We’ve been hearing it for over thirty years: “Cut income tax rates for the wealthy and supply-side prosperity follows.” Call it the Laffer Curve, Reaganomics, Austerity, the Pro-Growth Agenda; it was the same argument. There were national and international battles aplenty, but until quite recently state governments had escaped the ideological barricades. With the surge of Tea Party governors, that’s changed. In Louisiana, Kansas, North Dakota, Texas and other states, right-wing governors drank the Kool-Aid. And, to mix metaphors, the chickens have come home to roost.
As with any macro-economic experiment, it takes time to figure out what the consequences of supply-side state budgets would be. The evidence is in. It looks like supply-side budgeting is no more effective in states than it was nationally or internationally. States that went that way are in crisis, with no ideologically pure way out of the problem.
There’s been a steady drumbeat of headlines about this, starting with Governor Brownback’s woes in Kansas. It took an interesting and unexpected turn to reveal what’s really been happening in many other states. The collapse in oil prices has changed a whole lot of things.
On the positive side, cheap oil has been the closest thing we have had to a New Deal for Americans since FDR. It has put money in the pockets of average citizens and they’re spending it. “Demand-Side Economics” has emerged and it’s working. Spending and consumer confidence are up. Take that, Paul Ryan.
On the negative side, cheap oil hit industries and states that rely on oil revenue. Where oil is king, profits are lost, jobs are lost, and economic activity is down. And for our purposes, state tax revenues are down. Way down.
It turns out that in many states tax cuts for the wealthy were paid for with oil tax revenue. For a few years spending was cut and gimmicks abounded, but state budgets weren’t collapsing. With $50 a barrel oil, now they are. Austerity hawks in Louisiana and North Dakota are trying to figure out how to balance budgets and provide some kind of floor for public services without the secret stream of oil money they’ve depended on. Further cuts in corporate and income taxes are on hold. Education spending is slashed. Assets are sold. And budgets remain unbalanced.
Reality is not impinging on this debate. Governor Jindal of Louisiana, the leading supply-side experimenter, is ideologically unrepentant. “We made an explicit decision and commitment that we were going to cut the government, the public sector economy, as opposed to the private sector economy. We think it’d be better to shrink government and cut taxes.” And no one can figure out what to do. Without the fig leaf of oil taxes, political paralysis is the new normal.
There’s no intrinsic virtue in higher spending or higher taxes. There is enormous value in public investment in human and physical infrastructure. There are enormous stimulative economic consequences of such investment. And, there is proof that the way out of the Great Recession is demand-side policies, minimum wage increases, some high-end tax increases, and the range of policies that put money in the pocket of poor and middle-class Americans, who will spend it and increase demand.
It may be that the Koch brothers, the Tea Party, and the Republican Party will remain in thrall to an economic model that doesn’t work. They’re just going to have to make that argument without the oil tax revenues that covered up reality for so long.