Interesting Op-Ed by Jonathan Chait in today’s NYT: Captives of the Supply Side. Chait makes the interesting argument that as far as the GOP is concerned, it is not the religious right, but the economic far right that calls the shots:

"Last year, Senator John McCain earned widespread ridicule for
publicly embracing Jerry Falwell, whom he had once described as “evil.”
But an equally breathtaking turnabout occurred earlier in the year,
when Mr. McCain embraced the Bush tax cuts he had once denounced as an
unaffordable giveaway to the rich. In an interview with National
Review, Mr. McCain justified his reversal by saying, “Tax cuts,
starting with Kennedy, as we all know, increase revenues.” It was the
political equivalent of Galileo conceding that the Sun does indeed
revolve around the Earth."

That’s a pretty fair assessment of the Supply Side camp in the Republican party.  Enthralling my pal Larry, they dominate the economic debate to the point where there is no debate:

"Mr. McCain is not alone. Every major Republican contender — Rudy
Giuliani, Fred Thompson, Mitt Romney — has said that the Bush tax cuts
have caused government revenues to rise. No prominent Republican
office-seeker dare challenge this dogma for fear of offending the
economic far right.

Yet there is no more debate about this question among economists
than there is debate about the existence of evolution among biologists.
Most economists believe that it is theoretically possible for tax rates
to be high enough that a reduction in rates could actually produce more
revenues. But I do not know of any tenured economist in the United
States who believes this is true of the Bush tax cut

Granted, economic growth sometimes causes revenues to rise faster
than expected after a tax cut, as has happened since the 2003 tax cut.
But sometimes revenues fall faster than expected after a tax cut, as
they did after the 2001 tax cut. And sometimes revenues rise faster
than expected after a tax increase, as they did after the 1993 Clinton
tax increase.

Even very conservative economists who have worked for the Bush
administration — including Greg Mankiw, a former chairman of the
Council of Economic Advisers under President Bush who is now an adviser
to Mr. Romney — have publicly stated that today’s tax revenues would be
even higher were it not for the Bush tax cuts
."  (emphasis added)

That’s a fascinating observation. Apparently, this belief is heresy:

"No Republican candidate can risk committing heresy by acknowledging
this bipartisan consensus among economists. On social issues, however,
Republicans actually tolerate diversity of thought. For example, Mr.
McCain, Mr. Giuliani and Mr. Thompson all oppose, on federalist
grounds, a constitutional amendment to ban gay marriage."

Meanwhile, lots of credible economists are quite critical of the Supply Side argument (as well as some amusing goofs) — including Greg Mankiw.

And as we’ve long said here, the main credit for the current expansion
lies with the Fed’s Ultra-low rate cuts, and global growth — not
either the 2001 or 2003 tax cuts.

I am curious: is there a general consensus amongst readers as to whether or not Supply Side is legit or not?

What say ye?


Captives of the Supply Side
Jonathan Chait
NYT, October 9, 2007

Category: Economy, Politics, Psychology, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

154 Responses to “The Economic Far Right & the G.O.P.”

  1. Justin says:

    Depending on what varibles one holds constant in one’s model, supply-side has its place, but given the overwhelming supply of liquidity injected by the FED, and global markets, a tax-cut actually takes away from revenue. In other words: put too much grease on the chain and the chain slips/skips on the sproket. How could anyone argue otherwise?

  2. Justin says:

    But it works when used as a primer, when other areas of the economy are being choked off. Ok, I know it’s not fancy Dan language, but hey! lol

  3. spongetoddsquarepants says:

    Supply siders are big government, big borrow and big spenders. Quite vital for fattening the Military Industrial complex and nation building.

  4. Toro says:

    The dollar hit an all-time low last week.

    Hmm, I wonder if there’s a connection?

  5. TKL says:

    This is one of the Big Lies. Even the lifelong Republican Greenspan testified before Congress, sometime in ’04 or ’05, that the Bush tax cuts reduced revenue on balance. But if you repeat a lie enough times, people believe it.

    Trendline economic growth is basically the same now as it was when top tax rates were nearly confiscatory. If anything, trendline growth was higher when top rates were nearly confiscatory. The purpose and effect of the rate reductions appear to have been merely to aggrandize the wealthy.

    Indeed, wealthy people I know do not need more wealth to acquire things they want. So they do not spend any tax-cut benefit. Rather, they they invest it. A principal consequence of high-bracket tax cuts would therefore seem to be goosing asset prices and promoting asset bubbles.

    Incidentally, the childishly simple concept known as the Laffer curve might counsel raising rates rather than lowering rates. Nobody ever bothers to demonstrate which side of the curve we’re on — the upward-sloping side where higher rates would increase revenue, or the downward-sloping side where higher rates would decrease revenue. I fail to see why government should be in the business of maximizing revenue in the first place, but the money-hungry econocons always assume we’re on the right-hand side of the curve. ‘Taint necessarily so.

  6. dissent says:

    Supply side is just the rhetoric of the greedy and powerful bashing everyone else so they can continue to sop up the gravy and the govt contracts. It is really a sign of our national decline into stupidity and narcissism.

    In a democracy you get the govt you deserve. It is astounding that Americans are so lacking in good judgment that Bush was elected TWICE.

    The robber barons and the lunatics are running – and ruining – the country. Poor us. Poor Iraq.

  7. Norman says:

    Today’s WSJ gives some proof (yes, proof not ‘tenured economists’ analysis) that non-supply-siders like those at the CBO who provide static analysis have been under-predicting federal tax receipts over the last five years.

    At the begining of each fiscal year they make their predictions. Starting in 2003 and on to 2007 tax receipts came in higher than their predictions by: 0.7%, 3.0%, 4.4%, 5.7% and in 2007, 6.1%.

    If the ivory tower economists would have been correct then at least over this time the CBO would have been wrong as much as they were right and it all would have evened out. But they underpredicted the benefits of the tax RATE cuts on the economy and thus on tax receipts. They were wrong every single year and to show their stubbornness the percentage that they were off has expanded from only 0.7% to a whopping 6.1%.

    Read it and weep people of the Left. Real world not theory prevails. QED.QED. QED.


    BR: Norm, I don’t know what you are proving, but its not supply side economics.

    The increase in tax reciepts did not take place after the 2001 tax cuts — but they did take place after the huge Fed rate cuts.

    Why do you assume that the tax cuts — and not 46 year lows in interst rates — were responsible ?

  8. peter from oz says:

    not quite the forum but I have just spent a couple of hours reading and rereading the Fed minutes
    where does it say anything to justify todays records in Dow and S&P
    this market reminds me of Wile E Coyote half way between rock ledges
    rgds pcm

  9. deoksu says:

    Is supply side a credible economic theory, or, in other words, is it a guide to economic policy? Absolutely not. The Laffer Curve will only kick in in a significant way with extremely high rates of taxation and only with individuals who have the ability to opt out of doing work. It is a warning about overtaxation productive labor given the state’s reliance on capital? Yes. But it should only be regarded as a warning or ceiling, not a theory of econimic policy-making.

  10. michael schumacher says:

    The continued “auctioning” of excess tax receipts via the Treasurey sort of blows a hole in any theory that it is under or over reported. Since we, as a gov’t, are unable to even calculate the total number of jobs that are “created” from month to month (August’s were off by a factor of 800%) how is this any surprise to anyone……..

    It’s just another cog in the wheel of bullshit data gathering. The Fed continues to pander to the brokers and the data that it makes it’s decisions on is laughable at best.

    But it continues……….and we are all powerless to do anything about it until November 2008… will be way too late at that point.

    Got Gold??…..coins that is


  11. michael schumacher says:


    See the SPY daily chart right before the “release”…that was supposedly just out at that time. Can you say front run??!!

    That’s where it came from……


  12. Larry says:

    it’s rather easy to estimate a taxation level on labor that decreases the reward of working (Europe). but certainly there is a great deal of disagreement on what the optimal point of taxation is.

  13. Patrick (G) says:

    Supply Side is about as legit as the “Death tax.

    Only the patsies believe the arguments made in favor of Supply-side (or the repeal of the Estate Tax); it’s more Political FUD than legitimate policy discussion.

