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Supply-Side Neoliberalism Sure Beats the Alternative

Supply-Side Neoliberalism Sure Beats the Alternative

June 7, 2021

Besides “capitalism,” the two concepts perhaps most reviled by left-leaning intellectuals are “neoliberalism” and “supply-side economics.” These intellectuals harbor an odd antagonism, because each concept is associated with greater freedom, prosperity, and security. As such, one might suspect that the antagonists yearn for something other than these human values.

But what’s not to like about capitalism? It’s the social system that codifies individual rights to life, liberty, property, and the pursuit of happiness, the system in which property is owned and controlled privately. Capitalism was made possible by the Enlightenment, by the 18th century respect for reason in all fields – in science, politics, economics, the arts. In just a couple of centuries it revolutionized and modernized our material world; for the nations that embraced it, capitalism improved their health, increased their wealth, and extended their lifespans.

We no longer have a pure capitalist system, of course. The ideal form was best practiced in America between the Civil War and WWI. But whenever social systems have been closer to capitalism’s pure form (e.g., Hong Kong), they have performed wonders; systems farthest from capitalism, we all know (or should) have produced horrors.

Why does capitalism perform wonders? Why is it so efficient, practical, productive, and life-enhancing? Because it is the optimal habitat for humanity. It provides individuals the freedom to think, act, and pursue their self-interest. Some of capitalism’s foes are nihilists, of course, eager to terminate (not merely “redistribute”) its opulence; but many more foes disdain its ethical code of rational egoism, a disdain felt alike by secular socialists and religious conservatives (who otherwise pose as rivals). Many also hate inequalities in income, wealth, and social status, even though in freer nations that mostly reflects the diversity of developed talents and life choices.

What about “neoliberalism?” It means “new liberty” and refers to the post-WWII spread of pro-capitalist ideas from the likes of Ludwig von Mises, Friedrich Hayek, Ayn Rand, Milton Friedman, Robert Nozick, James Buchanan, and others. Liberty had not been as defended since before WWI.

The nearby exhibit – “A Timeline of Neoliberalism” – depicts key works in moral theory, politics, and economics that appeared over five decades and inspired party platforms, campaigns, and elections. The successful, multi-year governance of political leaders like Ronald Reagan, Margaret Thatcher, and Brian Mulroney would not have been possible without the fuel of neoliberal ideas. Nor would there have been pressure placed on the Soviet Union and its East European colonies; when they too relented, it could be said without hyperbole (as Thatcher put it) that neoliberals “won the Cold War without firing a single shot.” Even successors to the neoliberals in rival parties dared not change policy much. In the 1990s Bill Clinton first beat the Reagan successor (GHW Bush) who had pledged “no new taxes” (before raising them), then, before a Republican-controlled Congress, declared “the era of big government is over.” Soon thereafter, Clinton signed a law to “end welfare as we know it.” In Britain in 1995, Labor Party leader Tony Blair demanded a recission of the nationalization plank (in place since 1918) and with other neoliberal acts served as Prime Minister (1997-2007).

Amid the rise of neoliberalism and the fall of the U.S.S.R., Marxism and Keynesianism were in disrepute and retreat. Ideologues and control freaks in each camp detested the spread of neoliberalism; still today they use the term as an epithet, preferring a return to the old despotism.

What about “supply-side economics?” It was developed primarily by economists Robert Mundell (Nobel prize winner, 1999) and Arthur Laffer (famous for the Laffer curve, which showed the disincentive effects of high marginal tax rates and called for material cuts). Their work was popularized by Jude Wanniski (The Way the World Works, 1978) and Bob Bartley (in charge of the editorial pages of the Wall Street Journal, 1972-2002). Supply-side doctrines were applied with great success by practitioners including Congressman Jack Kemp, Treasury economists Paul Craig Roberts (The Supply-Side Revolution, 1984) and Bruce Bartlett – and, of course, America’s 40th President – in the form of “Reaganomics.” It is true (and sad) that few supply-siders were willing to shrink the morally suspect welfare state, but neither were their critics (who demanded a still larger version). Besides, their failure to get shrinkage does not negate their valid principles, one of which is that the real burden on the economy is government spending, not how it is financed.

