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Laugh at Laffer Over Supply-Side Economics

Since 1913, almost a hundred years now, this is the first time that we have had back-to-back elected presidents of opposing parties who have served two full terms.

Being able to compare the results of the economy under such diametrically different policies is a once-in-a-life-time opportunity. Balanced budget and surplus under Clinton - endless and mindless tax-cuts for the rich and big business under Bush, resulting in a National Debt increase of $3.2 trillion dollars.

Economic policies in effect under President Clinton were not only able to balance the U.S. Budget; they were able to put the budget in surplus. When the U.S. is over budget, it creates a budget deficit as well as increased interest payments on the national debt. When the U.S. is under budget, we have a budget surplus as well as decreased interest payments on the national debt.

Historically, the pattern for the United States has been budget deficits and interest payments would rise in tandem, but we had another first with President Clinton. The budget surpluses created lower interest payments, which in turn succeeded in reducing the amount the national debt rose.

If you look at the statistics, your immediate reaction will be 'hey, wait a minute - the national debt increased under President Clinton' - which is correct, but the increases were entirely due to the interest charged on the federal debt. When a new president takes office, the interest on the national debt doesn't stop - it continues, so the interest charges are still there.

Bill Clinton was in office for 8 years. The U.S. National Debt increased by $1.5 trillion dollars during his 8-year presidency. During this same 8-year period interest on the National Debt totaled $2.7 trillion dollars. If you eliminate the interest, the National Debt was actually reduced by $1.2 trillion dollars under President Clinton.

In contrast, George W. Bush has been in office since January 20, 2001. During the 6 years and 8 months that he has been in office, the National Debt has increased $3.2 trillion dollars.

An interesting note is the National Debt has increased by twice as much during the 6 years and 8 months that Bush has been in office, compared to the full 8 years that Clinton was in office.

Remove interest from the equation and the National Debt was reduced by $1.2 trillion dollars under Clinton policies and increased $803 billion dollars, to date, under Bush.

Arthur B. Laffer's napkin theory has to do with what is known as supply side economics. There is nothing very original about it, actually, a French economist, Jean Baptiste Say, came up with the idea well over a hundred years ago with Say's Law which says, simply, "Supply creates its own demand."

The idea is that if you're going to produce something, you have to go out and buy the raw materials first in order to manufacture the product. The Bush years should have been the best possible of all times for supply-side economics. The theory was practiced to the fullest possible extent. We're going to hear a lot about supply-side economics because it has been such a dismal failure for the last almost seven years. What is really laughable is the Bush comment at his September 20 press conference at which he declared that he is a "supply-sider."

"I'm a supply-sider. I believe supply-side economics, when properly instituted, enables us to achieve certain objectives. One, people find work and there's hope in the economy. Two, that supply-side economics yields additional tax revenues. And if we're smart about how we manage the fiscal budget, it leads to balance, and that's what we have done..."

Keynes, in his The General Theory of Employment, Interest and Money attacked the problem from the other direction--demand. Nobody was going to go out and do anything if there was no demand for it. During slack times, such as recessions, the government could help take up the slack by providing demand for goods and services through spending. Ideally, the government would run at a deficit during recessions and a surplus when aggregate demand was sufficient to provide full employment. According to Wikipedia, Laffer commented on Bush's supply-side economic policies on page A18 of the February 14, 2005 Wall Street Journal as follows:

"When 'W' ran for president in 2000, I voted for him but not enthusiastically. I had voted for Bill Clinton in the prior two presidential elections, but with Al Gore as the Democratic candidate in 2000 the choice was easy for me even if I wasn't all that excited about George Bush. I am now flabbergasted by the performance of Bush 43. [...] George W. Bush could well turn out to be the best president in recent history. [...] Because of President Clinton, President Bush's budget deficits can easily be absorbed by the U.S. economy. [...] Supply-side pro-growth economics couldn't ask for a better champion -- nor could any American."

A common misconception regarding tax cuts is that if government revenues increase after tax cuts, it must be that the tax-cuts were the reason. The question you would have to ask is, what would revenues have been if there had been NO tax-cuts. This, of course, is a debatable issue because it is difficult to prove.

The following chart depicts US Revenues for the period of 2000 through 2006. 2000 was the last full year that Clinton was in office and 2001 through 2006 are the first six years of the Bush presidency.

We had combined individual and corporate revenues of $1.2 trillion the last year of the Clinton presidency and we're still at $1.2 trillion at the end of the 6th year of the Bush presidency.

In 2005 Corporate revenues increased considerably so it could be said the Bush economic policies are working as planned, but are they?

Corporate revenues increased due to the fact the Department of Defense contract awards doubled from $133 billion in 2000, to $269 billion in 2005 and further increased to $295 billion in 2006.

The differences between the two presidencies are dramatic - under Clinton there were tax increases, coupled with increased benefits as well as increased revenues, budget surpluses "as far as the eye can see" and a reduction in the increase in National Debt. Under Bush there have been tax cuts, coupled with benefit cuts, decreased revenues, budget deficits and major increases in the National Debt.

Nobody, anywhere, is forecasting a surplus now.

Bush is now talking about eliminating the budget deficit by 2013, as he continues to add billions of dollars to the National Debt.

How is it possible to turn a surplus "as far as the eye can see" into $3.2 trillion of additional debt? Just what is so good about doing that? How many additional billions of dollars is that just to pay the interest on the $3.2 Trillion?

Where did the money go?

It's time to start turning the clock and the wheel in a different direction. They've been turning backwards for almost seven years.

Sources:  National Debt - U.S. Department of Treasury

               Revenues - Budget of the United States 2007 - Historical Tables

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Richard E Walrath is a writer residing in central Ohio with his family. He is a former budget analyst and co-owner of the Articles and Answers news and information sites.