Secretary Yellen tells it like it is to the World Economic Forum
Last Fall marked 16 years from the time WAMC offered me this platform to try out some of the economics I had been studying and teaching since 1970 when I started my full-time job at (then) Western New England College. I am excited to continue sharing what I have learned and continue to learn over my (now 50-plus-year) career as both a student and a teacher of economics. In my very first presentation, I noted a tension between the extreme free market individualism of Alan Greenspan, then being hailed as a “maestro” for his leadership of the FED during the 1980s and 90s, and the pro-government intervention of John Kenneth Galbraith.
[For Greenspan see Bob Woodward, Maestro: Greenspan’s Fed and the American Boom. (NY: Simon and Shuster, 2001). This book of course only celebrates Greenspan --- but after the 2008 financial meltdown, Greenspan was quoted as saying that “something” in his philosophy was definitely wrong because he never believed companies would engage in such irresponsible behavior as they did in the run up to the 2008 financial crisis. Here’s a direct quote: "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms…" Quote and descriptive article from the Guardian about Greenspan’s 2008 testimony can be found here: https://www.theguardian.com/business/2008/oct/24/economics-creditcrunch-federal-reserve-greenspan. For Galbraith, there are many excellent sources including his own writings but see Richard Parker, John Kenneth Galbraith: His Life, His Politics, His Economics. For a great flavor of how Galbraith writes, see his The Great Crash (originally published in 1955, it is in a Pelican paperback from 1961). The book covers the crazy speculation that led up to the stock market crash of 1929 which ended up starting the Great Depression.]
I ended my presentation with these words: “In these short descriptions of the Greenspan vs. Galbraith approach to the balance between individual liberty and cooperative political action to solve economic problems we see all the debates that have engaged and will continue to engage us as we attempt to chart our economic policy course in the 21st century.”
[In highlighting these two contrasting viewpoints, I actually was limiting myself to the economics that is discussed in most textbooks and courses in the United States. In doing that, I left out a third approach --- the approach of radicals writing in a tradition that dates back to Karl Marx. Though there are certainly some economists teaching in the US who are “radical economists” (I was one myself before I retired), for the most part their views are ignored at best and vilified at worst. In delivering these commentaries, I have often (but not always!) chosen to restrict the current discussion to the differences between right-wing so-called “free market” economics exemplified by Greenspan and others such as Milton Friedman and the more interventionist economists who build on the tradition of Keynes such as Galbraith and Paul Krugman. The reason I do this is because the American political spectrum – notwithstanding the prominence of the Democratic Socialist Senator Bernie Sanders and some progressive members of Congress such as Representative Alexandria Ocasio-Cortez --- really does run from free marketeers who are anti-interventionist to mainstream interventionists like traditional Democrats. Readers and listeners to my commentaries, however, should be aware that there is this very different approach out there, even if it is not understood by most Americans, including most American economists.)]
A modern version of this tension between the Greenspan and Galbraith “wings” of the economics profession has just surfaced in Treasury Secretary Janet Yellen remarks to the World Economic Forum on January 21.
[See “Remarks by Secretary of the Treasury Janey I. Yellen at the 2022 ‘Virtual Davos Agenda’ Hosted by the World Economic Forum,” available from the Department of Treasury at https://home.treasury.gov/news/press-releases/jy0565]
In this speech, Secretary Yellen contrasts what she calls the “failed” version of “supply side economics” with what she describes as the Biden Administration’s “modern supply side economics.” The term supply side economics got into the public mind in the late 1970s and early 1980s. It initially stemmed from an effort by economists, journalists and politicians to justify massive tax cuts --- targeted on high income people and corporations. To illustrate why high taxes on high income people hurt the very effort by the government to raise revenue, economist Arthur Laffer drew a diagram on a napkin in a Washington, DC restaurant for then Representative Jack Kemp and a journalist named Jude Wanniski. That diagram and subsequent writings launched what came to be known as “supply side” economics. Touted as an “answer” to Keynesian economics which had dominated economic policy in the United States since 1960, supply side economics argued that the problems the US economy was experiencing in the 1970s (combinations of too high unemployment and persistent inflation which came to be known as “stagflation”) could not be solved by manipulating the level of government spending or the level of taxation in order to stimulate more consumption or less depending on which problem – too much unemployment or too high inflation – was more significant. NO --- the solution was to improve the incentives of decision-makers, not just control how much extra money people had in their pockets.
[For an introduction to the theory of supply side economics, see Meeropol, Sherman and Sherman, Principles of Macroeconomics, Activist vs. Austerity Policies (Second Edition). NY: Routledge, 2019, pages 306-310. For a discussion of how supply side economics played a role in the Reagan Administration see Meeropol, Surrender, How the Clinton Administration Completed the Reagan Revolution (pbk edition, 2000) University of Michigan Press, pages 46-48 and 79-80.]
