It's time to bury supply-side economics

To continue to believe tax cuts always lead to prosperity flatly ignores about 2 decades of evidence to the contrary.

By Jun 21, 2012 8:18AM

By Howard R. Gold,


It's been the prevailing economic philosophy of the Republican Party since Ronald Reagan was elected president in 1980. Supply-side economics held that reducing marginal tax rates would spur economic growth, create jobs, and even generate tax revenue for the government.


And it makes sense in theory: If people keep more of what they make, they would logically work harder, spend more, and hire more people, right?


When you listen to supply-siders like Arthur Laffer, Stephen Moore, and Larry Kudlow, they always extol the Kennedy-Johnson tax cut of the 1960s—and especially President Reagan's tax cuts of the 1980s. But they rarely mention the 1990s or the 2000s.


Maybe that's because those two decades were almost a perfect controlled experiment that shattered their pet theories. President Bill Clinton raised marginal tax rates and the economy boomed and jobs were plentiful. President George W. Bush cut them, and we got only modest job growth.


In fact, there's more and more evidence suggesting that lowering marginal tax rates doesn't create many jobs at all.


For years I've tried to find any economist—left, right, or center—who could estimate the number of jobs created by the Bush tax cuts, but without success. So I'm taking a crack at it myself.


Using data from the Bureau of Labor Statistics' CES survey, I compared the number of jobs created in the years following the balanced-budget bill signed by President Clinton in August 1993, and after the second round of Bush tax cuts, which went into effect in May 2003. (Supply-siders think that was the real deal, not the earlier 2001 cuts.)


Nearly 20 million private-sector jobs were created from the August 1993 tax increase until the end of the Clinton administration in December 2000. The number following the Bush tax cuts, in a shorter time period (May 1993 to December 1997, when the Great Recession began), was above 7 million.


But when I actually counted the jobs created in various industries and eliminated those that clearly had nothing to do with lower marginal tax rates, I was left with a much smaller number: 2 million at most, a dreadful performance by any measurement.


This isn't an academic exercise. A 20% cut in marginal tax rates, including reducing the top tax rate to 28% from 35%, is a key plank of Republican presidential candidate Mitt Romney's economic growth plan (along with cuts in business taxes and reduced regulation, which I won't cover in this column).


One of Romney's top economic advisors, Glenn Hubbard, the dean of the Columbia Business School, wasn't available for an interview, nor could the Romney campaign provide another advisor by deadline. Top Bush economist Lawrence Lindsey also wasn't available.


Yet Hubbard, along with former Sen. Phil Gramm (Mr. Banking Deregulation of the late 1990s), penned an op-ed Thursday in The Wall Street Journal (subscription required) comparing the current recession with "the superior job creation and income growth" of—wait for it—the 1980s.


Again, no mention of the Clinton 1990s or the Bush tax cuts, of which Hubbard was a prime architect as chairman of the president's Council of Economic Advisors.


Isn't it curious how so many smart people have such complete amnesia about the last 20 years?


Yet there's a growing consensus that cuts in marginal income tax rates don't deliver the goods:


  • Robert Moffitt and Mark Wilhelm found "no evidence" that high income US taxpayers increased their work hours in response to the 1986 Reagan tax cuts. This undercuts a central premise of supply-side economics, that cutting taxes gives people incentives to work more.
  • A 2010 report by the nonpartisan Congressional Budget Office found that cutting income taxes produced the least bang for the buck among 11 proposed policy options aimed at boosting employment.
  • David and Christina Romer, economists at UC Berkeley (she was President Obama's CEA chairman), found that changes in marginal tax rates had little effect on US economic growth in the 1920s and 1930s, either.

But the most striking evidence is the glaring contrast between the 1990s and 2000s.


A 2008 study by the liberal Center for American Progress and Economic Policy Institute showed that private investment, GDP, wages, household income, employment, and federal revenue all grew faster—sometimes much faster—during the high-tax Clinton years than they did during the low-tax Reagan and Bush eras.


In August 1993, President Clinton signed a law that boosted the top personal income tax rate dramatically, to 39.6% from 31%. But rather than die out, the nascent economic recovery picked up speed and never looked back. By the time this giant boom ended, the US economy had added nearly 20 million private-sector jobs in every sector from manufacturing to retail trade to finance to information technology.


