SYNOPSIS: In one fell swoop Krugman discredits Steve Forbes' supply-side dogma
I sometimes wish that I could bring myself to have faith in supply-side economics. True believers like Steve Forbes live in a never-never land in which there are no hard choices or painful tradeoffs, budget deficits will be cured by growth and poverty will vanish as the rising tide lifts all boats. Alas, like the great majority of grown-up economists, I just cannot manage the necessary suspension of my critical faculties.
Supply-side economics can be defined as the belief that cutting taxes produces an explosion of economic growth. Yes, most economists agree that taxes are a drag on the economy. But supply-siders insist that the payoff from lowering rates would be vastly larger than others think plausible. Mr. Forbes promises that he can cut almost everyone's taxes without increasing the budget deficit; a Congressionally appointed panel tells us that switching to a flat tax would double the economy's growth rate.
Why does anyone listen to such extravagant promises? Many people accept supply-side nostrums simply because, like the victims of telemarketing scams, they have not learned that a deal that sounds too good to be true probably is. But for those who demand some evidence, the supply-siders continually return to what they regard as the clincher: the supposed economic miracle of the 1980's, in which Ronald Reagan's tax cuts were followed by simultaneous declines in inflation and unemployment.
But mainstream economists have never found the experience of that decade at all mysterious. The conventional wisdom in 1979 held that bringing inflation down would require a prolonged period of high unemployment. That is exactly what happened: The unemployment rate, which had been 5.8 percent in 1979, averaged 7.5 percent during the eight years of Mr. Reagan's Presidency. (It rose rapidly to almost 11 percent during his first two years in office, then declined gradually thereafter, not returning to 5.8 percent until 1988.) Why should anyone be surprised that inflation was lower when he left office than when he entered it?
Mr. Forbes and many others seem to be confused about the difference between the level of unemployment and its rate of change. Anyone who paid attention in Economics 101 knows that inflation normally declines if the unemployment rate is high, even if that rate is falling. Yet the supply-siders insist that something miraculous must have happened after 1982 because employment rose and inflation fell at the same time.
Imagine an overweight person going on a severe diet, beginning with a starvation ration of 800 calories a day and gradually increasing his intake to a somewhat healthier 1,500 calories. Would it be a refutation of conventional dieting theory if the person continued to lose weight as his meals grew larger? Well, substitute jobs for calories, inflation for weight, and you have the fuzzy logic behind the legend of Reaganomics.
The tragedy is that just last year Congressional Republicans seemed to have come to their senses, returning to old-fashioned, tight-fisted conservatism. Despite Mr. Forbes's fourth-place showing in Iowa, the Republican nominee, whoever he is, will probably run not on the theme of fiscal responsibility but on a Reaganesque program of tax cuts. Such a program would promise growth, but it would deliver new and bigger deficits.
Although Bob Dole has attacked Mr. Forbes's flat tax, he has also famously offered to be "another Ronald Reagan, if that's what you want." But unlike Mr. Reagan in 1980, a newly elected President Dole would find a Government already deeply in debt. Worse yet, the day is approaching when the baby boomers will start to retire and claim the trillions of dollars in Social Security and Medicare benefits they have been promised.
It may be pleasant to imagine that we could fly away from these problems by sprinkling a little supply-side fairy dust and thinking of Christmas. But the Republican Party is an organization of adults -- isn't it?
Originally published in The New York Times, 4.14.96