Just as many intellectuals and politicians despised neoliberalism, they despised supply-side economics, deriding it as “voodoo economics” and “trickle-down economics.” Even Reagan budget director David Stockman, a brief convert, tried to appease critics by claiming it was a “trojan horse” to provide “giveaways to the rich.” Despite foes’ smears, supply-side economics was neither untrue nor untried; it was a healthy revival of the sound doctrines and policies explicated by Jean-Baptiste Say (1767-1832), Frederic Bastiat (1801-1850), and Joseph Schumpeter (1883-1950). The trio’s pro-capitalist ideas and policies were dismissed and distorted (albeit never refuted) under the onslaught of Marxian-Keynesian dogmas during the brutal first half of the 20th century.

The essence of supply-side economics is not, as critics claim, that “tax cuts will balance the budget.” It’s not even a minor principle but, rather, a “straw man” argument which no supply-sider ever advanced. Budget balance (or imbalance) is determined as much by public spending as by tax revenues; if the former is excessive, no amount of tax reform can ensure budget balance. Moreover, the uniqueness of the supply-side approach to taxation is to focus on tax rates and how they affect incentives to produce, earn income, save, and invest. Unlike most other models, this one makes the reasonable assumption that people are self-interested, don’t pay taxes out of duty, and dislike paying their hard-earned income to corrupt and fiscally profligate governments.

Supply-side fiscal theory contends that if tax rates are too high (confiscatory, punitive) they can depress the tax base and thus tax revenues. If so, a cut in rates can increase output and income as well as the tax base (hence tax revenues). This is common sense, basic economics; it is price theory (microeconomics) applied to the economy (macroeconomics) and to public finance. It is the essence of the Laffer curve, which has been verified empirically in dozens of cases worldwide since the 1970s. It is precisely the much-reviled supply-side revolution that fueled the case for material cuts in top marginal tax rates in major nations since the early 1980s (Figure One) – and those cuts also, predictably, fueled a revival in economic growth rates in those nations.

Another major myth about supply-side economics is that it pertains only to taxes or to the maximization of government revenues. As did Say, Bastiat, and Schumpeter, supply-siders today rightly extoll entrepreneurship, profit-seeking, and prosperity. They know that wealth creation requires the rule of law, the protection of all aspects of private property rights, sound (gold-based) money, low and flat tax (and tariff) rates, free trade, efficient infrastructure, and national defense. For supply-siders, the real burden on any economy is government spending, not how it’s funded. Unlike demand-siders (whether Keynesian or Monetarist), they stress supply, production, and wealth creation; they recognize that supply is the only source of real demand, that demand is not akin to consumption (the using up of wealth), that government spending per se creates neither supply nor demand, that aggregate supply and aggregate demand are never “out of balance” or in need of a government corrective, since they’re the same thing viewed from different angles.  

Figures One and Two illustrate the dramatic decline on top marginal tax rates resulting from the supply-side revolution of the 1980s and 1990s. The U.S. federal government’s top marginal tax rate on personal income (Figure One) was cut from 70% in 1980 to 50% by 1983, then further to a low of 28% in 1986 (a rate that lasted for only five years, until the Bush tax hikes). Notice how tax rates likewise were cut in Britain, Germany, France, and Japan. This was a global revolution. Yet rates have been raised again in the opening decades of this century. The top U.S. rate is now 40%.

Top corporate tax rates also were cut dramatically due to the supply-side revolution (Figure Two). In 1984 top marginal rates averaged 42% in OECD nations; by 1999 the average was 32%; today it is 22%. Germany’s top rate was 55% in 1980; by 1999 it was 40%; today it is 14%. The top U.S. rate for large “C-corporations” was cut from 46% in 1980 to 35% in 1986 and remained there, above the OECD average, until the Trump rate cut (to 21%) beginning in late 2017. In the U.S., the top tax rate for smaller, pass-through business entities (“S-corporations”) was equivalent to the top personal rate, which was cut from 70% in 1980 to 28% in 1986; this tax-rate differential inspired faster growth in small-to-midsize businesses in the U.S. relative to larger firms.

A crucial aspect of the supply-side revolution was pro-capitalism and anti-cronyism. A main goal was to simplify the tax code, with fewer brackets and fewer special exemptions, deductions, and credits. Private sector activity would shift from tax avoidance to wealth creation. The idea was to lower tax rates while widening and increasing the tax base (i.e., taxable income). That meant a much lower negative impact on total tax revenues. Moreover, less onerous tax rates and fewer tax favors radically reduced the motivation to lobby for special tax breaks (i.e., far less cronyism).

