Labeling someone a supply-side economist these days is about like calling someone a Republican or a Democrat: The label doesn't say that much about the contents of the package.
Both Charles L. Schultze, chairman of the Council of Economic Advisers under President Carter, and Murray Weidenbaum, his successor under President Reagan, have remarked -- in about the same words -- "We are all supply-siders now."
But neither Schultze nor Weidenbaum nor most other economists would be willing to call themselves supply-siders if that were taken to mean they fully subscribe to the original, purist version of the doctrine. In more general usage, the supply-side appellation has come to mean nothing more than a belief that an adequate supply of goods is important in the fight against inflation and that a higher rate of business investment, even at the cost of less personal consumption, is needed in order to produce those goods efficiently.
In contrast, the original, purist version of supply-side economics involves a single, narrow idea: a cut in marginal rates in the individual income tax will encourage people to work harder and to save and invest more. In fact, to a purist, all that matters is the cut in marginal rates; that is, reducing the ever higher rates at which an individual's income is taxed as he moves up from one tax bracket to another.
Paul Craig Roberts fits the mold of a purist. An economist who once served as an aide to Rep. Jack Kemp (R-N.Y.), then went on the payroll of Sen. Orrin Hatch (R-Utah where he was able to influence the thinking of Sen. William V. Roth (R-Del.) and later became an editorial writer for the Wall Street Journal, Roberts probably has done more than anyone else to popularize supply-side economics. And he is greatly concerned that the concept not become adulterated.
In his last editorial-page piece for the Journal before becoming assistant secretary of Treasury for economic policy -- though he was no longer on the paper -- Roberts wrote that supply-side economics' swift rise to prominence left it vulnerable.
"More people have heard of the policy than know what it is. That poses a control problem: How do you keep measures that are inconsistent with the spirit of the new policy from assuming its name?" he asked.
This, he went on, is how one can sort the wheat from the chaff. "The fiscal revolution envisioned by supply-side economics cannot be achieved by just any random assortment of tax breaks that might emerge from the political negotiation process," he wrote. "It does not mean simply a tax cut. Indeed, there are a large number of 'tax cuts' that would frustrate the policy -- for examples, a rebate and an increase in the zero-bracket amount, which do not increase production incentives.
"A supply-side tax cut aims at increasing the incentives to produce new income by lowering the rate at which it is taxed, not at returning dollars to the taxpayers' pockets. It relies on the growth of incentives, rather than the growth of the federal budget, to stimulate the economy. In the Keynesian picture, higher real economic growth comes from higher spending and brings inflation in its wake. In the supply-side model, higher growth results from higher production, which lowers the inflation rate," Roberts explained.
Roberts and other true supply-siders, such as Kemp, thus make a sharp distinction between "spending" and "growth," and that is why there are so few true supply-side economists. To most of the economic world, this distinction, by definition, is not valid.
The "higher spending" Roberts mentions is spending as recorded in the United States' national income and product accounts. The most familiar part of this system of national accounting is the gross national product. As usually presented, the GNP is the total of personal consumption expenditures, business purchases of new structures and equipment, business or personal investment in new residential structures, the difference between imports and exports (with an excess of imports showing as a negative amount), the increase or decrease in business investories, and the purchase of goods and services by federal, state and local governments.
The traditional notions of stimulating the economy during recessions or slack periods usually involved either increasing government purchases of goods and services directly, say, by boosting outlays for public works projects, or by cutting taxes. Tax cuts do not show up directly in the GNP figures, but they increase the amount of money individuals or businesses have to spend themselves. This combination of higher spending by individuals, businesses and government caused the level of economic activity generally to rise as both idle workers and machines were put back to work.
The true supply-siders now deride this process, saying it simply leads to inflation. But they do not explain how it is that the "higher growth [that results] from higher production" doesn't show up in the GNP figures just like higher consumer or government spending. And of course it does, critics assert.
To many skeptics, it is almost as if the inflationary or noninflationary characteristics of higher spending depended entirely on motivation. If the government seeks to stimulate the economy, and thus spending, with a tax cut, that is inflationary. If it seeks to stimulate production, and thus spending, by cutting marginal tax rates, that is anti-inflationary.
This curious dichotomy was reflected last week when Walter Heller, chairman of the Council of Economic Advisers when the 1964 tax cut was passed, stressed on NBC's "Meet the Press" that the cut was intended to stimulate demand because the economy was operating far below its potential. Kemp, at a breakfast with reporters a few days later, maintained that the only reason that cut gave the economy a shot in the arm was that the cut took the form of a reduction in marginal tax rates.
But the true supply theory usually has one major corollary: Total spending, and therefore inflation, is to be controlled by limiting growth of the money supply.
"The heart of the supply-side idea is that tax cuts can provide incentives for growth even as monetary policy fights inflation," declared a Wall Street Journal editorial not long ago. At another point, the Journal, which has played a major role in publicizing supply-side economics, said, "The Reagan plan proposes to reduce demand through a restrictive monetary policy, thus combatting inflation. But it proposes to stimulate real growth by tax cuts that change incentives in the economy."
But again, the critics point out, we measure "demand" in the comprehensive figures of the GNP accounts. What kind of "real growth" is it, they ask, that will not show up in the GNP? How can a tight money policy hold down "demand" without affecting "real growth?"
Apparently the only answer is that changes in "demand" as measured in the GNP accounts do have two components, the change in real economic activity and the change in prices. Implicitly at least, the supply-siders assume that when lower rates of growth in the money supply serve to limit total spending -- or "demand" in the GNP sense -- all that will be squeezed out will be inflation, not "real growth."
Unfortunately, that is not what has usually happened in the past, either in the United States or in other nations, when monetary policy limited increases in spending. There usually have been substantial losses of real output too, according to the work of Robert J. Gordon of Northwestern University and other economists.
The true supply-sider also is not very interested in the size of the federal budget deficit. Supply-siders generally do not any longer stress the early claims by economist Arthur Laffer and his famous "Laffer Curve" which suggested that U.S. taxes are so high that rate reductions would bring in more revenue, not less, almost immediately. But deficits do not worry them. As Roberts wrote, "Delaying the tax cuts 'because the deficit is too large' is a way of sending a signal that the administration doesn't have confidence in its own policy."
President Reagan, however, chose to do just that -- delay the tax cuts -- sepcifically because of what making the personal income tax retroactive to Jan. 1 would have done to the budget deficit. On that score, and others, such as the large business tax cuts included, the Reagan package is a compromise with pure supply-side theory.
The constant confusion over the meaning of supply-side economics has tripped up even two of its most ardent supporters, columnists Rowland Evans and Robert Novak, who rarely miss an opportunity to tout the pure supply-side approach to tax policy. With almost the same breath, however, they have pushed hard recently to have New York businessman Lewis Lehrman named to an administration post, beginning with Treasury secretary.
Each time they have urged Reagan to hire Lehrman, the columnists have described him as a supply-sider. In fact, he is not. Lehrman says the two most important economic policy moves the administration should make are to balance the budget and to peg the value of the dollar to a gold standard. Cuts in marginal income tax rates take a back seat with him, and that, by definition, makes him no supply-sider at all.