Supply Side/Reaganomics/Trickle Down: Does it really work?

My friend Josh and I have a sort of perpetual debate going about the theory of "supply side" economics and whether or not it worked. Neither one of us specialized in Economics, but both of us work in the financial sector (he is an accountant, I am in banking). He contends that it works, and I argue that it did not, as we have been using supply side economics in roughly 20 of the last 30 years.



This post is my attempt at trying to understand supply-side economics.



Basically, supply-side economics supporters claimed that by cutting taxes on the top earners in our society that tax revenues would increase, as well as "trickle-down" to the general populace because the top earners are the ones that create jobs. In essence, supply-side economics cuts taxes to the top earners in order to increase supply, since our society runs on supply and demand.



Proponents used the Laffer Curve to theorize that in order to maximize federal revenue one couldn't go too low with tax rates, nor too high. This is true. But Reagan and his financial advisors (and every following Republican President that has used this since) misunderstood the Laffer Curve, thinking that every tax cut would increase revenue. But that is simply not true. If you decrease taxes too much, revenue goes down. Basically, tax rates were far higher during the Kennedy administration than they are now (50-60% vs. today's 35-40% for top-tier earners). They were cut, and revenues went up. But that was the maximization. It already happened in those days. Reaganomics worked for Reagan. But that was the highest part of the Laffer Curve. Continuing to cut, as Bush 43 did, led to our problems today. But this is just the Federal Revenue side of this.

On the public side of this, or the "trickle-down" side, which contends that increasing the revenues for the highest earners will trickle down into the pockets of even the poorest. The rich business owner will gain more in money, invest more of it into his company, hire more workers, raise wages, and the middle class will earn more, which goes to the Starbucks and McDonalds and to the companies that employ the lower class, and they too will get hired more and increased wages. Sounds great, doesn't it? But it doesn't work out that way in reality. Business owners have always looked for the bottom line. But unlike the '80s, when Reagan employed Reaganomics, when it was better for the bottom line to hire American workers and raise wages to keep them happier at your company rather than the competition's, now it has become cheaper to outsource. "Trickle-down" now longer works. It has become "trickle out."

Keynesian economics, however, advocate the laffer curve as well, but with a better understanding. They too advocate cutting taxes, but to the middle and lower class. This frees up more money in the classes that spend their money more freely. Money circulates more. The tax base increases, thereby increasing tax revenues. On the public side, Keynesian economics, a "mixed economy," is better described as "trickle-up." Sometimes, private enterprises screw it up for the macro-economics of a country, as we saw in last year's meltdown.

Keynesian economics utilizes the private sector pre-dominately, but realizes that once in awhile, the private sector needs guidance from the government and public sector. This is theory that saved us from the Great Depression and brought in the Golden Age of Capitalism (1945-1970). Keynesian economics is still capitalism, folks. It just uses the government to make sure that the economy "trickles-up" instead of down, which works better. It isn't the middle class that outsources. It is the upper-class. I'd take "trickle up" over "trickle out" any day.

Let me know if I missed anything. Again, this is just my non-economist's view of macro-economics.