    The real policy is that taxes are for the little guys and not for multi-millionnaires families that earned their money the hard-way (by waiting until the family patriarch finally keeled over), and they buy Republican politicians to do their bidding.

    So, not surprisingly, Supply-Side FUDonomics has become an article of faith for any Republican politician that wants to stay bought-off.

  14. Owner Earnings says:

    The tax cuts have a small amount to do with the current state of the economy.

    Total amount of the tax cuts per yer? $50 Billion? That’s peanuts.

  15. I’m certainly not an economist and forgive me if someone already said this but logic would have it that tax cuts are justified and would have greater potential for positive economic impact when the economy and financial markets are already strong. Tax increases, following the same logic, would have the greatest potential for economic impact if imposed during times of economic weakness…

    The recent tax cuts were quite the opposite: occurring at economic weakness and in the face of enormous military spending…

    As a result of economic weakness (2000 to 2003) lower interest rates contributed to the subsequent weakness in the dollar and global growth, which, taken together created the vast majority of economic strength from 2004 to today…

    My response to Barry’s question would be that “supply side” theory can be beneficial if used properly. That’s not a political statement. Just common sense…

  16. Brian B. says:

    I will try and make this brief:
    I started a restaurant some time ago and after 3 years, 6-7 days a week 10-14 hours a day, I finally became successful. Towards the end I was grossing over $250,000 in personal income. I had 2 restaurants and 37 employees. Well it was then that I realized I had a ‘silent’ partner. Yes, he didn’t take any risk, didn’t do any work, didn’t supply any investment monies, and dare I say was glad I was making money. For as far as the “Left” was concerned I was “Rich”. Yipee!! So who was this silent partner, of course, it was the Government. For they were with me when it was time to pay up: Payroll taxes, State income Taxes, Corporation taxes, business licenses and taxes, Federal income taxes, Property taxes, then all the consumption taxes, sal bes, alcohol, tobacco (yes, my only vices, fine wine and cigars), cable, utilities, blah, blah… so whats all that total 60%? The old silent partner of mine… no risk, only reward. HHHMM, I think I would like that job. Anyhow, to my point, how much is fair? I mean really, according to many I was rich, no matter that if you worked it out on an hourly basis, it wasn’t very high, I almost got divorced, I still have very few memories of my first daughter growing up, etc… So again I ask, how much is “Fair”? 60%? I think it is already a ridiculous amount. Now I am to understand that I need to ‘contribute’ more for the underpriviged, I worked VERY hard for what little I had. No thanks, I won’t make that mistake again, I have since sold the business and unfortunately the new owners went under, so there went those 37 jobs… Alot of folks like to complain about the “Rich” but until you have been there be glad you are not, it’s not all it’s cracked up to be. Good Luck all..

  17. Woodshedder says:

    I wish our op-ed author would have provided some sources so we could check all of his “tenured economists.”

    I’m surprised Barry that you didn’t provide any links to economists who promote the supply side.

    Also, I’m wondering what a “tenured economist” is? Is it a teaching prof at a university? Someone with a Ph.d in Economics?

    If so, why do I NOT find it at all strange that “tenured economists” holed up in the bastions of liberal dogma do not believe the Bush tax cuts helped?

  18. Brendon says:

    The idea that small cuts in tax rates (33% to 31%, etc) can produce not only large, but persistent economic stimulus is, and pardon the language, absolute bullshit.

    I once heard your pal Kudlow ascribing the economic boom of the late 1990s to Reagan’s early 80′s tax cuts. That is one persistent shock.

  19. jag says:

    Its fascinating to read the comments on how lowering tax rates have screwed the “little guy” in light of the fact that:

    Top 1% Pay More Income Tax Than Bottom 90%

    The new data shows that the top-earning 25% of taxpayers (AGI over $62,068) earned 67.5% of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86%). The top 1% of taxpayers (AGI over $364,657) earned approximately 21.2% of the nation’s income (as defined by AGI), yet paid 39.4% of all federal income taxes. That means the top 1% of tax returns paid about the same amount of federal individual income taxes as the bottom 95% of tax returns.

    Many top earners have methods at their disposal to reduce or delay recognizing income. Make rates confiscatory and all you’ll do is drive new efforts (if not new scams) into hiding or “changing” reportable income. Trust me, in the 80s I saw so many feeble tax shelter schemes/scams come across my desk it seemed that no one was in business to do anything OTHER THAN avoid taxes.

    Besides, multiple, very large sample surveys have been taken to assess what people deem “fair” tax rates. Consistently, across generations, race, gender, you name it, people believe the maximum federal tax should be 25%.

    What does that public consensus mean? I think it means the “rich” feel exactly like everyone else; the farther away from 25% rates rise, the more the rich spend on avoiding paying taxes.

    Don’t give “the rich” the incentive to go back and hide income because all it will lead to is waste on a massive scale. They’ll win that game even if their tax schemes are massively unproductive.

  20. bob says:

    Brian B.

    Your so-called silent partner who just took all of your hard earned income and contributed nothing. Right.

    Who paid for the roads your customers used to get to your restaurants? Who paid to subsidize the grain and meat production for the food you prepared. Who paid to subsizide the electricity and other fuel you burned?

    By the way…you wern’t rich. That’s the top 1/2 of 1%. They pay 15% not 60%.

    Unless it’s time to stop paying for roads (or bridges in Minnesota) the trickle down cheerleading section might want to justify out why Enron executives had lower taxes than Brian. Oh…I know…they deserve to pay a lower tax rate because they were “contributing” more to society.

  21. b says:

    Left wing CHIMP

    never criticize left-wing politics

  22. Lord says:

    Republicans are enamored of it because it lets them escape responsibility of offering spending cuts. They fear doing so would make them unelectable, while borrow and spend is more attractive than tax and spend.

  23. Karl Smith says:

    As an economist I will say there is absolutely no doubt in my mind that 2001 tax cuts cost significant revenue and probably hurt economic growth.

    There is some possibility that the 2003 tax cuts increased economic growth but I am extremely doubtful that they paid for themselves.

    Also, I’m wondering what a “tenured economist” is?

    A trained (PhD) economist with tenure (lifetime appointment) at a university.

  24. Justin says:

    How come I always here about the mega-rich republicans controlling the political realm, when most of the mega-rich in congress are democrats – Rockerfeller, Kohl, Kennedy, Kerry, etc? Isn’t there something funny going on? Like, keep the middle-class liberals placated, so we can amass our family wealth from right under their noses…(anyone who can inform me better, I’d truly appreciate it).

  25. Eventhorizon says:

    Every time I see this debate no-one ever mentions the fact that at the same time as taxes were cut (under Reagan too), gov’t spending was ramped up massively.

    Now, the government receives back nearly 1/3 of all the money it spends (hires someone at $100k, they pay about $30-40k taxes).

    So obviously a government can cut taxes and increase spending and see increased tax revenues. No-one ever seems to acknowledge that with no tax cuts, tax revenues would have soared solely due to increased spending.

  26. foo says:

    Consider the extreme case – government reduces all taxes to zero.

    And government tax revenues rise as a result?

    Laffer or laugher?

  27. Winston Munn says:

    As with any concept, once it is politicized to the degree that it is endorsed by Rush Limbaugh, the concept becomes worthless.

    To ignore the psychological aspect of any economic idea is to court disaster. In a manufacturing-based economy, supply-side might be of some use if the tax incentives were targeted to constructive use, i.e., R&D, machinery, education, etc. – but even in an industrialized country, offering blanket corporate tax relief allows corporations and thus human nature the decisions as to where that money will be utilized – stock options and stock buybacks do little for the “trickle-down effect” of supply side.

    To think supply side economics benefits a consumption-driven debt-based economy is plain silly – how are the fees for LBOs and Hedge Fund bonuses going to positively impact the broad economy?

    I’d say it is a given that Goldman Sachs hasn’t invested much in infrastructure this year, and I’m still waiting for the first Lehman Brothers automobile to roll off that assembly line….

    On the other hand, if you have $5 million coop for sale in NYC, supply-side may just be the deal maker.

