer.” Senate Majority Leader Mitch McConnell, who was so catastrophically wrong about the Bush tax cuts, predicted within days of the TCJA’s passage, “I think it’s going to be a revenue producer.”

But if McConnell was “totally confident” the GOP tax plan wouldn’t add to the national debt, the nonpartisan Congressional Budget Office concluded otherwise. CBO forecast the Tax Cuts and Jobs Act of 2017 would drain $1.9 trillion in tax revenue from Uncle Sam’s coffers in its first decade. Using dynamic scoring to factor the impact of additional economic growth, CBO still estimated the cost of the Trump tax bill would reach $1.5 trillion over 10 years.

It’s no wonder that Obama White House economist Jared Bernstein concluded, “There’s not a shred of evidence to support the Secretary’s ‘pay-for-itself’ claim. Sure, significantly faster growth would spin off more revenues. But there’s simply no empirical linkage between tax cuts and growth that’s both a lot faster and sustained.”

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Sorry, Laffer: GDP and employment grew faster when taxes were higher—even much higher.

Bernstein is spot-on. It’s not just that the U.S. economy almost always does better under Democratic presidents (Barack Obama was no exception). As the historical record shows, America has enjoyed faster economic growth, higher incomes, and greater job creation when taxes are higher—even much higher. And Bernstein has plenty of company in rejecting the immaculate misconception that is the Laffer curve. A 2012 survey of many of the nation’s leading economists conducted by the University of Chicago Booth School of Business gave Laffer’s thesis an F. In a nutshell, not a single one of the economists surveyed agreed that “a cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.”

In his comments, David Autor of MIT pointed out, “Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer.” Former Obama administration economist and current University of Chicago professor Austan Goolsbee put it this way: “Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already.”

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Zero economists surveyed agreed that tax cuts pay for themselves.

Enough, indeed. Exactly as Democrats predicted, the GOP’s Tax Cuts and Jobs Act has led to widening deficits while delivering most of its winnings to corporations and the wealthiest people in America. As critics warned, the steep reductions in corporate tax rates increased not investment in new plants, equipment, and jobs, but stock buy-backs and accelerated mergers and acquisitions activity. Poll after poll shows the Republican tax cut is very unpopular, and growing more so among Donald Trump’s core supporters.

Meanwhile, the four zombies of the supply-side apocalypse continue to humiliate themselves. This week, Arthur Laffer blamed Barack Obama for the Great Recession that began in December 2007, despite the 44th president not taking the oath of office until more than a year later. Last month, Larry Kudlow boasted that “we have virtually paid for” the Trump tax cuts, a “laffer” that earned him four Pinocchios from the Washington Post Fact Checker. For his part, Steve Forbes defended the carried interest tax break from Democratic efforts to end it and Donald Trump from the Mueller Report even as he was promoting his new documentary. As for Stephen Moore, Trump’s troubled choice for the Federal Reserve board blamed the outcry over his lack of qualifications, his back taxes, his unpaid alimony, and his sexist comments on opponents “pulling a Kavanaugh on me.”

But despite their uninterrupted record of failure as public intellectuals, Arthur Laffer, Steve Forbes, Stephen Moore, and Larry Kudlow never go away. Sadly for the financial prospects of American workers and taxpayers, these Edsels of economics, these flat-earthers of forecasting cannot be killed off, because Republican candidates, conservative think tanks, and right-wing media need them to live. Every election cycle, they are exhumed, cleaned up, and recharged to give a pseudoscientific veneer to the festering public policy carcass that is supply-side economics. After more than 40 years, the only certainties in life for Republicans are debt and tax cuts.

Well, that and the reappearance of the four zombies of the supply-side apocalypse. After all, just months after Stephen Moore and Arthur Laffer championed Kansas Gov. Sam Brownback as the poster child for “The Red-State Path to Prosperity,” in March 2013, Politico ran a glowing profile titled, “Arthur Laffer is back as GOP tax man.”

Now he’s back again. But he and his fellow supply-side zombies will eventually disappear if enough Americans finally stop listening to their ideas. To put an end to their economic terror, use your head, and ignore theirs.


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