Supply-side economics
Based on Wikipedia: Supply-side economics
In 1974, an economist named Arthur Laffer sketched a curve on a napkin that would reshape American politics for the next half-century. The drawing was simple: a hump-shaped line showing that government tax revenue starts at zero when tax rates are zero percent, rises as rates increase, hits some maximum point, then falls back toward zero as rates approach one hundred percent. The implication was explosive. If rates were already past that peak, the government could actually collect more money by cutting taxes.
That napkin sketch became the intellectual foundation of supply-side economics, a theory that promised something almost magical: lower taxes would pay for themselves through economic growth. It's an idea that has dominated Republican economic policy since Ronald Reagan rode it to the White House in 1980. It's also an idea that critics call a "zombie" that refuses to die despite repeatedly failing to deliver on its promises.
But what exactly is supply-side economics? Where did it come from? And why does it remain so politically powerful even as economists continue to debate whether it actually works?
The Basic Idea: Make Stuff, Then People Buy It
To understand supply-side economics, you first need to understand what it was rebelling against.
For most of the twentieth century, mainstream economic policy followed the ideas of John Maynard Keynes, a British economist who argued that governments should manage the economy by controlling demand. When times are bad, Keynes said, the government should spend more money and cut taxes to put cash in people's pockets. When they spend that cash, businesses hire workers to meet the demand. The economy grows. Simple enough.
Supply-side economics flips this logic on its head. Instead of focusing on the people buying things, it focuses on the people and businesses making things. The core belief is captured in something called Say's Law, named after the French economist Jean-Baptiste Say, which can be summarized as: "Supply creates its own demand." Make a product, and you create the income and purchasing power needed to buy it.
From this perspective, the path to prosperity isn't getting consumers to spend more. It's making it easier for producers to produce more. And the way you do that is by reducing the things that discourage production: high taxes, heavy regulations, and barriers to trade.
The Four Pillars
Supply-side economics rests on several interconnected ideas about how to boost an economy's productive capacity.
First, lower taxes. This is the most famous and politically potent element. The argument goes like this: when tax rates are high, people have less incentive to work hard, take risks, or invest their money. Why put in extra hours or start a new business if the government takes most of the reward? Cut those rates, and you unleash a wave of productive energy. More importantly, supply-siders argue, this increased economic activity can generate so much new taxable income that the government actually ends up collecting more revenue than before—even at the lower rate.
Second, reduce regulation. Every rule a business must follow is a cost: lawyers to interpret it, compliance officers to implement it, paperwork to document it. Some regulations are necessary, but supply-siders argue that excessive red tape strangles entrepreneurship and makes it harder for new companies to form and existing ones to grow.
Third, promote free trade. Tariffs and trade barriers are essentially taxes on imported goods. They raise prices for consumers and shield domestic producers from competition that would force them to become more efficient. The containerized shipping revolution of the late twentieth century—those massive standardized metal boxes you see stacked on cargo ships—slashed the cost of moving goods around the world and exemplified the kind of efficiency gains supply-siders celebrate.
Fourth, encourage investment. This includes everything from education and healthcare (investing in "human capital," the skills and health of workers) to tax breaks for businesses that buy new equipment or fund research and development. When a company can write off the cost of a new machine in one year instead of ten, it's much more likely to make that purchase now rather than later.
The Stagflation Crisis That Started It All
Supply-side economics didn't emerge from pure academic theorizing. It was forged in a genuine economic crisis.
The 1970s gave America something economists thought was impossible: stagflation. The word combines "stagnation" and "inflation"—an economy that was simultaneously stuck in neutral and suffering from rapidly rising prices. Unemployment was high. Inflation was in double digits. And nothing in the Keynesian toolkit seemed to work.
The standard Keynesian prescription for a sluggish economy was to stimulate demand through government spending. But that risked making inflation even worse. The prescription for inflation was to cool down the economy, but that would push unemployment even higher. Policymakers were trapped.
Into this void stepped a group of economists and writers who argued that the Keynesians had been looking at the problem wrong. The issue wasn't weak demand. The issue was that high taxes and heavy regulation had so discouraged production that the economy couldn't supply enough goods to meet existing demand. Too many dollars, in Reagan's later phrase, were chasing too few goods.
The journalist Jude Wanniski gave the movement its name. Though there's some dispute about whether he coined it first or whether the economist Herbert Stein did, Wanniski certainly became its most enthusiastic evangelist. His 1978 book "The Way the World Works" laid out the supply-side case in detail, arguing that the high marginal tax rates of the era—the rate on each additional dollar earned could reach seventy percent for top earners—were strangling American productivity.
The Laffer Curve: The Most Powerful Napkin Sketch in History
Let's return to Arthur Laffer's famous curve, because it's both the most influential and most controversial element of supply-side thinking.