    But the real joke is that these “so-called” tax breaks are being offset by enormous government spending and U.S. debt increases – the two biggest spenders of all time have been Ronald Reagan and George (Dubya) Bush.

  28. Clarke says:

    Supply Side might be a codeword that gets people’s panties in a knot but its really quite simple.

    Its a re-naming of Classical Economics.

    Fundamentally, the premises are that there are no “demanders,” only “producers.” A person trades that which they produce for that which they desire. This has far-reaching implications for the pseudo-science of “tenured economists.” Its also terminally difficult to discuss with anyone who’s been to college to study economics. Why is that?

    As I read the posts above I’m struck by how emotional they are.

    One thing to remember is how cosmically incompetent our “tenured economists” were in the 1970′s and that much of what Supply Side economics espoused was politically charged in light of the failure of the left wing economics establishment to get anything right.

    Do I need to link to a chart of inflation that spans 300 years or do people already know what that looks like?

  29. rick says:

    Remember when the tax cuts were enacted. Just before 9/11. Over the past 6 years the revenues might have been greater but the timing of the original cut at a time when the economy could have taken a different path might have made a difference. You can argue about continuance of the cuts but I think most economists agree that the timing of the cuts in the face of a uncertainty from 9/11 did help the economy in the short term.

  30. JJL says:

    More rate cuts on the way seem to be the reading of the FOMC minutes today. Inflation is well contained was the FED’s stance. Checking the Walmart and Kimberly Clarke news its my position that if you want to buy some useless china crap your kid does not need, prices are falling and we have deflation. If, however, you need to collect your kids actual crap or wipe your own butt, we have inflation running wild!

  31. GreyWolf - USA says:

    Approx. 50% of households pay NO Federal Income tax.
    So, the politicians (esp. the dem cong) tax the rest of us to buy the votes of this 50% with “free” government handouts.

    And you people are worried about the effect of supply side.
    You’re examining a fly and ignoring the pink elephant.

  32. Brian B. says:


    As I mentioned before how much is “Fair”? I don’t have a problem paying taxes for my military or for roads or for the police/fire(I was a police officer in Los Angeles for 10 years prior to my business venture). I just have a problem with working very long hours, and investing my life and being told that I needed to pay more! Or my “Fair” share? Which is what I still don’t understand. As I said, Approx 60% after all the taxes are added up just seems to be an absurd amount. BTW, I may lean to the Right, but I am also very unhappy with the drunken sailors that have been spending for the last 6 years.

  33. hidebound says:

    for Barry B. the truly rich are rich only because of the government. Do you think that Gates would be so wealthy if he had to personally shut down everyone copying windows?
    back to the thread: my vote is a resounding no, supply side in the current situation is a fraud. Supply side works only when the private sector is able to put the capital freed up by tax cuts to better use than the government (last time was probably 1860??) For the last two decades good companies have been generating a steady flow of profits — they have unable to reinvest them into anything remotely productive. If America were advancing strongly enough to reach the future capital would be extremely expensive.

  34. Ottnott says:

    At current U.S. income tax rates:

    Supply-side economics is the proverbial free lunch.

    The reason no supply-side economics has a dearth of believers in the ranks of trained economists is simply that the evidence against the free-lunch claims of supply-side economics is so strong.

    Rhetoric and anecdotes are enough for pundits and advocates, but the field of economics demands evidence that can withstand review. Supply-side economics falls far short.

  35. Karl K says:

    The best comment so far was that of the restauranteur who worked his butt off and created nearly 40 jobs.

    Look, economists (tenured and non-tenured) and non-economists on here can debate this particular issue until the cows come home.

    It all eventually comes down to this fundamental fact.

    Who does a better job deploying money/capital in the economy? The government? Or the market?

    If your answer is the market — and I am sure even some of the non-tenured economists believe — then government should tax as little as possible. We should never concern ourselves about whether the government is getting enough revenue, because it should get as little as possible.


  36. whipsaw says:

    michael schumacher said:

    Got Gold??…..coins that is

    Interestingly enough, the short term indicator that I use just rolled over to sell on gold and buy on dollars today. I wouldn’t touch either side of either one right now, but will be watching my long term indicator for confirmation over the next month or so. Both of those have gotten too one-sided as trades and will likely adjust between now and the end of the year.

    See the SPY daily chart right before the “release”…that was supposedly just out at that time. Can you say front run??!!

    I was a little surprised by the rally, but I don’t think it was front running, just performance anxiety beginning to kick in. It was fairly obvious what the gist of the minutes would be and I was expecting a very slight bump, but perhaps the mere removal of uncertainty (nobody said “okay, but just this once”) was enough in itself.

    There is a lot of short interest from what I can tell, along with a lot of money still on the sidelines. Both are essential for a major rally, all it takes is a catalyst to get it started. I don’t know whether there will be another cut at the end of the month, but that would probably do it, as would unexpectedly good earnings.

    I don’t know how your gold coins are doing, but my calls are up 25% over the past 3 weeks or so and I didn’t jump in until after the Big Move. We’ll see what happens, but any idiot can make money in a rising market as long as he keeps one eye on the door. I’ve got my stop levels and am not about to pile on which would disrupt my otherwise conservative asset posture. I’m perfectly content to sit back and let my NAV go up most of the time- that will come to an end eventually, but probably not how you and many others here expect.


  37. donna says:

    There is no supply side. It’s a lie.

    An economy is created from supply and demand. Creating more supply doesn’t create more demand, so the economy doesn’t grow.

    Demand is created when people have money to spend. ALL people, not just the rich ones.

    Republicans think they can ignore all but the rich. In the short run, perhaps. But in the long run, yes we are all dead – but so is the economy.

  38. C. Maoxian says:

    I think Calvin Trillin got it just about right when he wrote:

    “It has taken me a long time to understand what was meant by supply-side economics: we have a limited supply of rich people, so we must always be on their side.”

  39. Gregg says:

    Every time tax rates have been cut – The 1920s, The 1960s, The 1980s and the early 2000s – revenue has increased far more than expected. Is it just possible that people taken as whole actually do respond to incentives? The incentive in this case being to keep more of what they earn. I remember Carter saying during a debate with Reagan that a tax cut would only lead to inflation – or specifically MORE inflation. Using that logic, his problem was that tax rates weren’t high enough. Does anyone seriously believe that higher tax rates were the answer to 1970s stagflation?

  40. F says:

    jag and GreyWolf

    The NYTimes (via Kevin Drum) has already taken care of this canard:

  41. alexd says:

    Dissent :The idea that you get the gov you deserve is stupid due to the idea that everyone instantly becomes a unified thing after a vote. There are aspects of democracy that are less than ideal. If I vote against a candidate or a policy and have to be force fed a result that I might oppose, like a duck being forced fed so that their liver can make a better foi grasse, does that mean I deserve the result? Consider that the loosing party in the last presidential election represented by dividing the population by % a greater population than any european country. The people who vote for something get the results they deserve the loosers just have to accept the results for better or worse.

    We need a politcal do over.

    Also none talks about the interest on the national debt. How much of every fed dollar of tax goes into a foreigner’s pocket? The money borrowed as a percentage of the whole which went to the wealthy who as previously mentioned do not tend to spend it but rather invest it, since foreign markets have gone up far faster than US markets what should I think of that. The Iraq war has not proven itself to have been a very good investment. If I borrow money it is either for an absolute emergency or it should be to develop something that will give me a greater return than the interest I am charged. We have not done that. If we got rid of the deficet, then a tax cut would be ok since we would have extra money or we could do like Singapore and now China does and invest it.

    Brian B, I think you did a good thing and worked your ass of to it, the question I have is could you have paid someone 125k or lets say 150k to do your job and spend your time with your family? Just a concept not an insinuation. That what Barry R does he gets Kudlow and Laffler to do all the work!

  42. Karl Smith says:

    Just as a note:

    The rapid increase in tax revenue is due to the increase in inequality. With a progressive tax system more inequality means that the government can raise the same revenue with a lower rate schedule.

    That is, if we tax the rich more heavily the government gets more revenue when the rich get more revenue. What happens to the poor is almost irrelevant because they pay such a small fraction.