Of course, higher taxes didn't cause this boom. That's the whole point: other economic forces were so powerful that marginal tax rates didn't matter!


And they didn't matter a decade later when President Bush signed the second of two tax cuts in May 2003, accelerating the 2001 act's provisions, reducing the top rate to 35%, and cutting capital gains and dividend tax rates.


But something else was brewing: In July 2003, the Federal Reserve cut the federal funds rate to 1% and kept it there for a year. By doing so, the Fed pumped hot air into a speculative real estate bubble, with far-flung effects. As Martin N. Baily, Susan Lund, and Charles Atkins wrote in a 2010 paper for the McKinsey Global Institute:


"From 2003 through the third quarter of 2008, US households extracted $2.3 trillion of equity from their homes in the form of home-equity loans and cash-out refinancings. Nearly 40% of this—$897 billion, an amount bigger than the 2008 US government stimulus package—went directly to finance home improvement or personal consumption." (Italics added.)


The two Bush tax cuts caused an estimated $1 trillion loss of federal tax revenues—and each year the revenue shortfall is an additional $100 billion. It's the "gift" that keeps on giving.


So here's how I'm calculating the jobs created by these cuts.

First, to the 7.33 million net new private-sector jobs, I'm adding back a million jobs lost in manufacturing and technology, for about 8.3 million new jobs created.


Job Growth under Bill Clinton and George W. Bush 
(job increases in thousands)


After Clinton
tax hike

After Bush
tax cut

Total Private Employment









Retail Trade



Wholesale Trade



Leisure & Hospitality






Finance (incl. real estate finance)



Professional & Business Services






Residential Constr./Contractors



Health & Educational Services



(Selected categories, so may not add up.)

Source: Bureau of Labor Statistics, CES data


Then I'd subtract the 2 million new jobs in health and education, which grew steadily in both the Clinton and Bush years with no impact from tax policy. I'd also remove the 400,000 jobs added in residential real estate and homebuilding, obviously a result of lower interest rates and the housing bubble.


Then, I'd subtract 2 million new jobs in professional and business services, also the result of a structural move to a service economy. Five million of those jobs were added under President Clinton.


That leaves us with 4 million jobs added in cyclical industries like retail and wholesale trade, leisure and hospitality, transportation, and securities, as well as nonresidential construction. My best guess is that half of those jobs were the result of the housing bubble, cash-out refinancing, and rock-bottom interest rates, while the rest may have come from the additional animal spirits and cash in consumers' pockets as a result of the Bush tax cuts.


My unscientific estimate, then, is that the Bush tax cuts were responsible for maybe 2 million jobs at most. Pathetic is an understatement.


I welcome your input and would be glad to revise this number in a future column if you provide a better estimate.


Supply-side economics is not the only economic philosophy that has come up short in the Great Recession. As I wrote here last year, neither Keynesian stimulus nor Friedmanesque monetary policy have done the job.


Surely, supply-side economics worked better when the top tax rate was slashed from 70% to 28% under President Reagan. It might be more justified at the state level, where crippling tax burdens have made some states uncompetitive. And raising taxes too high would likely hurt growth, so it may work better in reverse.


But clearly, this is a theory with diminishing returns that has outlived its usefulness. Because after the last two decades, believing that cuts in marginal personal tax rates will create jobs and revive our economy is like still believing the sun orbits the earth.


Howard R. Gold is editor at large for Follow him on Twitter @howardrgold and read his commentary on politics and economics at


Jun 22, 2012 6:13PM
we need to raise the upper tax rates,cut government spending, stop subsidizing companies that are already making a profit and stop giving a refund to people who don't pay any federal taxes. Our debt is way too high for a single solution its going to take a combination of solutions to make it work.
Jun 22, 2012 9:33PM
Spending must be cut regardless of whether we believe it will promote job growth.  ARRA and other stimulus spending obviously hasn't created the jobs and has moved us closer to insolvency.
Jun 27, 2012 9:32AM

We are at the end of a cycle where demand has fallen to the point that it has hurt the economy. DEMAND for products and ONLY DEMAND for products will change this. Demand creats jobs in most cases. But you can't have demand if you have high unemployment. Vicious downward cycle.