The logic seems almost self-evident when you consider the extremes. At a zero percent tax rate, the government collects nothing. At a one hundred percent tax rate, the government also collects nothing—because why would anyone bother to work or invest if they couldn't keep a penny of their earnings? Somewhere between those two points, there must be a rate that maximizes revenue.
So far, most economists would agree. The controversy is about where that maximum point actually sits.
Supply-siders in the Reagan era argued that American tax rates had climbed past the peak. Cutting them wouldn't just leave people with more money; it would generate enough additional economic activity that the government would ultimately collect more tax revenue, not less. Some enthusiasts went further, claiming that tax cuts essentially paid for themselves.
Skeptics pointed out that this was an empirical question, not a matter of theory. Yes, the Laffer curve exists in some form. But there's no guarantee that any particular economy is on the downward-sloping side of it. If rates are below the maximum point, cutting them will simply reduce revenue, period.
The evidence from subsequent decades has generally supported the skeptics. When Reagan cut taxes dramatically in the 1980s, federal revenues as a share of the economy declined. When Bill Clinton raised taxes on high earners in 1993, Republicans predicted economic disaster—but the economy boomed, creating more jobs than during the Reagan years. These results don't disprove the Laffer curve as a concept, but they suggest that American tax rates have not typically been above the revenue-maximizing level.
Reagan's Revolution
Whatever the theoretical debates, supply-side economics achieved its greatest political triumph when Ronald Reagan won the presidency in 1980.
Reagan had a gift for making complex economic arguments sound simple and appealing. His campaign promised an across-the-board cut in income tax rates and an even larger reduction in capital gains taxes—the levy on profits from selling investments like stocks or real estate. The appeal was straightforward: let people keep more of what they earn, and everyone benefits.
Congress passed Reagan's tax plan in 1981, cutting taxes by seven hundred and forty-nine billion dollars over five years. The top marginal income tax rate eventually fell from seventy percent to twenty-eight percent—a staggering reduction.
What happened next remains fiercely contested.
Supporters point to the long economic expansion of the 1980s as validation. After a sharp recession in 1981-82 (caused largely by the Federal Reserve's aggressive moves to crush inflation), the economy took off. Growth was strong. Unemployment fell. And while budget deficits ballooned, supply-siders argued this was because of increased military spending, not the tax cuts.
Critics tell a different story. The Nobel Prize-winning economist Paul Krugman, perhaps the most prominent supply-side skeptic, summarized the era this way: "When Ronald Reagan was elected, the supply-siders got a chance to try out their ideas. Unfortunately, they failed." While he acknowledged that supply-side economics had produced better results than the tight-money policies that preceded it, Krugman argued the promised gains fell "so far short of what it promised." He memorably dismissed supply-side economics as believing in "free lunches."
The Kansas Experiment: A Cautionary Tale
Perhaps the most dramatic modern test of supply-side theory occurred not at the federal level but in Kansas.
In 2012, Governor Sam Brownback signed a sweeping tax cut that he promised would be "a shot of adrenaline into the heart of the Kansas economy." The plan slashed income tax rates and eliminated taxes entirely on certain business income. Brownback predicted explosive growth.
The explosion went the wrong direction.
Job growth in Kansas actually lagged behind neighboring states. The state budget went into freefall. Schools faced devastating cuts. Roads deteriorated. The state's credit rating was downgraded. By 2017, the situation had become so dire that the Republican-controlled state legislature voted to roll back the tax cuts over Brownback's veto.
The Kansas experiment became a cautionary tale that critics cite whenever supply-side proposals resurface. Supporters counter that Kansas was a small, isolated case with unique circumstances—not a fair test of policies that might work better at the national level or when implemented differently.
The Deeper Philosophy: Incentives and Human Behavior
Beyond the debates about deficits and growth rates lies a more fundamental argument about how human beings respond to incentives.
Supply-side economists emphasize two key decisions that taxes influence.
First: the choice between work and leisure. If you get to keep ninety cents of every additional dollar you earn, you might be willing to work overtime, take on a side project, or push for that promotion. If you only keep fifty cents, maybe you'd rather spend Saturday with your family. High marginal tax rates, from this perspective, discourage effort at the margin—precisely where additional productive activity would occur.
Second: the choice between consumption and saving. Money you save and invest helps businesses expand, funds new ventures, and increases the economy's productive capacity. But if the government taxes the returns on those investments heavily—through income taxes on interest, capital gains taxes on profits, or taxes on dividends—saving becomes less attractive relative to just spending your money now. Lower taxes on investment income, therefore, should encourage the saving and investment that drive long-term growth.
Critics don't deny that incentives matter. They question how much they matter at realistic tax rates, and they point out that the relationship isn't always straightforward. Sometimes higher taxes can actually increase work effort: if you need to earn a certain amount to maintain your lifestyle, and taxes go up, you might work more to meet that target, not less.