    Indeed, it is possible for the economy to shrink but tax revenues to rise if inequality is rising fast enough

  43. Ottnott says:

    Every time tax rates have been cut – The 1920s, The 1960s, The 1980s and the early 2000s – revenue has increased far more than expected.

    The argument advanced by supply-siders is not that revenue would be higher than expected, but that the economic growth would increase enough that tax revenues would be higher with the cuts than without.

    That isn’t what happened in the 1980s and 2000s. I’m not familiar with the tax cuts of the 1920s, but I’m not sure I’d invoke that decade if I were advocating for a policy used in that period.

  44. Spankey says:

    Reagan used to say that “we know how better to spend our money than Washington”. Tax cuts stimulate creativity and thrift, as well incentive. I believe tax cuts work to juce the economy.


  45. NoFate says:

    Republicans start with the answer they want and then build the argument to support it. Machiavelli and the Sophists of Ancient Greece would be proud.

    Except for Ron Paul, none of them have any credibility. They are genocidal maniacs who spend money like a drunken sailor in a whore house (or an airport bathroom perhaps). They make Nixon look like a communist.

    The worst part is this huge IOU in lost taxes gets added to the IOUs for the Iraq War, Social Security and Medicare.

    Who eventually has to pay the bills? OUR CHILDREN thats who!! Exxon and Halliburton are getting rich and our children will inherit the wind.

  46. dblwyo says:

    Sad, sad, sad. We’ve been waving the magic wands of voodoo economics around long enough and all the carefully gathered empirical evidence is that it doesn’t work in practice and is questionable in theory. Before he went to the dark side Prof. Krugman had several excellent discussions of supply side and other related issues. Any of his ’90s popular economics books are well (extremely) worth the read. In fact having just re-read Peddling Prosperity for the fifth time it’s as good a survey of macro-econ, macro-policy, what worked or didn’t and why and the voodoo waved by various policy entrepreneurs of the Left and Right as you can find. Too bad it’s not been followed by a refresh to bring it current.
    If you’ll skim Mankiw’s blog you’ll find that while much more cautious he’s basically in this camp and that’s reinforced by reading (skimming) his intermediate macro-text. Again highly recommended.

  47. RW says:

    What is the market? A structured collection of people who vote with dollars.

    What is the government? A structured collection of people who vote with ballots.

    To hear supply-siders or other fundamentalists one would think one was god and the other the devil herself.

    So let’s see, Europe is now growing faster than the USA so perhaps we should assume higher taxes make for better markets?


    Well, China is growing faster than the USA, should we assume more government control makes for better markets?


    Did the Katrina debacle convince anyone that perhaps there might be such a thing as too little government? Or at least that it might be worth doing government well if you are going to do it at all and that it might be worth paying the cost for the kinds of professionals and resources capable of doing a good job at that?

    Personally I prefer the hidden hand of capitalism to the hidden mind of socialism but I am not aware of any pure examples of either on earth and frankly both seem to work quite well in different combinations particularly when extremes are avoided.

    So here’s a bigger dose of simple: Perhaps the vain attempt to create an economic theory making the case for one system’s clear superiority over the other simply evades the real issue, that it’s about values; and taxes actually have far less to do with a country’s wealth than they have to do with its sense of where markets might fail to adequately express the national will.

    Those ruminations aside, tax cuts do not pay for themselves and those who continue to maintain they do are knee deep in that wide river of failed metaphysics that includes flat earth theory and phlogiston (no need to worry about drowning, the river only gets more shallow further on). As the (conservative) economist Greg Mankiw remarks, if a politician thinks tax cuts increase revenue why advocate spending restraint, why not just pay for new spending programs with more tax cuts? The (conservative) economist Andrew Samwick adds (, “The question that I would like to have answered by any policy maker who voted for the tax cuts and believes that they have increased revenues is: Why did you make them so small?”

  48. Mr. Econotarian says:

    The Laffer Curve debate is difficult because there are a lot of factors that work into federal revenue. Tax rates are just one, not to mention the business cycle, unexpected events and natural disasters, tax policy (what is taxed: income, capital gains, corporate profits, payrolls, imports, etc.), debt policy, and the Fed’s interest rates.

    The real question is whether more federal income is a good idea. Personally, I’d prefer for all Americans to have an increase in income, rather than the government (federal, state, and local).

    The question is can one prove that government’s ability to use a dollar will improve our personal income more than leaving that dollar in our personal income.

  49. blam says:

    Republican supply side tax cuts are always accompanied by the creation of a credit bubble to stimulate consumption and, unfortunately, destroy savings.

    During Wrongald Rayguns time, they (Alan Greenspan’s commission} doubled Social Security withholding which was used to cover some of the huge deficit created by cutting the revenue stream. That’s exactly what Bushco neo-facsists have done. I cringe when I hear the republicans selling SS disaster. They’re just looking for a way to cover the deficit.

    Raygun/Cheney/Rumsfeldt/Bush also created the S&L real estate bubble as a means to stimulate demand. Sound familiar ?

    Supply side economics ranks right up there with the flat tax and repeal of the un-earned income transfer (er inheritance) tax.

    Yes – asset bubbles and extraordinary corporate profits are part of the package.

    Keep on pointing out that the idiot emperor king has no clothes.

  50. Andy says:

    “Supply Side Theory” of tax cuts stimulating the economy by freeing the people to spend more is only true when taxes are so high that they are choking off consumption. I can see the logic behind cutting taxes from 70% to 35% so that people could spend more.

    However, in the gospel of “tax cuts are always good”, two parts are always missing from the discussion: (1) cutting taxes from 35% to 33% doesn’t generate a whole lot of additional consumption; (2) those tax decreases will indeed lower tax revenue in the short term that’s supposed to be balanced by a reduction in spending.

    But the reduction in spending never seems to occur. So the government spends lots more than it ever takes in.

    The worst part is that politicians only talk about “balancing the budget” without ever wanting to talk about the $9 trillion debt we’ve got out there. How’s that going to magically disappear? And how much of tax receipts is going to pay the interest on that when it could be doing something useful like funding ways to make us energy efficient or cure cancer?

  51. Damian says:

    “Today’s WSJ gives some proof (yes, proof not ‘tenured economists’ analysis) that non-supply-siders like those at the CBO who provide static analysis have been under-predicting federal tax receipts over the last five years.”

    Norm – you’re making a logical mistake – just because the CBO is bad at predicting tax receipts doesn’t mean that supply side/laffer curve economics works – it just means that the CBO is bad at predicting the future – which, as Yogi said, is hard. We only have to look at every other government report to know that just about everyone is bad at predicting….join the crowd.

  52. Stuart says:

    The FOMC cut to bail out their banking buddies. Moral Hazard….the rot is pungent.

    “Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead. Given existing commitments to customers and the increased resistance of investors to purchasing some securitized products, banks might need to take a large volume of assets onto their balance sheets over coming weeks, including leveraged loans, asset-backed commercial paper, and some types of mortgages. Banks’ concerns about the implications of rapid growth in their balance sheets for their capital ratios and for their liquidity, as well as the recent deterioration in various term funding markets, might well lead banks to tighten the availability of credit to households and firms.”

  53. David says:

    Supply-side economics gives me a run-around
    Is it a sure-fire way to speed things up
    When all it does is slow me down.

    Demand-side economics is likes a nervous magician waiting in the wings
    Of a bad play where the heroes are right
    And nobody thinks or expects too much. And Hollywood’s calling for the movie rights.

    “Things must be as they may”

  54. The Dirty Mac says:

    There seems to be consensus that higher GDP results in increased tax revenues. If tax rates don’t affect GDP growth than obviously there will be a static loss in tax receipts. I have a hard time accepting that. But also I have a hard time accepting that the level of taxation should be based on what the government “needs”.

  55. The Dirty Mac says:

    And that “economic far right” thing is based on the premise that Bush, et. al. favor a minimalist government with funding inadequate to provide basic services. Based on what I saw during six years of the Bush Administration and a Republican Congress, such a premise is patently absurd. Maybe I’m slow, but I have a hard time seeing where Sarbanes-Oxley and a prescription drug entitlement fit in with mid 19th century lassez faire policies.