This cycle started when manufacturing started leaving our shores. Manufacturing employed the greater part of our work force and provided decent pay to those who spend it. It created a wealthy middle class who spent their income. This opportunity is now gone and until employment picks up due to manufacturing we will not see unemployment below 8%. Service economies do not work!

Jun 22, 2012 7:43PM
 We have to cut expenses. If we don't it will not matter our country will destroy itself. To get out of debt we have to tax each household about $190,000.00. This obviosly won't happen. To solve this problem we have to have a combination of spending cuts and and money managment. Money is not about how much you bring in it is how you manage it. We have lost sight of this with our goverment.Raising taxes will not help anybody if we allow our politicians to give it to their buddies.When we stop Obama from giving money to the UAW or Buffet and the insurance companies. (Don't worry I will include the Bush favors to the oil industry).  We have to have someone who will dish out the tax money fairly get us out of debt and the job creation will take care of itself.
Jun 21, 2012 6:12PM
Is there any connection to tax cuts, and moving our manufacturing overseas?
Jun 21, 2012 1:31PM

Another MSN spin op-ed with the sole purpose of justifying raising taxes.  Notice there was no mention that nearly half of ALL wage earners pay NO federal income tax.  Yeah, I know, they pay state and local taxes but they also vote in federal elections and guess what.  If you don't have any skin in the game, you are going to vote for the guy who promises more federal benefits.  No wonder food stamps have quadrupled in the last 4 years.  Worse yet, many of those who pay no federal tax actually get a "tax refund", another term for federal welfare program.  It's easy to conclude that if only 1 in 2 workers is paying taxes, the one who's paying is paying twice what he should.  Sounds like my taxes have been raised already.


No one who advocates raising taxes has ever said "how much is enough".  I recently met a Canadian doctor who was on vacation in New York.  He averages 3 months of vacation each year.  When I asked him why he takes so much vacation he informed me that if he works beyond a certain point, he's virtually working for the government so, "why would I do that?" was his reply.  The only way to get the deficit under control is for everyone to pay something so that they will vote accordingly when their representatives propose big government programs and spending.

Jun 22, 2012 9:18AM
I hope one thing we can all agree on is that we need job creation - where we differ in opinion is how to get there.

To Conservatives: Do you know that many people in the middle class are really hurting right now and have been for more than a few years? We Progressives know that the middle class can't take on any more of the burden; at least not the majority of the middle class.

Are there reforms that may be needed to address fraud in social programs that some people may abuse/take advantage of? - I'm sure there are, but the majority of the middle class is hanging by a thread financially.

If the financial burden swings anymore on to the middle class, you will see either a total collapse of the economy (much worse than what we have now), and/or a revolution.

Jun 21, 2012 2:35PM

William is right and should add, the 50% not paying taxes are also enjoying the freedoms assured by our military who put their lives on the line for us.  Why should they vote for the commander in chief when they don't support the mission financially?

Second, the problem Howard Gold's argument is that he's leaving the spending component out of his calculations.  The reason the Bush tax cuts failed to to have the expected results is because, unfortunately, the Replublicans at that time spent like Democrats.  The hole they dug consumed the stimulus of the cuts.  Now the Democrats are trying to triple down on that miss-guided policy by sucking still more out of the economy with higher taxes and more unproductive spending.

Jun 21, 2012 4:02PM
All Americans should vote no matter their income or tax status.  More lower income serve in the military than the rich, and more of them die in our wars than the rich.  The rich mostly never join the military. 
Jun 27, 2012 12:10PM
What a bunch of horse manure. The author eliminates jobs created under Bush using some unknown algorithm because he couldn't attribute them to the Bush tax cuts, but does not do the same thing under Clinton (eliminate jobs that he could not prove were created because of the Clinton tax hikes).
Jun 26, 2012 11:13AM

Mr. Gold,


After reading your missive, it was obvious that you are in favor of higher taxes on the 50% of the people who pay income tax. As part of that 50%(just barely), you can stuff that idea someplace where the Sun doesn't shine. The major problems with the 2000's can be attributed to lax lending policies for housing, wars and a congress and presidents who have been spending like drunken sailors. Leave the tax rates ALONE. Cut the spending. Pass a budget and stick with it.. Get rid of earmarks with NO exceptions. If nothing is done to reign in the spending, there will be no country to govern and liberal/progressive/socialists like you will be crying because there is nothing you can do to screw it up anymore. 