From Heresy to Orthodoxy and Back Again
The intellectual status of supply-side economics has traced a curious arc.
In the late 1970s, it was a rebellious outsider challenging the Keynesian establishment. By 2007, the supply-side advocate Bruce Bartlett was declaring victory: "Today, hardly any economist believes what the Keynesians believed in the 1970s and most accept the basic ideas of supply-side economics—that incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon."
But by the same token, Bartlett himself became a critic of what supply-side economics had become in practice. The original supply-siders, he lamented, had focused narrowly on cutting marginal tax rates. Their successors supported "even the most gimmicky, economically dubious tax cuts with the same intensity." The sophisticated theory had degenerated into a simplistic belief that all tax cuts are always good.
This evolution reflects a common pattern in political economy. An intellectually serious idea gets simplified for political consumption, then applied far beyond its original scope. The careful distinctions of academic debate—between marginal rates and average rates, between taxes on income and taxes on consumption, between short-term and long-term effects—get lost. What remains is a bumper sticker: "Taxes bad. Cut taxes. Economy good."
The Historical Roots: From Ibn Khaldun to Adam Smith
Supply-siders like Bruce Bartlett have traced their intellectual lineage back centuries, claiming some unexpected ancestors.
Ibn Khaldun, the fourteenth-century Islamic scholar, wrote about how empires decline as rulers impose ever-heavier taxes on productive citizens, eventually killing the golden goose of commerce. David Hume, the Scottish Enlightenment philosopher, argued that low taxes encourage industry and commerce. Adam Smith, in "The Wealth of Nations," devoted considerable attention to how taxes affect economic behavior.
Even Jonathan Swift, the satirist who wrote "Gulliver's Travels," gets claimed for the supply-side tradition based on a passage about how excessive taxes can reduce rather than increase revenue—essentially stating the logic of the Laffer curve two centuries before Laffer drew it.
Alexander Hamilton, America's first Treasury Secretary, advocated for policies that would encourage manufacturing and commerce, including tariffs to protect infant industries. Though Hamilton's support for tariffs might seem to contradict free-trade supply-side principles, his emphasis on creating conditions favorable to production puts him in the same broad tradition.
Whether these historical figures would recognize themselves in modern supply-side economics is debatable. But the appeal to such a distinguished intellectual pedigree reflects the movement's aspiration to be more than a passing political fashion—to represent enduring truths about how economies actually work.
The Demand-Side Counterpoint
To fully understand supply-side economics, you need to understand what it argues against.
Demand-side economics, rooted in Keynesian thinking, starts from a different premise about how economies can go wrong. The problem isn't that producers can't or won't produce enough. The problem is that buyers sometimes lack the purchasing power or confidence to buy what's already being produced.
In a recession, factories sit idle while workers who could operate them go unemployed. The productive capacity exists; it just isn't being used. From this perspective, the way to restart the engine is to put money in people's pockets so they'll start buying again. When demand increases, businesses will ramp up production to meet it.
Supply-siders counter that this gets the causation backwards. You can't consume what hasn't been produced. Creating artificial demand through government stimulus might provide a temporary boost, but sustainable prosperity requires expanding the economy's capacity to actually make things.
In practice, most economists today recognize that both supply and demand matter. The question is which is the binding constraint at any given moment. During a recession with idle factories and unemployed workers, boosting demand probably makes sense. When the economy is already operating near full capacity, expanding supply—through education, infrastructure, investment, and yes, perhaps tax incentives—becomes the priority.
Where We Are Now
Supply-side economics remains a powerful political force in America nearly fifty years after its emergence. Every Republican presidential candidate since Reagan has promised tax cuts as a path to growth. The argument that lower taxes will pay for themselves through increased economic activity appears in Congressional debates with remarkable regularity.
Yet the track record remains mixed at best. Tax cuts have not consistently paid for themselves. The Kansas experiment failed spectacularly. The Clinton-era tax increases on the wealthy, which supply-siders predicted would be disastrous, preceded one of the strongest economic expansions in American history.
Does this mean supply-side economics is simply wrong?
Not necessarily. The original insight—that taxes affect incentives, and that incentives affect behavior—remains valid. At some tax rate, cuts probably would increase revenue. The question is whether American tax rates have ever actually been that high, and whether the specific tax cuts proposed will generate the promised growth.
The theory's persistence despite questionable evidence perhaps says more about political economy than about economics itself. Tax cuts are popular. The promise that cutting taxes will actually increase government revenue makes them even more popular. And once a politically convenient idea becomes embedded in a party's identity, it develops a remarkable resistance to contrary evidence.
Supply-side economics began as a serious intellectual response to a genuine economic crisis. Whether it has retained that seriousness—or become, as its critics charge, a zombie ideology that shambles forward regardless of evidence—may be the defining question for American economic policy in the years ahead.