  56. wnsrfr says:

    I think that the percentage that is perceived as “too much” can be the tipping point between a revenue-cutting tax cut and a stimulating tax cut, as some have noted.

    That percentage is really not fixed by any magic formula, but is one of psychology of the moment/year.

    It is not an argument to be made by a tenured economist but one of all the factors that drive government spending.

    Simple things, like waging war, fighting floods, perhaps even battling locusts…

    How can we be arguing about tax rates without questioning, quite simply, the complete idiocy of cutting taxes while waging a very expensive war? However we got into Iraq, we are there. However we are going to get out, it won’t be fast or inexpensive.

    The only sensible response for a populace at war is to raise taxes, as that is one of the main reasons we pay taxes: our security and stability as a nation.

    Somehow due to the one-sided nature of this war’s decision-making we, as a nation, are not paying for it. The Republicans won’t raise taxes due to some mechanical defect in their collective brains, and the Democrats won’t because “it isn’t their war”.

    As a nation we are racking-up the bills but are not paying for them. Tax rates need to match reality, and the reality of the Iraq war has not been factored-in AT ALL.

  57. Francois Theberge says:

    Supply siders would have us believe that taxes are the biggest enemy of the entrepreneur and investor.

    As Warren Buffet discussed in Robert G. Hagstrom’ book “The Warren Buffet Way” (I am referring to the 1st edition) inflation is the Bogeyman, not taxes.

    Donna wrote:

    “Republicans think they can ignore all but the rich. In the short run, perhaps. But in the long run, yes we are all dead – but so is the economy.”

    The Republican Party will die way before the economy does. *evil grin*


  58. TKL says:

    “Approx. 50% of households pay NO Federal Income tax. So, the politicians (esp. the dem cong) tax the rest of us to buy the votes of this 50% with “free” government handouts.”

    This oft-made observation is a double-edged sword. What would become of our economy, indeed our society, if we lowered taxes on the top 50% and raised taxes on the bottom 50% enough to reach some supposed level of greater fairness? With average folks’ budgets already tight and debt-dependent, it’s hard to imagine there’s much room for shifting the burden without fomenting some sort of revolution. Be careful what you wish for. The New Deal that econocons love to hate was very much for the benefit of the wealthy, as it forestalled far more severe socialist alternatives. You can cry about how unfair it seems, but it’s a lot better than being strung up by an angry mob.

  59. Winston Munn says:

    This just in…..

    Reading the fine print of the FOMC minutes, it is revealed that at least eight of the governors complained about it being either “stifling” or “too damn hot” in here for a decent meeting.

    The concensus of economists who have analyzed the minutes now believe the 50 point rate cut the result of “unseasonably warm weather”.

  60. Tom B says:

    “Did the Katrina debacle convince anyone that perhaps there might be such a thing as too little government?”

    NYT had an excellent article this week about an aerosol hot ub sealant that was so toxic people were ending up in the ER. HD kept it on the shelves for 18 MONTHS. Repeat slowly after me: Regulation is GOOD. Consumer safety is GOOD. Financial oversight is GOOD.

    I hope the next Prez is smarter than a brick and nicer than a junkyard dog. That pretty much means a Democrat, as far as an I can see, I am not filled with enthusiasm for either Clinton or Obama, but it seems to me that the deeply flawed Guliani is the best the GOP could nominate.

  61. Andrew says:

    Tax cuts + runaway deficits = mortgaged children

    He who pays the piper calls the tune. In our case, this is increasingly foreign money – and even the US is not exempt from a credit card limit.

  62. Kevin P says:

    Of course we supply-siders believe in the Laffer curve. However, remember one part of the Laffer curve shows that increased taxes also increase government revenue. Then at a certain point further increases in taxes reduce government revenue. Problem is nobody really knows where that point is. It appears the Reagan tax reform really created incentives for production. The Bush income tax reductions were rather small and geared to a small number of tax payers at the top end. To be honest, it is not clear how those tax cuts fit with the Laffer curve and supply-side incentives given Fed easy money and global growth.

  63. Norman says:

    RE: Damian

    Here’s my logic:

    The CBO, a non-dynamic body, has been wrong and getting wronger on tax receipts. Supply siders have been much better. Further, this has been going on for five years. Maybe both haven’t hit it on the head but one body is clearly better. (Check Paul Krugman’s predictions he of Princeton and a famous book writer.)

    Thus, logic tells me but not everyone it seems that the supply siders have it much more correct than the liberals. For me its not about ideology its about being right.

  64. Schnauser says:

    there are only two kinds of people in this world: those that benefit from government largesse, and the rest of us. I would gladly give anyone, rich or poor, a tax cut if it meant that these congressional assholes would stop spending money. if only the federal budget would grow inversely with the rate of inflation, just imagine how the Fed might behave?

    rereading the transcript of J. Stewart’s interview with Greenspan, its quite amazing what Stewart got him to actually admit.

  65. Woodshedder says:

    I do not think anyone has posted any legitimate research which disproves supply side theory.


    However, at least we all now know who is voting for Hillary.

  66. Mike G. says:

    I think the idea that tax cuts raise more revenue CAN definitely be true. It depends on what the tax rate is before and after. A small marginal tax cut probably won’t deliver. But there isn’t a magic equation where for every % dropped you get x% more revenue. The tax cut is just one way to light a fire under the economy. It is the smaller tax bite from the larger economy that pays off.

    I keep seeing posts that say no such thing happened under Reagan. How are you coming to that conclusion? Revenues what? DOUBLED? So how do you reach the conclusion that they would have more than doubled with no tax cut? Are you figuring out the revenues from the GDP for those years assuming a higher tax rate? If so, that’s nonsense. We wouldn’t have had the growth in GDP without the tax cuts.

    This is kind of the mirror side of the static analysis that CBO does for figure out how much tax cuts will “cost”. If don’t correctly like Kennedy and Reagan did, the DON’T “cost”.

  67. wunsacon says:

    Norman, sure, you’d like to shove some “reality” into the face of some elitist Leftists. But, you missed BR’s point.

    >> Read it and weep people of the Left. Real world not theory prevails. QED.QED. QED.

    Wow. So sure of yourself! (Yet wrong.) C’mon, Norman. You know, you might learn something from elitist leftist comedian Bill Maher: “Doubt, for lack of a better word, is good.”

  68. rr says:

    Regarding taxes and economy, simple relation – investor discount rates go up, investment goes down. Investor discount rates = Base Real Rate of return + Tax Premium + Inflation Premium.

    Cut tax rates and the tax premium goes down, lowering investor discount rates, raising the NPV of investment projects, which results in more projects being accepted.


  69. ejr says:

    The boom under Reagan had very little to do with supply side and a whole lot to do with oil. The same can be said for the troubles prior to Reagan.

    The price of oil is a fundamental inflation lever, leading to the real stagflation in those times, just as it is today. The Iran Iraq war gutted the price of oil, and gutted stagflation. At the same time, Reagan’s record borrowing and military buildup, and the unprecedented levels of financial corruption (junk bonds) allowed a boom to occur. Tax cuts had little impact on this equation. Real income has been mostly dropping since that time, and is the root cause of today’s troubles.

    The Bush administration launched a vastly greater level of corruption, with hedge funds destabilizing the entire world financial system. Also, the housing boom and unprecedented levels of credit all around, combined with truly massive levels of borrowing and unproductive government expenditure, have served to create what looks like legitimate economic activity. Yet real employment has been declining, along with real wages this entire time.

    Classic Karl Marx crisis of overproduction. The increase in wealth transfer from the general population into corporate coffers has hastened the arrival, and intensified the severity of the correction we are now in. The lack of real income gains and the maximization of remaining consumer credit pretty much ensures a collapse of American consumer spending, which will ripple around the world. Domestic GDP could easily drop three or more trillion per annum, and the bottom is falling out of all international support for the dollar. America could now completely collapse, and if not, will still become very much poorer at any rate.

    America’s oil dependence pretty much ensures that the main inflation driver will rapidly devalue all forms of remaining American savings, and while this continues neither the current Bush administration, nor the coming one will be able to do anything to kick start real growth.

