The Case For Supply-Side Economics

Ryan Heshmati

September 06, 2024 (Last Modified September 13, 2024)

“Trickle-down economics,” as it has been referred to by opponents, defined the Reagan era and brought positive economic change. Nevertheless, the Neoliberal economic ideals that Reagan’s administration championed face heavy criticism in the political sphere. 

Why? Often, critics point to stagnant wage growth for the middle class, but that might just miss the entire basis for supply-side economic theory.

Reagan Republicans in the 1980s blamed government spending and excessive taxation for the poor economic climate the Carter administration grappled with. Consequently, when President Reagan took office in 1981, he acted swiftly to make significant changes to economic policy. Most notably, under his leadership and through two separate moves, the government cut the highest income from 70% to 38.5%. How did America fare?

After inheriting an economy suffering from inflation and unemployment, Reagan left office eight years later with a much better economic legacy than his predecessor. Per the Bureau of Labor Statistics, unemployment stood at 7.5% in January 1981 and dropped to 5.4% by January 1989 as Reagan’s presidency ended. According to the Federal Reserve Bank of Minneapolis, inflation fell from 10.3% in 1981 to 4.1% by 1988 (tight monetary policy certainly also helped there).

Those who oppose supply-side economics argue that the basic premise that benefits from tax cuts will ultimately aid the economy as a whole (and thus all stakeholders, not just high earners getting direct cuts) is flawed. While inequality in wage growth might indicate that the economic benefits of tax cuts at the top are only earners at the top, that would ignore the major innovation that the United States experienced.

Sure, the real wage growth for median wage earners was not huge over the last forty years (especially when compared with the top 1% of incomes), but the increase in access to computing power, for example, has been incredible. Forty years ago, not even the richest Americans could have the compact, lightning-fast iPhone technology that Americans across income levels access and enjoy today. This innovation is central to supply-side economic theory. Proponents believe that tax cuts incentivize investment, and investments lead to advancements like the iPhone. Now, it is impossible to know how the economy, and innovation, would be different had 70% top marginal income tax rates stayed in place to present day. Even so, the belief that letting successful workers keep a larger share of their income incentivizes growth is in line with the fundamentals of human nature.

In recent years, many have attacked supply-side economics. Americans in the Reagan era (and arguably well beyond his presidency and through Clinton’s) benefited from the move against government spending and excessive taxation. Many criticize supply-side economics for the income inequality that intensified in the United States over the last forty years; however, it is important to consider income as only one factor in a litany of others (like innovation) necessary to understand the successes and pitfalls of any economic school of thought.