Up and Coming Weekly is a weekly publication in Fayetteville, NC and Fort Bragg, NC area offering local news, views, arts, entertainment and community event and business information.
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FEBRUARY 14-20, 2018 UCW 21 WWW.UPANDCOMINGWEEKLY.COM POLITICS Grade policy on a curve by JOHN HOOD North Carolina has become a na- tional leader in implementing sup- ply-side economics – but that doesn't mean what you think it means. For some supporters and many crit- ics, the term "supply-side economics" is all about the Laf- fer Curve. Popular- ized by the econo- mist Art Laffer, it's really an ancient insight about public finance. If a govern- ment's tax rate is zero, it will collect no revenue. But if its tax rate is 100 percent, it will also fail to collect any revenue because people won't work for nothing or they will hide their incomes from a rapacious government. Somewhere between those two poles lies a point at which govern- ment will maximize revenue collec- tion. In the early 1960s, when the top federal income tax rate was 91 percent, President John F. Kennedy and many economists argued Wash- ington was far above that point. ey were clearly correct. In the 1970s, when Laffer was drawing his revenue-maximization curve on a napkin and the top in- come tax rate was 70 percent, he and other economists thought Wash- ington was still on the downward- sloping side of the curve. ey were probably correct. President Ronald Reagan and bipartisan majorities in Congress responded by reforming the tax code and, ultimately, pulling the top rate down to 28 percent. It went up a bit during subsequent administrations but will likely never reach the strato- spheric levels that predated Reagan, because the supply-siders clearly won the revenue-maximization argument. But for most supply-siders, that wasn't their key argument. eir goal wasn't to maximize government revenue. It was to maximize employ- ment, incomes and economic growth. Like many political labels, the term "supply-side economics" was con- cocted by a critic, not an advocate. During the mid-20th century, "demand-side" economics was in the ascendancy. Following the teachings of John Maynard Keynes – and those who translated his rambling texts into comprehensible sentences and manageable equations – demand- side economists argued that one of government's most important jobs was to "manage" the economy by smoothing out its peaks and valleys. Recessions, they argued, were the result of sudden, irrational drops in consumer demand. During those periods, governments ought to prop up demand with spending, funded primarily by borrowing. During boom years, they ought to raise taxes and rein in spending to pay off the debts incurred during recessions. Moreover, the argument went, governments should impose high tax bur- dens on the wealthy, who save and invest much of their money, and redistribute the proceeds to those who will spend virtually all of it. is was a cockamamie idea, if you think about it – and that's precisely what free-market economists did in the 1960s and 1970s. ey pointed out that investment is how the econ- omy becomes more productive. at, in turn, is how workers gain incomes and average living standards rise. Supply-side economics is a broad policy of promoting work, savings and investment through tax and regula- tory reforms – which boost private investment – and through budget and policy reforms that raise the payoff from public-investment activities such as infrastructure and education. e best symbolic representation of supply-side thinking is the Armey Curve, named after economist and former Congressman Dick Armey. It grants that the absence of govern- ment would be economically disas- trous. But it also observes that after a certain point, taxing people to pay for more services makes them worse off. e Armey Curve has lots of empirical support. Most modern studies of growth differentials among American states, for example, show that high taxes (and regulations) are negatively associated with economic performance, while high government spending isn't positively associated with economic growth. at suggests most states and localities are larger than they ought to be. ey are on the wrong side of the Armey Curve. Since 2010, state and local spend- ing as a share of North Carolina's economy has dropped by 10 percent. e goal of North Carolina conserva- tives is not to reduce it to zero. e goal is to keep government from encroaching too much on the private investment that is the primary driver of economic progress. JOHN HOOD, Chairman of the John Locke Foundation. COMMENTS? Editor@upandcomingweekly.com. 910-484-6200. Like many political labels, the term "supply-side economics" was concocted by a critic, not an advocate.