Supply-side Economics, the 2017 Tax Act, and Beyond

Abstract

Several of the designers of the 2017 Tax Act were prominent as 'supply side' advocates at the time of Reagan tax cuts during the 1980s. The economic argument for supply side tax rate reductions drew on a policy mix framework developed by Robert Mundell as early as 1962. Within that framework, the easy fiscal/tight monetary policy solution was intended for circumstances of either pressure on reserves or the exchange rate (as during the Kennedy Administration) or of serious domestic inflation (as under the Carter and Reagan Administrations). Tax cuts in the US subsequent to the 1980s have not had the intended stimulus effects because neither the currency weakness nor inflationary preconditions have existed. Absent such preconditions, tax rate reductions will generate either domestic over-heating or a redistribution of income to those in higher brackets. Any argument in favor of the 2017 Tax Act should not fall back on Mundell’s policy mix advocacy. In contrast, the case for an easy fiscal/tight money policy may have unexpected force in situations of fixed exchange rates, or where domestic monetary policy options are otherwise constrained or absent - as in Eurozone periphery countries.  In another contrast, response to the 2020-2021 Pandemic calls attention to what may become the limits of policy mix macroeconomics.