Not sure what will or does or does not work.  I too can play with numbers and make my plan/idea/philosophy look good.  It just depends on which quotes and numbers you want to pull out of the air.  Or you could say that everyone has an opinion and a rectum and most of them stink. 

You can spend lots of time and words but when you get done only hind site will tell you what actually worked at any particular time and place. 

Jun 27, 2012 9:48AM
If MSN is going to allow this to be published as a legitimate financial article, then it should really allow for an opposing point of view.  Even Maynard Keynes, at the end of his life, acknowledged he was basically wrong about government spending as econominc stimulus.
Jun 26, 2012 11:22PM
Let me see if I get this straight, the less money I have in my pocket and the more I will spend to get a dynamic economy going...OK that makes sense...And when the politicians get more money from people who would use it to do something useful than give it away to buy votes in some form of entitlement or another, this will spur economic growth and employement. OK that makes a lot of sense. So I think we should basically be taxed 100% and be 100% entitled. This for sure would make for the most productive and dynamic economy in the world. I don't know about you guys but this year I am voting for Al Sharpton. He is a true visionary of America's future.
Jun 27, 2012 8:14PM
Where in the world did you get you math skills?  Demand generally creates jobs, but if the demand is not in the US, then there go the is simple.

No jobs, no demand.  No demand, no jobs.  Both political parasites  need  to get out of the cutting tax business and go with a straight 10% tax.

I am single, no dependents, make less than $15,000.00 a year; but I pay damn near 25% federal taxes.  Something isn't quite right here; so at the end of the year, I bring home about: $11,250.00.    And buddy you try living off of that.
Jun 26, 2012 11:29AM
The GOP hands the gold to rich corporations and individuals while throwing a dog bone to the remaining 97% of us.  Vote GOP and watch the middle class disappear if it's not already too late.  Reagan style economics was a 40 year running scam to transfer wealth the upper crust.
Jun 30, 2012 3:22PM
Supply side has always equaled money from my pocket into the wealthy's pocket. It is one of the great right wing myths.
Jul 2, 2012 5:37PM

The term 'supply side economics' is code. To people who understand it, SSE means money for the wealthy and an economic system where one class never fails and the other class always fails (there are only two classes in SSE).


Here's how it works -


The philosophy of SSE - Any product has inherent worth because it creates the need for other products and services. For example, a company that makes a computer that doesn't work still needs to hire accountants, executives, engineers, sales people, janitors, office managers and has to buy plastics and processors and card board boxes, etc. The product doesn't work - so what!. By existing, the product helps the overall market. So how do you make sure that unsuccessful companies continue to operate (or, how do you take competitiveness out of the market)? Corporate welfare, debt based spending, a Federal Reserve that is always inflating the money supply...


So what does supply side economics really mean? It means a market where any company is supported by banks / government will always be successful, because they have an inherent value (that's just code - an excuse). Not exactly a free market, merit based, system is it? For example, all of the banks that made bad bets and got bail outs - in a free market or at least fair market, they would have gone out of business. In Supply Side Economics, their existence made them too big to fail, when in reality, they were just well positioned and had control over the political landscape and the money trough. Supply Side Economics = Companies (executives) that are aligned with big banks, the government and the military are never allowed to fail and do not have to compete. They never tell their employees that the game is set or their customers. Think - five media companies, less than 12 railroad companies, less than seven car companies, less than ten computer companies, less than ten large software companies, all of these hold the greater part of the market share....all supported by big money. All the result of SSE.


These republicans today are not conservatives, they are neo-conservatives, just as Democrats are no longer liberals, they are neo-liberals. Both support a tilted market place and bank run kleptocracy. YOU exist to buy their products and be debt slaves. That's it. There is no way out, you are a slave to them.

Jul 5, 2012 5:56PM
Barry's trickle up poverty is working wonders though!!!!
Jul 2, 2012 6:00PM
Supply side economics is just another word for "trickle down".  Basically, those at the top of the heap take a p1$$,  which then trickles down onto the people below them.  
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.




Quotes delayed at least 15 min
Sponsored by:


There’s a problem getting this information right now. Please try again later.
There’s a problem getting this information right now. Please try again later.
Market index data delayed by 15 minutes

[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%).

Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, ... More


There’s a problem getting this information right now. Please try again later.