Defending Supply-Side Economics

Three years ago, I debunked a very sloppy report about tax policy.

The authors, David Hope and Julian Limberg, wanted readers to believe that lower marginal tax rates did not improve economic performance.

But there were major methodological flaws in the report, perhaps because the authors were political scientists rather than economists.

And I pointed out some of the most absurd findings.

• Are we really supposed to believe Thatcher’s tax-rate reductions played no role in the U.K.’s impressive recovery?
• Are we really supposed to believe the Reagan tax cuts played no role in America’s economic renaissance?
• Are we really supposed to believe that Ireland’s lower tax rates didn’t help turn the “Sick man of Europe” into the Celtic Tiger?
• Are we really supposed to believe that New Zealand’s tax cuts didn’t contribute to that nation’s remarkable turnaround?
• Are we really supposed to believe that countries such as Italy, Finland, Belgium, etc, are examples of supply-side reform?

Perhaps the strongest evidence against the Hope-Limberg report is that serious left-leaning economists didn’t give it any attention, presumably because they recognized it was based on cherry-picked data and laughable assumptions.

So after the initial burst of (predictable) media publicity, it quickly faded from the public discourse.

But, like a bad penny, it has reappeared. In her Washington Post column, Jennifer Rubin resuscitates the Hope-Limberg study as part of an attack on pro-growth tax policy.

…the claimed economic benefits of tax cuts for the rich don’t hold up under scrutiny. …A 2020 paper by David Hope of the London School of Economics and Julian Limberg of King’s College London examined “18 developed countries — from Australia to the United States — over a 50-year period from 1965 to 2015…” It turns out that “per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn’t, the study found.” …Hope and Limberg…confirmed there is “strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.” …Sold as a prosperity booster, trickle-down tax cuts for the very rich do not increase prosperity, growth or employment for the average American.

The economists who wrote these studies obviously would disagree with Rubin’s regurgitated analysis.

And these economists also would disagree.

The bottom line is that most academic economists lean to the left, but they generally make more sensible arguments than Hope and Limberg (and Rubin).

• They will acknowledge that lower tax rates are good for growth, but they will argue that the positive effects are small.
• They will acknowledge that lower tax rates are good for growth, but they will argue that sacrificing some growth is acceptable to achieve other goals.
• They will acknowledge that lower tax rates are good for growth, but they will argue other policies can achieve the same results.

Those are all legitimate arguments, even if I have a different perspective. The same cannot be said for the Hope-Limberg study.