Liberals Look Towards Supply-Side Future
A new economic movement is building with the Democratic party. The Biden Administration is pushing for a progressive version of supply-side economics, and it could rewrite liberal policy-making for years to come.
Speaking to the World Economic Forum in January, Treasury Secretary Janet Yellen announced the Biden-Harris Administration’s latest economic sales pitch: modern supply-side economics. Secretary Yellen immediately sought to differentiate the new “Bidenomics” from Reaganomics, which popularized supply-side economics as a right-wing governing tool. Yellen’s announcement comes as the theory of supply-side progressivism begins to catch on within Democratic Party circles. As the Administration continues to build back better from the pandemic and the havoc of the Trump years, renewed focus on the supply-side can provide a blueprint forward on the economy.
Bidenomics and Reaganomics represent fundamentally different approaches to stimulate supply-side growth. In 2019, now-White House Council of Economic Advisers member Heather Boushey wrote a brief history of traditional supply-side economics. The theories, which would drive the Reagan Administration’s failed growth policies, were conceptualized by economist Arthur Laffer. Laffer theorized that cutting taxes on the wealthy would spur economic growth that would eventually result in increased tax revenue. He illustrated this in the Laffer Curve, which was drawn on a restaurant napkin for President Gerald Ford’s Chief of Staff Dick Cheney in 1974. Decades later, this interpretation of the Laffer Curve has been thoroughly discredited. President Ronald Reagan styled his economic policies after it, as did Presidents George W. Bush and Donald Trump. Each time, the tax cuts failed to pay for themselves, resulting in budget deficits and heavy reductions in social spending.
While both Biden and Reagan share common ground on goals to stimulate supply-side growth, the key difference lies in their strategies to achieve that aim. Reagan and other Laffer disciples sought to cut taxes on capital, while Biden plans to improve the standing of labor. Secretary Yellen summarized the differences between the two approaches in her speech. While “traditional” supply-side economics utilizes “aggressive deregulation paired with tax cuts designed to promote private capital investment,” Bidenomics instead “prioritizes labor supply, human capital, public infrastructure, [research and development], and investments in a sustainable environment.” Yellen reiterated that the old methods failed and have only succeeded in shifting the tax burden from capital to labor while increasing inequality. Unlike the failed Laffer Curve, modern supply-side economics is firmly rooted in economic evidence.
The members of the Biden White House are not the first liberals to theorize new ways to approach supply-side economics. In September 2021, New York Times columnist Ezra Klein published a manifesto for what he deemed “supply-side progressivism.” While Janet Yellen sought to differentiate between modern and traditional supply-side economics, Klein proposes supply-side progressivism as an alternative to the demand-focused hegemonic discourse of liberals and progressives. He describes this current discourse as “give people money or a moneylike voucher they can use to buy something they need or even just want.” This includes many current plans for universal health care, housing vouchers, and the child and earned-income tax credit.
Demand-focused policies cannot be described in blanket terms. Rather, some are effective, while others are ineffective. Broadly-focused policies are more likely to achieve their goals. For example, the child tax credit (CTC) has proven to be successful. The Institute on Taxation and Economic Policy found that the CTC cut child poverty by 40%, increased the income of low-income families by 35%, and reduced childhood chronic stress while improving educational outcomes. Aside from the immediate impacts on poverty, the CTC will improve the wider economy in the long term by investing in human capital.
Conversely, other well-intentioned demand-side policies backfire, leading to what the Niskanen Center deems “cost disease socialism.” This phenomenon occurs when fiscal measures subsidize demand in a supply-restricted sector, leading to shortages and ballooning costs. Poorly-targeted government subsidies drive greater demand for limited goods and services while simultaneously reducing incentives to lower costs. This effect can be seen in efforts to alleviate America’s housing crisis. As rents skyrocket nationwide, a number of cities have begun exploring rent control policies to prevent displacement and lower costs. These efforts may prove misguided, as rent control has a problematic history. It simply institutes a price ceiling without addressing any underlying issues. Vox’s Jerusalem Demsas notes that “we’re facing a national housing shortage of 3.8 million homes, and it’s the leading contributor to the spiraling cost of housing and modern homelessness.” As the problem is fundamentally a supply-side crisis, a demand-focused policy will not be effective. Forcing housing to be cheaper without solving the underlying shortage will only create more problems.
Modern supply-side economics attempts to merge the best demand-side policies with supply-side fixes to many of the nation’s systemic issues. By charting a new path beyond the confines of traditional liberal and conservative orthodoxy, the Biden Administration is asserting its commitment to a future of economic growth that is truly broad-based. During recent testimony to the Senate Banking Committee, White House Council of Economic Advisors Chair Dr. Cecilia Rouse highlighted the Infrastructure Investment and Jobs Act as “a historic step towards realizing that [modern supply-side] vision.” Rouse further summarized the plans laid out by Secretary Yellen by describing the White House’s strategy as “investments in our economy to boost labor supply, raise productivity, reduce inequality and create strong sustainable growth.” While previously-enacted legislation like the infrastructure package and American Rescue Plan have made immense progress towards realizing the Administration’s lofty goals, future Congressional action is still badly needed. Aside from extensions of existing successful demand-side programs, most importantly the child tax credit, Congress needs to finish negotiations on future legislative packages.
While most major stakeholders agree that the child tax credit should be extended, negotiations between a bipartisan working group have been only quietly proceeding. The CTC cannot wait, as child poverty is starting to climb again after the revamped program’s expiration. Meanwhile, broader spending packages are also floundering. After a major setback in December, negotiations on BBB continue at a glacial pace. The most recent news suggests that Democrats want to refocus the reconciliation proposal on climate and anti-inflation measures.
Finally, both chambers need to work together on recent dueling innovation bills. The Senate passed the United States Innovation and Competition Act in June 2021, while the House passed their own version, the America COMPETES Act, in February 2022. Both bills received bipartisan support, although the House version contains more Democratic priorities. No matter which specific provisions are included in the eventual compromise, the impact of the bill will be great. The Bipartisan Policy Center’s Tanya Das found that passing an innovation bill would “expand the federal tools available to effectively develop and commercialize clean energy technologies while securing U.S. leadership, security, and prosperity.”
As the Biden-Harris Administration develops a new economic vision based around progressive supply-side economics, Congress needs to push forward with the legislation that will allow that vision to outlast the current president. While the Bipartisan Infrastructure Law and American Rescue Plan were transformative acts, the work is far from complete. Effective demand-side policies like the Child Tax Credit need to be extended, while negotiations on the Build Back Better Act and future bipartisan innovation bill must conclude hastily. Sustainable growth will not happen without Congressional action.
Alex Moskovitz is a freshman C.L.E.G. major in the School of Public Affairs. He is a Staff Writer and Deputy Editor at American Agora.
Image courtesy Kyrion, Creative Commons.