A history of Supply Side

Photo by Marc Schäfer on Unsplash

Before 1980, Democratic and Republican President had essentially all worked under the same underlying assumptions about the economy. All of them believed government investment was an antidote to recession, an economic worldview popularized by John Maynard Keynes after concluding this is what had helped the US get out of the Great Depression. Both Democratic and Republican Presidents believed in massive government jobs programs and welfare spending. Eisenhower did this through the Interstate Highway System, and having the Republicans essentially adopt the support of FDR’s various programs. Kennedy and Johnson pursued the same policy through the New Frontier and Great Society programs they championed. Richard Nixon proposed a universal health care system and universal basic income in addition to strengthening existing welfare programs.

With the election of Ronald Reagan in 1980, American economic policy was changed forever. A new economic philosophy known as supply side economics became a major part of the Republican agenda. Supply side economics aimed to reduce taxes on income, capital gains and corporations. The theory behind doing so was a belief that the freed up money would then be invested in the economy through expansion of business. These cuts in revenue to the federal government would then be used as the reason to reduce spending on government programs, a strategy known as “starving the beast”. Although intellectually inconsistent, some supply side ideologues also believe that the economic growth caused by lowering taxes actually results in more taxable income for the government. In addition to tax and spending changes, Reagan also adopted a stance of deregulation under the belief that regulations were slowing economic growth.

Before Reagan, these ideas were met with skepticism even from within his own party. Richard Nixon had famously declared “We are all Keynesians now”. President Gerald Ford had strongly criticized much of Reagan’s agenda in 1976, and President George H.W Bush referred to the ideas presented by Reagan as “voodoo economics”.

By the time Reagan had left office the economy was booming. The US was a averaging more than 3 percent growth yearly, Unemployment had decreased, as had rates of poverty and inflation. 21 million new jobs were created during Reagan’s time in office, the second largest peacetime expansion of the US economy ever.

However, America began to face different economic challenges. Under 8 years of Reagan, the national debt tripled. The US went from being the world’s largest creditor country, to the most indebted country on Earth. Wages for middle class and poor workers were stagnant. Most of the biggest economic gains benefited the wealthiest. A series of deregulatory legislation passed in the early 80s had led to the Savings and Loan Crisis-the biggest failure of financial institutions since the great Depression.

Throughout this time, Democrats had been taking political note, and put together a political group called the Democratic Leadership Council. The DLC was created in 1985 to pave the way for Democrats to retake the White House, and two of it’s biggest backers were Bill Clinton and Al Gore. The DLC was an attempt to moderate the Democratic Party, particularly through economic issues.

When Bill Clinton was President, he arguably pursued the same agenda as Ronald Reagan. Clinton muscled through the biggest cuts to welfare by any sitting President in 1996, promoted the elimination of as many tariffs as possible, Clinton also entered the United States into the North American Free Trade Agreement and World Trade Organization, two trade agreements championed by supply-siders. President Clinton catered to the business community through legislation such as the Digital Millennium Copyrights Act.

Clinton and the Republican Congress then passed a bill so dangerous it essentially caused the Great Recession of 2008 single handedly. The bill, known as the Gramm-Leach-Bliley Act of 1999 deregulated financial institutions, repealing safeguards put into law after the Great Depression. The most significant rollback was Glass-Steagall-a 1933 law that forbade commercial and investment banks from using the same pool of capital for investments. When Bush came to office, similar politics played out. Bush cut regulations, making it much easier for banks to take out risky loans and had placed voices sympathetic to Wall Street at the heads of major governmental regulatory bodies like the FDIC and SEC.

Decades of deregulation and tax cuts led to a major problem in 2008, when financial markets collapsed, and the US credit rating was downgraded in 2011 for the first time ever, due to massive debt.

In response to the crisis, Obama adopted an approach that attempted to reconcile the supply siders and Keynesians. Obama adopted the mostly Republican idea of tax cuts and investment, but also maintained a public works program in the same Stimulus bill. The Stimulus was composed of about $300 billion in tax cuts and 500 billion in new spending. Later in his term, Obama would pass an additional $400 billion in other tax cuts. Obama also echoed the supply side line by making 95 percent of the Bush tax cuts permanent. Obama would show other supply side tendencies in pushing for the Trans Pacific Partnership trade deal, and cutting the yearly deficit by about 60 percent. Obama tried to balance out his more free market ideas with the politically Keynesian ideas of new regulation and the passage of the Affordable Care Act.

The new regulations put in place by Obama were in a bill known as Dodd-Frank. Dodd-Frank was the most sweeping regulatory bill since 1938, and was seen as an attempt to put in place safeguards against another Great Recession. It stablished oversight of banks that pose systemic risk to the broader economy, closely monitored the derivatives market (a financial instrument that was a major component of the 2008 crash), the tightening of regulation on credit ratings agencies (the agencies had colluded with banking institutions before 2008) and the creation of the Consumer Protection Bureau (a body designed to identify financial fraud directed at consumers). Later added to the bill was the Volcker Rule, essentially a watered down version of the previously aforementioned Glass-Steagall Act.

With Trump in office, many of these safeguards that prevent a market crash have been slowly whittled away. The consumer protection bureau is now run by an appointee who doesn’t want it to exist. Democrats joined Republicans in rolling back bank “stress tests” that show whether or not a bank poses systemic economic risk. Derivatives are no longer as widely regulated as intended under the bill, and Republicans in the House have passed a full scale repeal. As a result, we’re already seeing investment banks as highly leveraged as they were in in the 1920’s and late 2000’s.

When the economy is doing well, deregulation and general supply side economics usually win all the political battles. In this respect 2018 was no different. The sad reality is that after years of deregulation, the US almost always sees a massive economic crash. Recessions themselves happen generally every ten years. With these facts in mind, it’s likely we’ll face a recession before the next Presidential term-whether it be Trump or a Democratic successor.

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