An Exclusive ‘Path to Prosperity’

Ryan Plan Is for the Rich, Not the Rest of Us

The supply-side mantra of tax cuts for the wealthy—that core conservative (but deeply mistaken) belief that lower taxes for the top 1 percent of Americans will inevitably trickle down to the rest of us—has left our nation indebted in ways that profoundly harmed our economy. Undeterred, House Budget Committee Chairman Paul Ryan’s new budget returns us to the same policy path—proclaiming that this time the results will be different.

As they say, the definition of insanity is doing the same thing but expecting a different outcome.

The logic behind supply-side economics is that since tax policy distorts private decision making, all taxes must be bad for economic growth and job creation. As Michael Ettlinger and John Irons put it in their paper, “Take a Walk on the Supply Side”:

The chain of logic for supply-side policies to work requires the following. Lower tax rates on savings (or on those who save more) leads to higher saving rates. Higher saving leads to more economic investments and greater capital accumulation. Finally, more capital leads to greater economic growth. At each of these steps, however, there is reason to doubt the theory—there are other possible outcomes and conflicting theories.

Rep. Ryan’s plan is supply-side economics on steroids. His budget for fiscal year 2012 beginning in October would curtail spending, end Medicare as we know it, and reduce taxes on the wealthy while keeping overall tax revenue constant. This can only mean taxes will go up on the “nonwealthy.” Ryan boasts that all this pain will be for good. And he is backed by the Heritage Foundation, which predicts—among other fantastical claims—that his budget will add an estimated additional 1 million jobs in 2012. Those 1 million jobs, however, are fictional.

For starters, the underlying drivers of economic growth in Heritage’s model seem suspect: If the Ryan budget passes, then Heritage predicts that between 2012 and 2013 investment in residential construction will grow twice as fast as it did during the run-up of the housing bubble. This is not only exceedingly unlikely but also would be bad for our economy. We need a hyper-repeat of the housing bubble?

Then there is Heritage’s job-creation estimate, which would need to be 2.2 million higher between now and 2012—more than 50 percent more than their estimate—in order to actually reach an unemployment rate of 6.4 percent by the end of 2012 as they predict. This is nothing new. The Heritage Foundation’s Center for Data Analysis has been providing supply-siders with unrealistic modeling for decades. Past Heritage predictions overestimated job creation by an average of 6.2 million jobs per year (see Figure 1).

Chart 1

The fact is this: Supply-side economics didn’t work in the first decade of the 21st century and isn’t highly likely to work now. Why would repeating the mistakes of the past bring about a different outcome? The early 2000s saw unprecedented tax cuts for the wealthy, yet in the economic recovery that followed those tax cuts, investment growth, employment, and output all were slower than any other economic recovery in the post-World War II era. For the first time in any economic recovery since the end of World War II (when the U.S. Census Bureau began measuring family income annually), our nation’s middle-class families saw their incomes fall in inflation-adjusted terms.

Supply-side economics doesn’t work. It didn’t grow our middle class then and we shouldn’t experiment with the lives of American families now so that the wealthy can once again reap the rewards of supply-side policies while middle Americans fall further behind. In fact, there’s every reason to believe that building a stronger middle class—not an exclusive path to prosperity for those already prosperous—will enhance economic growth.

Don’t forget that the decline in incomes and economic security for most Americans in the late 2000s was a factor in increased economic instability as these households borrowed to make up for falling incomes. If we had had a stronger middle class, our nation might have avoided the massive household debt run-up of the past decade. And remember that when the U.S. housing and financial crises brought on by the Bush administration crashed our economy, the federal budget deficits resulting from the Bush-era tax cuts left the federal government in a weaker fiscal position to respond.

Our economy today is on the mend from the Great Recession of 2007-2009 but many American families are still struggling, and while our budget deficit needs to be reined in over the long term, right now, we must focus on jobs. The best way to do that is to build a strong middle class to enhance economic growth by providing a solid consumer base, a solid tax base, and a real democracy. Our national priority should not be the rich. It should be the rest of us.

Heather Boushey is Senior Economist at the Center for American Progress.