  70. Eclectic says:

    The economy is like this mechanical analogy:

    A gasoline aircraft engine has a manual device used to alternately enrich or lean the fuel being supplied to the engine. This is necessary as the changes in atmospheric pressure that occur upon climbing or descending cause changes in the concentration of atmospheric oxygen. Even before the advent of computer controlled automobile engines, these devices were not used on automobile engines since they generally functioned at a relatively constant altitude and atmospheric pressure. Their fuel systems were pre-adjusted for geographical sales.

    Although counterintuitive, greater power is often produced by leaning an aircraft’s engine. In other words, by reducing the amount of fuel being supplied to the engine as the ratio of fuel:air mixture fed to the intake manifold. This is because the most efficient combustion (thus most efficient cost of motive power) occurs when the fuel:air mixture is adjusted for the oxygen content of the atmosphere.

    Now to the economic relativity:

    For every level of economic output (GDP), in the aggregate, and for every individual person’s private economic output, there are different levels of taxes that work most efficiently to reimburse government for its necessary services to those entities, while at the same time not destroying any entity’s opportunity to rightfully control and direct private property for the purpose of economic gain. That is, to rightfully maintain i-n-c-e-n-t-i-v-e.

    Economic incentive is like the air we breathe. It has oxygen in it that when provided with the fuel of a social, physical and fiscal infrastructure, produces GDP. However, the infrastructure has real costs that are tantamount to the capital expenditure of a corporation that is the basis for its ultimate productivity.

    One of the problems we have in our society is that we simply are unable to recognize the great disparity between the levels of leaning needed for individuals relative to their incomes.

    The great defect of Supply Side economic theory is that it tends toward a perpetual policy of maintaining a too lean mixture (taxes too low) for all economic classes in the misguided belief that the economic engines of high income individuals need it as much as those of low income individuals do. As a consequence, often the increase in overall income tax revenue is erroneously cited as a witness to higher productivity, when in fact it actually raises the capital expenditure costs of replacing the infrastructure that permitted it.

    Thus the productivity cited is, in reality, merely a temporary illusion.

    I do believe that income taxes should be progressively applied, but not progressively as a linear function, but exponentially progressive (Brian B. – I understand and sympathize with your frustration). Even Warren Buffett understands the principle that billionaires are rewarded with a disproportionate level of public service infrastructure for which higher taxes ought to be due.

    Ultimately, Supply Side economic theory makes use of fiscal policy in a manner that is the mirror image of Classical Theory’s utilization of monetary policy. Both of them ignore the event of an economic dislocation in which the supply of money loses its capacity for linear modulation of GDP.

    Supply Side economic theory’s most extreme defect is its tendency to ignore the detrimental effects of u-n-r-e-s-t-r-a-i-n-e-d free-market capitalism. Subprime abuses of the housing construction and financing businesses are yet evolving examples.

  71. seamus says:

    @woodshed: “I do not think anyone has posted any legitimate research which disproves supply side theory.

    Have you ever heard of Russell’s Teapot? Or perhaps the Flying Spaghetti Monster? You don’t get to make shit up and then challenge others to disprove it.

    When Clinton raised marginal tax rates in the mid-’90s, Bob Dole and Newt Gingrich predicted economic disaster and lower tax revenues. Funny how the GOP remembers the ’80s but forgets the ’90s.

    I’d like to get on one of these presidential debates and ask how they intend to pay off the $9T national debt. Give one example of how government can reduce spending or raise revenues sufficiently to run those kinds of surpluses into perpetuity. I’m waiting.

    RW, your comment made my evening. “Perhaps the vain attempt to create an economic theory making the case for one system’s clear superiority over the other simply evades the real issue, that it’s about values; and taxes actually have far less to do with a country’s wealth than they have to do with its sense of where markets might fail to adequately express the national will.” Right on.

  72. wtf says:

    I love how someone making $250k per year thinks the GOP supply side argument applies to or benefits them. Its almost comical.

    One other question for the successful restranteur. How many of the 37 employees did you provide health insurance for or did you rely on the rest of us to cover your tab?

    Listen, I am not criticizing your attempt to start a business and try very hard to make it successful. In fact I applaud your efforts. But until people like you realize that you are being played for fools by the same people you have been supporting you will get nowhere.

    Strengthening the middle class, investing in infrastructure, the arts, and education will give you more opportunity to succeed than your blind faith in tax cuts for the ultra rich.

    You are middle class, get over yourself already and support policies that actually help you and the rest of the country.

  73. VJ says:

    What’s amazing is that anybody is still a big enough sucker to fall for such failed RightWing propaganda.

    As I’ve documented in various segments on various occasions in the past, every time tax rate cuts have been enacted, the national economy subsequently either slowed dramatically (the ’60s), or entered recession (the ’80s and ’00s), and federal income tax revenues plummeted precipitously.

    * The national economy experienced a dramatic slow-down in 1966, less than 18 months after tax rate cuts were enacted into law, with GDP going over a cliff from 10.1% down to 1.4% (note that the previous high levels of GDP occurred while the top marginal rate of individual income tax was 91%).

    * After the 1981 tax rate cuts under Reagan were enacted, GDP was a net negative 10.2% over the five subsequent quarters.

    * As David Stockman, Director of the OMB 1981-1985 stated, federal tax revenues plunged to 1940′s levels after the tax rate cuts in 1981.

    * The U.S. Treasury documented the plunge in federal tax revenues down to 1950′s levels after the tax rate cuts beginning in 2001.

    Tax rate cuts have never stimulated the American economy, never increased federal income tax revenues, and never created a net increase in the American workforce. Tax rate cuts have repeatedly led to economic slow-downs or recessions, and/or massive federal deficits and debt, and/or declining Standards of Living.

  74. Steve says:

    Lower tax rates are better for the economy than higher tax rates. End of story.

  75. cinefoz says:

    Supply side economics need to be renamed.

    As I understand it, this form of economics concentrates on Investment rather than Consumption. Low taxes are supposed to be targeted to support the goal of increased Investment. Increases in Investment are supposed to increase the number of good jobs, enhance Productivity, and make the world sing and dance all day.

    Thus, low capital gains tax is good. Other forms of low taxation are less certain.

    The Laffer Curve is simply a generic diminishing returns to scale curve. Almost all variable relationships follow it. Yes, if taxes are at confiscatory levels then lowering them will increase revenues because people will work more … they get to keep more of their own money. If taxes ARE NOT confiscatory, then it is just voodoo economics.

    In summary, most people who write of and speak of Supply Side Economics are ignorant and know nothing about the subject.

  76. cinefoz says:

    I just said:

    In summary, most people who write of and speak of Supply Side Economics are ignorant and know nothing about the subject.

    Addendum: Most people who support Supply Side Economics know little or nothing about it. They are embracers of Faith Based Economics, who feed off of each other’s misinformation in a sort of mutual admiration society, expressing Field Of Dreams Economics.

  77. REW says:

    Supply side economics is not directly about taxes, and those who criticise it solely on tax effects are either lazy or ingnorant.

    A true supply side economist believes in:
    A) Sound money. A gold standard or a gold based price rule. A stable unit of account eliminates distortions in long-term price signals.
    B) That the role of the producer is more important than the role of the consumer, because before any of us can consume, we must produce. Thus all policies, fiscal and regulatory, should encourage more production.

    Some tax cuts (i.e., Bush’s 2003) will encourage risk taking and production. Others (i.e., Bush’s Keynesian 2001) will not.

    Republicans who claim that tax cuts always pay for themselves are just as wrong (and dogmatic) as the Democrats who propose tax hikes for all our ills.

    Read The Way The World Works.

    BR, where is your post on how dogmatic the Democrats are about wanting to soak the risk with tax cuts?

  78. wnsrfr says:

    I vote for Eclectic’s post as the best!

  79. SPECTRE of Deflation says:

    A Political Party has nothing to do with this debacle. This is far more evil with the elites screwing everyone. Poor Ben got FOIA’d and had to give up his records:

    Were Friends of the Fed Tipped Off?

    Kevin Duffy

    According to an October 3rd article on Bloomberg, a phone call from none other than Robert Rubin (a.k.a. “Mr. Bailout”) to Ben Bernanke in early August set in motion a series of public and private sector conversations that culminated in the surprise discount rate cut on August 17th:

    The Federal Reserve’s Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke’s public about-face 10 days later, according to records of his schedule.

    Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke’s appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.

    Not surprisingly, Bernanke also consulted with Hank Paulson:

    Bernanke was also in frequent contact with Treasury Secretary Henry Paulson, who said in an interview last month that he meets the chairman regularly.

    Let’s establish a time line, keeping in mind Rubin and Paulson are ex-Goldman Sachs CEOs in direct communication with the chairman of the Fed…

    Aug. 7 – The Fed stands firm, keeping rates unchanged.

    Aug. 8 – Rubin calls Bernanke.

    Aug. 9 – Bernanke calls some Wall Street bigwigs including Ray Dalio at Bridgewater Associates, the 4th largest U.S. hedge fund firm with $32 billion under management (Dalio is personally worth $4.0 billion according to the latest Forbes 400 issue). The Wall Street Journal reports, “the Fed twice entered the market today to pump a total of about $24 billion of liquidity into the system, more than its typical daily open-market activities.”

    Aug. 10 – A Goldman Sachs “quant” hedge fund, Global Equity Opportunities, suffers a brutal week, losing about 28% of its value to $3.6 billion. Its North American Equity Opportunities fund and Goldman’s flagship, Global Alpha, are also taking significant losses.

    Aug. 13 – Goldman Sachs injects $2.0 billion into Global Equity Opportunities. The company is joined by a group of big-name investors, including AIG’s Hank Greenberg and Eli Broad, who pony up $1 billion. (Greenberg, 82, is worth $2.8 billion; Broad, 74, is worth $7.0 billion according to Forbes.)

    Aug. 16 – In a wild day, the Dow rallies back to unchanged in the final hour after being down nearly 400 points intraday. The Dow closes at 12,846.

    Aug. 17 – Before the market opens, the Fed drops the discount rate by 0.50% to 5.75%, timed for maximum bullish effect on an option expiration Friday. The Dow rallies 233 points to 13,079. Global Equity Opportunities rises 12% for the week.

    Aug. 31 – Global Alpha loses 22.5% in August, its worst month ever. Year-to-date, the fund has lost a third of its value. According to Bloomberg, “Investors last month notified… Goldman, the most profitable securities firm, that they plan to withdraw $1.6 billion, or almost a fifth of the fund’s assets as of July 31… Global Alpha will have to return 80 percent before the managers can resume collecting 20 percent of investment profits from clients who were in the fund at the beginning of last year.” Global Equity Opportunities finishes the month down 23%.

    Sep. 14 – Global Equity Opportunities is reportedly down 1.9% so far for the month. Global Alpha is down 2.8% (and off 46% from its March 2006 peak). “People aren’t going to keep suffering losses,” said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds. “These funds are supposed to do well with risk management. Something has gone badly awry.”

    Sep. 18 – The Fed surprises the market with 0.50% cuts in both the fed funds and discount rates. The Dow rockets 336 points, its best day in 5 years, to 13,739.

    Sep. 20 – Goldman reports much better than expected 3rd quarter results. Trading and principal investments revenue checks in at $7.6 billion, up 21% from the 2nd quarter and up 73% from a year earlier. “The numbers are great,” Glenn Schorr, an analyst at UBS AG in New York, wrote in a note to investors today. The earnings demonstrate Goldman’s “ability to not only navigate choppy waters, but make a ton of money doing so,” he said.

    Oct. 1 – The Dow closes at a record 14,088.

    Oct. 3 – Goldman Sachs stock hits an intraday high of 230.63, up 46% from its mid-August lows and within 2% of its all-time high.

    It is no secret Goldman Sachs has plenty of friends in high places. It is no secret the company, as well as the rest of Wall Street, was on the ropes in August. In mid-August, politically-savvy Hank Greenberg wrote a big check and a week later he was 12% in the black. By the end of August, Goldman reported its second best trading results ever. How much of their good fortune was a result of skill we’ll leave to the reader’s imagination.

    Were Goldman, Hyperion, Bridgewater and others privy to what is essentially inside information? A friend and keen observer of the financial scene writes:

    Bernanke might defend himself by arguing that he only asked the questions and didn’t answer any. Give me a break! Great traders like Ranieri made their fortunes reading the nuances of comments made by other traders AND policymakers. Tone and emphasis matter as does the types of questions being asked. It is a HUGE advantage having this kind of special access.

    Lew Rockwell is right: Politics is a rich man’s game.

  80. Brian B. says:


    Intersting comment, However, If you read my post, I didn’t end up with $250K. After all the taxes I ended up with much less. And at the time living in Los Angeles, that wasn’t much. So now I was suppossed to offer health care for my employees? You mean the ones that worked for 3 weeks then quit without giving notice? Or the ones that would suddenly need a day off no matter what kind of situation I was in? Or the ones who resented me cause they thought they saw a successful business? When they had no clue how much time, energy, money I had invested. The restaurants were only storefront Pizza restaurants and those 37 employees were a culmanation of who knows how many people I hired. Interesting how posters feel compelled to complain before they have been in that type of situation. WTF, may I ask how many business’s you have started? I don’t want this to become personal but you do not have any idea how hard it is to start a business from ground up. I did not have any fortune to start this with. I levereged my home and took out my savings and almost went bankrupt within the first 6 months. I am sorry but wasn’t I due a bit of profit? Health care, wow, sorry I had so many issues to worry about finding health care for employees that worked only 20 hours a week, just wasn’t one of them. So I ask again how much is fair? BTW, I dont resent the system the government, or my employees but that was 1 expereince that I will never repeat. It was by all accounts a successful bussiness but when all was said and done the profit I had left over wasn’t worth it.

  81. Eclectic says:

    Thanks wnsrfr… here’s the wrap:

    Unless I missed it somewhere, no poster mentioned the core philosophy used as the construct for Supply Side economics, that construct being Say’s Law:'s_law

    This is likely to produce a chicken versus egg argument, with both advocates and detractors of Say’s Law taking sides according to their hopefulness and willfulness rather than their objectivity.

    The fallacy of Say’s Law is that it quite often would produce the illusion that it works, because unknown demand, itself the result of an unrecognized opportunity to gain from accreting human productivity, is simply assumed to spring from the creation of supply.

    In other words, market participants want, but don’t know that they want… and thus the creation of supply will find an opportunity to benefit a market participant by improving either their own productivity or something akin to it which the market participant had not realized prior to the availability of supply.

    In pre-industrialized, pre-labor-specialized societies, this effect would have seemed to conjure magic from the mist. Unfortunately, today it’s just a license to exercise unrestrained free-market capitalism’s worst attributes.

    The irreducible fact is that, still, d-e-m-a-n-d has to exist, even if only subconsciously and unknowingly so, and thus Say’s Law is false.

    In reality, today’s advocates of Supply Side economics fail to observe that it is in fact a gross stimulant to government spending (Keynesianism under cover of disguise) that drives markets higher, without providing the associated tax revenue to maintain and replace the infrastructure that permitted it.

    Consequently a financial crisis may yet be the indicator of the phantom productivity credited to Supply Side policies.

  82. SPECTRE of Deflation says:

    There is no efficient market or discounting mechanism. This is a rigged game for the benefit of the elite class. BenDover Bernanke is a stooge, and so are his fellow FED officials.

  83. jag says:

    jag and GreyWolf

    The NYTimes (via Kevin Drum) has already taken care of this canard:

    Posted by: F | Oct 9, 2007 8:21:46 PM


    The NY Times and Drum talk about ALL taxes paid (state, local, etc). I thought the subject here was FEDERAL income tax rates?

    So, my point wasn’t a “canard” it was a FACT. If you want to argue other taxes should be lower on the middle class and higher on the “rich”, fine. I’d be all for higher taxes on homes over the median SIZE, taxes on discretionary items, taxes on anything considered “luxury” items.

    But when you use the “canard” smear to “refute” someone’s point and it doesn’t even address the point in question you aren’t being as clever as you think, no?

  84. CK says:

    Daniel Gross shrinks supply-side economics to a single false proposition, which few supply-siders have ever propounded. Politicians will say anything that sounds good. But does the Club for Growth (supply-side enforcer) enforce the proposition? Does Grover Norquist? No, they do not.

