Reaganomics redux

Supply-side economist Diana Furchtgott-Roth defends President Bush's $1.6 trillion tax cut.

By Daryl Lindsey

Feb 15, 2001 | If you want to find a one-stop shop for all your answers to the Bush administration's view on tax cuts, look no further than the American Enterprise Institute. As Washington transforms into Austin on the Potomac, few institutions will have the kind of influence with President Bush as AEI, the think tank where incoming White House Budget Office Manager Larry Lindsey hung his hat, and the place second lady Lynne Cheney works. As host to panel discussions like "Does It Really Make Sense to Pay Off the National Debt (Using the Budget Surplus)," it's not very surprising that AEI falls on the supply-side theory of the tax cut debate.

AEI conservatives like Oxford-trained economist Diana Furchtgott-Roth, argue that tax cuts focused on the upper-income brackets are the best prescription for an ailing economy because they create opportunities for investment and job creation by the individuals who are financially equipped to create new jobs or start new businesses. It's the classic trickle-down theory of tax cuts that drove Reaganomics and now, apparently, will form the theoretical heart of the Bush administration's fiscal policy.

As a former junior economist at the President's Council of Economic Advisors during the Reagan presidency, Furchtgott-Roth is quite familiar with supply-side economics -- and the similarities between the current Bush tax-cut plan and its philosophical predecessor, the 1981 Reagan plan.

There appears to be growing public support for the supply side school of tax cuts. As Nicholas Lemann astutely observes in this week's New Yorker, exit polls taken in November indicate that voters overwhelmingly support the kind of across-the-board tax cuts promoted by the supply-siders and the Bush administration, even though voters know that these types of cuts tend to favor the rich. That, combined with Fed Chairman Alan Greenspan's dire warnings about the tanking economy, is creating an atmosphere that will undoubtedly make it easier for President Bush to hustle a major tax cut on Capitol Hill.

Even Bush's biggest Democratic critics on the Hill are backing up Greenspan's call for a tax cut. The question is not whether or not it's time for a tax cut, but rather how large, and what kind of tax cut it should be.

Democratic critics look back at the massive 1981 tax cut and the hundreds of billions of dollars in budget deficits that ensued and are keen to remind us that it took 15 years to undo the damage of Reaganomics. A more cynical theory is that Bush's tax plan is a wolf in sheep's clothing -- that he's trying to bankrupt Congress in order to make it easier to shift responsibility for social programs to faith-based organizations, education to private schools through proposed voucher programs and to drum up support for privatizing Social Security through the use of private investment savings accounts.

But the supply-siders see it differently. In 1981, we were roiled by recession and just coming off the tail end of an energy crisis. Spending by the Democrat-controlled Congress was spiraling out of control, inflation and tax rates were increasing, and something had to be done to stop it. So Reagan pushed through his 1981 tax package, which was scheduled to cut $455 billion in tax revenues between 1981-85. Problem is, the cuts resulted in a steep increase in the federal deficit; and within the first year of passage, Reagan was already having to increase tax rates.

Times are different now, say the supply-siders. We don't have a budget deficit any longer, and there's no need for surplus cash reserves. Surpluses encourage pork and greed in Congress -- a political evil that is viewed by conservatives the same way soft money is seen by reformers like Sen. John McCain. Surplus cash doesn't belong in Washington's coffers -- it belongs in the hands of the taxpayers and the businesses that drive the economy. And that, they argue, is what Bush's tax plan will do.

In a recent interview with Salon, AEI's Furchtgott-Roth offered a spirited defense of the Bush tax cut proposal and argued that the risk of not offering a tax cut is far greater than the risk that such a cut would entail.

Next Page: "Economists think they know more than they do"

• View blog reactions