Supply Side Economics [WAS: Re: [CLUE-Talk] Iraq Stuph]

[Randy Arabie]

On Wednesday, 23 April 2003 at 18:18:32 -0600, Jeffery Cann <fabian at jefferycann.com> wrote:
> On Tuesday 22 April 2003 09:37 pm, Randy Arabie wrote:
> 
> > Kennedy-Johnson & Reagan-Bush administrations both implemented tax cuts
> > in that resulted in an increase in tax revenue.
> 
> While that may be true, why was there such a huge deficit during these 
> administrations, which later led to long-term recessions under both 
> administrations?

By spending more money than the tax revenue generated.  There are two
sides to the equation.

> Many economists do not agree that a long-term deficit is a good thing.  
> Supply-side economics has not been proven, as some would lead to believe.  

It's a *theory*, not a law.  I'm no expert, but I don't think applying
supply side theory requires that government run deficits.  I do think the
evidence is pretty clear that lowering the marginal tax rate can result
in an increase in tax revenue.  Here's a link to one study:

http://www.cato.org/pubs/pas/pa-261es.html

It isn't linear.  Neither is the opposite.  A government can't simply
increase tax rates and tax its way into prosperity.

> Of course, it's difficult to pinpoint economic health against a tax
> cut or deficit spending.

I'm not sure what you mean by your statement.  

I'm not an economist, so I won't venture a guess at the beneficial
leverage point where deficit spending and the subsequent debt payments
exceed the benefit of increased economic activity.  

It's all a matter of the "time value of money".  A business consultant
will tell you that a healthy, growing business operates with some debt,
rather than having cash sitting idle in a bank account.  The problem is,
we are talking orders of magnitude greater, to such a degree that world
wide interest rates (economies) are potentially influenced by the amount
of debt carried by the U.S. Government.  

I'm reluctant to say you should apply the same principal to government.
IMO, we certainly don't need the type of deficit spending like we saw in
the 1980's.
-- 
Allons Rouler!
        
Randy
http://www.arabie.org/