Let’s let Secretary Yellen describe her contrast of the Biden Administration approach with the original version of supply side economics:
“What we are really comparing our new approach against is traditional “supply side economics,” which …. seeks to expand the economy’s potential output, but through aggressive deregulation paired with tax cuts designed to promote private capital investment. It is, unquestionably, important to properly implement regulation and maintain a pro-growth tax code, but they are not sufficient and can often be overdone. Modern supply side economics, in contrast, prioritizes labor supply, human capital, public infrastructure, R&D, and investments in a sustainable environment. These focus areas are all aimed at increasing economic growth and addressing longer-term structural problems, particularly inequality. The recently enacted Bipartisan Infrastructure Bill and the Build Back Better legislation that remains under consideration in Congress incorporate this modern supply side approach.
Our new approach is far more promising than the old supply side economics, which I see as having been a failed strategy for increasing growth. Significant tax cuts on capital have not achieved their promised gains. And deregulation has a similarly poor track record in general and with respect to environmental policies—especially so with respect to curbing CO2 emissions.
Moreover, this [“old” supply side] approach has deepened disparities in income and wealth by shifting the burden of taxation away from capital and towards labor. … [C]apital-based automation has also played a role—and perhaps the major role—in widening educational wage gaps between 1980 and 2016.
A country’s long-term growth potential depends on the size of its labor force, the productivity of its workers, the renewability of its resources, and the stability of its political systems. Modern supply side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage. Essentially, we aren’t just focused on achieving a high topline growth number that is unsustainable—we are instead aiming for growth that is inclusive and green.
The economic moment is well-suited to accommodate such a modern supply side expansion. Potential GDP in the United States is constrained by a declining labor force. And with few exceptions, productivity growth has been sluggish since the late 1970s. We have underinvested in public infrastructure, and in education and training for children and all those who have not sought a four-year college degree. This underinvestment has widened the gap in earnings between highly skilled workers and those who lack a college degree—a gap that has relentlessly increased since the late 1970s.”
Secretary Yellen was much too discreet to really call out supply side economics for what it is – a modern version of selling snake-oil. What she describes as reduced taxation on capital income actually was a heavily slanted tax cut towards high income people and very significant reductions in the taxation of corporations. The original Economic Recovery Tax Act of 1981 that incorporated supply side principles resulted in NO tax cut for the lowest income people whose income tax burden was zero or low and in fact, because of scheduled increases in the payroll tax for social security, many moderate-income people saw their income tax reduction eaten up completely by the payroll tax increase.
[“… because of the rise in Social Security payroll taxes already scheduled, between 1980 and 1985 the actual ratio of [total] federal taxes paid on income ROSE for the bottom 40 percent of the population…” (emphasis added), Surrender… p. 80.]
The prediction that cutting taxes on the highest income tax-payers (the top income tax rate was 70 percent in 1980 – by the time the supply siders were through, it had come down to 33 percent by 1988 – the rate of taxation on corporations was also cut dramatically) would spark such an increase in productivity and incentivize savings and investment so much that the rise in incomes would produce more government revenue even with rates being cut --- sort of what is supposed to happen as a result of a sale --- never came true. Neither did the promised increases in investment. [For details see, Surrender chapter 8 and the table on page 168.]
However, that never mattered to many of the lobbyists who supported supply-side economics tax cuts. They were happy that their rich clients got richer. Beginning with the earliest supply side tax cuts in 1978 and continuing dramatically once Ronald Reagan became President, inequality exploded. (The increase in inequality was also a result of the fact that high unemployment during the decade of the 1980s led to a long period where real wages (in purchasing power) were virtually frozen (see my commentary dated January 21, 2022).
Secretary Yellen argued that the Biden Administration policies represented a “modern” supply-side economics. In describing the elements of modern supply side economics, Secretary Yellen making clear that there is a positive role for government rather than merely reducing regulation and cutting taxes on rich people. In her remarks she summoned the US government to get involved in helping to reverse the increases in inequality that have been so damaging to people’s lives over the past forty years. The following play an important role in increasing the size and even more importantly the quality of the labor force: early childhood education, making sure that poor people have the same quality public education as well-off suburban families, seeing to the health and nutrition of mothers and infants. All of these require government action. In addition, of course, to deal with temporary unemployment, government needs to ensure sure that people have housing and necessities (such as food!). All of these and more are part of the proposed Build Back Better Bill which has been defeated by two renegade Democratic Senators and a united front of Republicans in the US Senate who are more concerned with defeating Democrats than in helping the country.
Secretary Yellen is making an extremely important point. There is a most important role for government in creating a more productive labor force, in incentivizing green technologies so that the world doesn’t choke on carbon emissions before the end of the current century and in guaranteeing a minimum standard of living for all. The old supply side economics said, bribe the rich and the super rich and everything else will work out for the rest of us --- GARBAGE --- history proved them wrong over and over again ---- The new supply side economics is definitely the better way to go.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies
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