The supply-side revolution – being pro-capitalist, pro-entrepreneur, pro-profit, pro-growth, and pro-prosperity – understandably has faced many counterrevolutionaries in the early decades of this century. Top marginal tax rates on personal income have been increased, although not back to pre-1980 confiscatory levels; pressure is building to further raise top rates, and politicians who endorse the idea have been gaining traction and getting elected. The reactionaries also have been busy reintroducing tax favoritism, eliciting more lobbying, campaign contributions, and cronyism.

We have heard a lot in recent decades about capitalism allegedly degenerating into “cronyism” or “plutocracy” (rule by the rich). But cronyism has nothing to do with capitalism. The only way to get money out of politics is to get politics out of money making. That is a uniquely supply-side prescription, but it is the last thing in the world any Marxist, Keynesian, or welfare-state fan wishes to see. It is ludicrous when foes of supply-side policy claim that it “favors the rich,” for these foes are the same people who, by seeking to punish the rich, insidiously seek their favors.

Tax policy aside, there has also been a boom in government spending this century, which supply-siders interpret as a burden (not a “stimulus”) for the economy. There also has been greater regulation, stemming from 9/11 (PATRIOT ACT), the accounting scandals of the early 2000s (Sarbanes-Oxley Act), the financial crises of 2008-09 (the Dodd-Frank Act), and the Covid-19 lockdowns of 2020-21. Finally, there have been sharp policy turns away from free trade.

Back in 2012, fearful of a Romney-Ryan victory and a mere preservation of supply-side policies, two analysts at the left-leaning Center for American Progress issued a report titled “The Failure of Supply-Side Economics.” They included a half dozen graphs allegedly showing that “supply-side doesn’t work.” They showed no such thing. They cherry-picked data, conveniently altered time periods, and posited irrelevancies. Their shoddy work was yet another in a long train of similarly bogus “studies” that have appeared since the beginning of Reaganomics in the early 1980s.

Let us review the relevant empirics, both fully and fairly. Table One summarizes and contrasts U.S. economic-financial performance in 1980-2000 versus 2000-2020. Whereas the last two decades of the 20th century were animated by globalism and supply-side neoliberalism, the first two decades of the 21st century have been animated by nationalism and demand-side neofascism.

The extent of the differential performance should be astonishing to those unaware of the facts but honest enough to learn them. Tragically, America has shifted from prosperity to austerity in a single generation. Real GDP growth was 3.4% per annum in 1980-2000, twice the rate of 2000-2020. Industrial production over the last two decades has been a mere 1/6th of the previous annual rate. Real private fixed investment expanded by 4.8% per annum in 1980-2000, more than double the rate since then. Growth in civilian employment this century has been a mere quarter of what it was in 1980-2000.

What about the dollar and money? The dollar appreciated at a compounded annual rate of 1.1% in 1980-2000 but depreciated at that same rate in 2000-2020. In real terms (ounces of gold), the dollar appreciated 3.9% per annum in 1980-2000 but has been devalued 9.2% per annum since then. The money supply has increased 15% per annum so far this century, triple its rate of increase in 1980-2000. To what end? For what purpose? Obviously, the production of money isn’t the production of real wealth. As more money has been issued, more has been demanded (hoarded). That hardly depicts a robust, future-oriented, risk-taking, entrepreneurial economy.

What about real gains on financial assets? The S&P 500 returned 11.7% per annum in the supply-side decades of 1980-2000, more than double what it has delivered since then (5.3% per annum). U.S. T-Bonds returned 8.1% per annum in 1980-2000, likewise double their return since (3.6% per annum). Prices of key commodities like crude oil, gold, and food declined in 1980-2000, but have since increased. With robust growth in output and jobs in 1980-2000 came less costly living.

What about U.S. public finances? The supply-side policy mix is ridiculed most, perhaps, for its alleged fiscal profligacy. But Table One reveals how federal spending has increased far more in 2000-2020 (6.9% per annum) than it did amid supply-side dominance in 1980-2000 (5.6% per annum). Recent profligacy hasn’t done very much to “stimulate” the economy, has it? But surely federal tax revenues stagnated amid all the tax cutting of 1980-2000? No, they grew by 7.0% per annum, more than twice their growth rate so far this century. Whereas in 1980-2000 revenue growth outpaced spending growth, the reverse has occurred in 2000-2020, with spending growth outpacing revenue growth. The result: a relatively faster rise in the national debt this century. The turn of the last century recorded four straight years (1998-2001) of budget surpluses. So much for fiscally “reckless” supply-side policies. The U.S has registered not a single surplus since 2001.