    Then it must be a liberal straw man, like “trickle-down.”

    Supply-side economics means that the producers matter most in an economy. It is a broad attack on demand-side economics, which worries about the consumer’s “70% of GDP.” Supply-siders know that producers are 100% of GDP and are highly responsive to incentives. Consumers, by comparison, are placid cows whom policymakers may ignore.


    BR: please supply a link for his — I cannot find it on Slate or Newsweek

  85. hot karl says:

    “Who paid for the roads your customers used to get to your restaurants? Who paid to subsidize the grain and meat production for the food you prepared. Who paid to subsizide the electricity and other fuel you burned?”

    American taxpayers, you dolt. The government is only a proxy. Nice try at the GOTCHA game, though.

    “By the way…you wern’t rich. That’s the top 1/2 of 1%. They pay 15% not 60%.”

    15%? Are you daft? Oh, wait. We’ve already established that.

    “Consider the extreme case – government reduces all taxes to zero.

    And government tax revenues rise as a result?

    Laffer or laugher?”

    You should have paid attention in Econ 101, mouthbreather. You would remember that there are two tax rates – 0% and 100% – that produce zero revenue (theoretically, save the quibble on the 100% side.)

  86. L'Emmerdeur says:

    Supply-side economics are Stalinist in nature: “Soviet Russia produce potatoes, Soviet people eat potatoes” *cocks trigger*

  87. Tom S. says:

    Eclectic nailed it.

    “Supply Side economic theory’s most extreme defect is its tendency to ignore the detrimental effects of u-n-r-e-s-t-r-a-i-n-e-d free-market capitalism. Subprime abuses of the housing construction and financing businesses are yet evolving examples.”

    With expectations of a multi-year long slide in mortgage and credit losses to the ‘abused’, watch how the free-marketers change their tune to “no one could have known!”

  88. todd says:

    at some point on the curve a reduction in taxes probably does result in more economic economic activity and more revenue, but that point is probably way up there (taxes at 90% of income?)???

    the argument is rather used because people WANT to hear that you not only can get something for nothing, but in this case you get something for SOMETHING: more revenue AND lower taxes.

    it is simply irresponsible – later generations are going to think we had our heads up our butts, and it is primarily the baby boomer generation who is doing this to the country. …

  89. David says:

    Why are more tax revenues a good thing?

    While the 2001 tax cuts might not have produced the same amount of revenue as keeping the tax rates the same, why are we debating the size of revenues as if more taxes=better gov’t/outcome? That’s utter Bull.

    Supply-side or whatever, smaller gov’t=better gov’t. You want to balance the budget? Cut taxes AND spending for once, and let’s start with ag subsidies and the Dept of Education. Oh, and the Surgeon General’s office (what the heck DOES he do anyway?).


  90. Uncle Jeffy says:

    Class Assignment #3 (30 points, due 10/17/2007):

    Explain the concept of multivariate analysis to Larry Kudlow and like-minded “analysts.” Demonstrate proof that Kudlow understands your explanation by asking him about the role of monetary policy and government spending in stimulating economic growth.

    Extra credit (20 points): Accomplish this within the next 1000 years……

  91. FloydU says:

    1000 years is a long time

  92. Anon says:

    These explanations are all great but doesn’t it come down to this???

    Cut taxes and go to war. A war that has an Ambrams battle tank guzzling more gas than a 35-foot Grady White fishing boat… Do the math there.

    Also, a 3 year old can understand why these tax cuts were not the best idea. Let’s use Candy.

    A 3 year old boy receives 1000 pieces of candy for his birthday. His father allows him to eat three pieces per day and promises to put 1 back so the supply last longer. The kid’s stash will eventually run out.

    I’m not saying the US will run out of money but is my point understood?

  93. me says:

    “The real question is whether more federal income is a good idea. Personally, I’d prefer for all Americans to have an increase in income, rather than the government (federal, state, and local).”

    So where does the $TRILLION for Iraq come from? More Magic?

    “there are only two kinds of people in this world: those that benefit from government largesse, and the rest of us. ”

    So you don’t use roads, fire departments, the military in Iraq? Dude, there are no rest of us as you suggest. As pointed out about, even Bill Gates uses the government to enforce his monopoly. So the rest of us are all consumers of government.

  94. tw says:

    In spite of a great deal of hyperbole here, no one has provided a single example of where an increase in tax rates produced higher tax revenue or greater economic activity. While pointing the complexity of the economy and a multiplicity of factors can come together to produce higher tax revenue, not one example has thus far displayed the results of a tax increase of any kind. Therefore supply side economics may deserve a caveat, but how does the alternative stack up by comparison?

  95. SPECTRE of Deflation says:

    In spite of a great deal of hyperbole here, no one has provided a single example of where an increase in tax rates produced higher tax revenue or greater economic activity. While pointing the complexity of the economy and a multiplicity of factors can come together to produce higher tax revenue, not one example has thus far displayed the results of a tax increase of any kind. Therefore supply side economics may deserve a caveat, but how does the alternative stack up by comparison?

    Posted by: tw | Oct 10, 2007 12:31:02 PM

    Agreed. Ronnie’s tax cuts inflated the living shit out of tax receipts in the 1980′s. Doesn’t anyone remember this? The problem was that the spending exceeded even the increase in receipts and economic activity. The well heeled thieves of Washington will spend in an unquenchable thirst for my damn money. F**k them!

  96. me says:

    “Federal agencies have published similar statements regarding the effect of tax cuts on federal receipts. From the Congressional Budget Office’s 2007 Budget Outlook: “The expiration of tax provisions as scheduled has a substantial impact on CBO’s projections, especially beyond 2010 when a number of revenue-reducing tax provisions enacted in the past several years are slated to expire,” the report says. “Almost all of the expiring provisions reduce revenues.”

    The Joint Committee on Taxation estimated that the 2001 tax legislation (the Economic Growth and Tax Relief Reconciliation Act) would cause government revenues to be 107.7 billion less than they would have been in the absence of the legislation in 2004, 107.4 billion less in 2005 and 135.2 billion less in 2006. The committee’s estimates for the effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003 were that it would reduce otherwise projected revenues by 148.7 billion in 2004, 82.2 billion in 2005 and 20.7 billion in 2006. The JCT makes its comparisons against the Congressional Budget Office’s receipts baselines.

    The projections were not off the mark. A look at the committee’s estimates of total federal revenue including the effects of the 2003 tax legislation versus the actual federal receipts shows that the JCT’s projections were higher than actual revenues in 2003 and 2004 and slightly lower than actual receipts in 2005.

    Also, Rob Portman, director of the Office of Management and Budget, and Ed Lazear, chairman of the Council of Economic Advisers, told journalists at the Washington Times last October that the tax cuts prompted economic and stock market growth. But, the paper reported, “they conceded that the tax cuts…cut deeply into government revenue.””

  97. Brendon says:

    someone mentioned there being no empirical evidence disputing the claims of supply-siders. In fact, Mankiw and Weinzierl show that an income tax cut recoups only 25% due to increased growth while a tax cut on capital recoups 50%.!&_cdi=5834&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=8391d808449a05b05f1090799867f334

    Moreover, Peter Orszag head of the CBO, found the supply side effects of the 2001 and 2003 tax cuts to be small and temporary.

  98. RM says:

    I’ve noticed in a number of the comments that there is still the misconception that tax cuts lead to increased revenues with the Reagan 80′s being pushed as the example. To me that is like George Bush turning a budget surplus into a major budget deficit and then getting credit when over time the deficit shrinks from $450 billing to $200 billion– you’ve effectively lost sight of the fact that he started with a surplus.

    It is no mystery that tax revenues invariably increase over time, tax cut or no tax cut and especially during periods of economic recovery, but the real measure of whether tax cuts increase revenue is whether the government brings in more money than it would have if the tax structure had remained as it was which hasn’t happened in any of the cases cited thus far.

  99. VJ says:


    Lower tax rates are better for the economy than higher tax rates. End of story.

    Then why were the two greatest periods of economic prosperity in the past more than one hundred years when federal income tax rates were at their highest ?