The Failure of Supply-Side Tax Policies

Writing in the Times' Economix blog, Princeton's Uwe Reinhardt makes the case against the argument - now standard boilerplate "supply side" Republican rhetoric - that tax cuts lead to higher investment and GDP:

From a macroeconomic perspective, however, changes in tax rates are but one of many factors that drive the time path of gross domestic product (G.D.P.), savings, investment, employment and other such variables. By itself, changing tax rates steers the economy about as much as would tapping an elephant on the leg with a chopstick. There may be some effect, but typically it is small and dwarfed by other effects.

He provides a chart showing that the share of investment in GDP fell during the Reagan/Bush years (i.e., in the wake of the 1981 tax cuts), rose in the Clinton years (i.e., following the 1993 tax increase), and has fallen again since the 2001 and 2003 tax cuts. A point he doesn't make: this pattern would be consistent with the hypothesis that "crowding out" prevails - i.e., that government borrowing, which ballooned in the Reagan and (to a lesser extent) G.W. Bush administrations, displaces private investment.

Nonetheless, some economists are still apparently on board, as this statement released by the McCain campaign shows. Jonathan Chait writes:

First, 100 economists is not actually all that many, given the number of economists in our country. Second, the list of signatories actually has only 90 economists on it. (Count for yourself.) This trouble with basic arithmetic might explain the McCain campaign's stated beliefs in such fallacies as tax hikes always cause revenues to fall.

Was the campaign unable to find 100 economists? The list certainly does not suggest excessive discrimination about credentials. It's heavily larded with GOP apparatchiks now residing in the right-wing think tank world (my favorite is "economist" George Schultz of the Hoover Institution), as well as two signatories who list their affiliation as "McCain-Palin 2008." The takeaway here is that, even with the most generous standards, the campaign couldn't find 100 economists in the country to badmouth Obama's proposals, let alone endorse their own.

I'd disagree slightly: some of the signatories do actually have pretty strong academic credentials. But we do know that most economists support Obama; I'm sure if his campaign tried, they could gather a more impressive list.

Hmm... back in July, McCain had an endorsement from 300 economists... have 210 of them jumped ship?