The near-phobic disdain for supply-side economics and neoliberalism this century is part of a new wave of anti-capitalist sentiment. We have seen this movie before. It is a horror film. The true friends of rationality, liberty, and prosperity should wake up, stand proudly, and contend boldly.

This article was originally published on and has been reprinted upon agreement.

Richard M. Salsman Ph.D.
About the author:
Richard M. Salsman Ph.D.

Dr. Richard M. Salsman is a professor of political economy at Duke University, founder and president of InterMarket Forecasting, Inc., a senior fellow at the American Institute for Economic Research, and senior scholar at The Atlas Society. In the 1980s and 1990s he was a banker at the Bank of New York and Citibank and an economist at Wainwright Economics, Inc. Dr. Salsman has authored five books: Breaking the Banks: Central Banking Problems and Free Banking Solutions (1990), The Collapse of Deposit Insurance and the Case for Abolition (1993), Gold and Liberty (1995), The Political Economy of Public Debt: Three Centuries of Theory and Evidence (2017), and Where Have all the Capitalists Gone?: Essays in Moral Political Economy (2021). He is also author of a dozen chapters and scores of articles. His work has appeared in the Georgetown Journal of Law and Public Policy, Reason Papers, the Wall Street Journal, the New York Sun, Forbes, the Economist, the Financial Post, the Intellectual Activist, and The Objective Standard. He speaks frequently before pro-liberty student groups, including Students for Liberty (SFL), Young Americans for Liberty(YAL), Intercollegiate Studies Institute (ISI), and the Foundation for Economic Education (FEE).

Dr. Salsman earned his B.A. in law and economics from Bowdoin College (1981), his M.A. in economics from New York University (1988), and his Ph.D. in political economy from Duke University (2012). His personal website can be found at

For The Atlas Society, Dr. Salsman hosts a monthly Morals & Markets webinar, exploring the intersections between ethics, politics, economics, and markets. You can also find excerpts from Salsman's Instagram Takeovers HERE that can be found on our Instagram each month!

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The logical and moral case for free trade, whether it’s inter-personal, international, or intra-national, is that it’s mutually beneficial. Unless one opposes gain per se or assumes exchange is win-lose (a “zero-sum” game), one should herald trade. Apart from self-sacrificing altruists, no one trades voluntarily unless it benefits oneself. Mr. Trump pledges to “make America great again,” a noble sentiment, but protectionism only hurts rather than helps do that job. Roughly half the parts in Ford’s best-selling trucks are now imported; if Trump has his way, we couldn’t even make Ford trucks, let alone make America great again. To “buy American,” as the nationalists and nativists demand, is to eschew today’s beneficial products while underrating the benefits of yesterday’s globalization of trade and fearing tomorrow’s. Just as America at her best is a “melting pot” of personal backgrounds, identities, and origins, so also products at their best embody a melting pot of globally-sourced labor and resources. Mr. Trump claims to be pro-American but is unrealistically pessimistic about her productive power and competitiveness. Given the benefits of free trade, the best policy any government can adopt is unilateral free trade (with other non-enemy governments), which means: free trade regardless of whether other governments also adopt freer trade.

Best Case for Capitalism -- The Capitalist Standard, October 10, 2017

Today marks the 60th anniversary of the publication of Atlas Shrugged (1957) by Ayn Rand (1905-1982), a best-selling novelist-philosopher who extolled reason, rational self-interest, individualism, capitalism, and Americanism. Few books this old continue to sell as well, even in hardcover, and many investors and CEOs have long praised its theme and insight. In a 1990s survey conducted for the Library of Congress and the Book-of-the-Month Club, respondents named Atlas Shrugged as second only to the Bible as the book that made a big difference in their lives.  Socialists understandably reject Rand because she rejects their claim that capitalism is exploitative or prone to collapse; yet conservatives are wary of her because she denies that capitalism counts on religion. Her major contribution is to show that capitalism isn’t only the system that’s economically productive but also the one that’s morally just.  It rewards people of honesty, integrity, independence, and productiveness; yet it marginalizes those who choose instead to be less-than-human, and it punishes the vicious and the inhumane. Whether one is pro-capitalist, pro-socialist, or indifferent between the two, this book is worth a read – as are her other works, including The Fountainhead (1943), The Virtue of Selfishness: A New Concept of Egoism (1964),and Capitalism: The Unknown Ideal (1966).

Trump and GOP Condone Monopoly Medicine -- The Capitalist Standard, July 20, 2017

The GOP and President Trump, having brazenly broken their campaign promises by refusing to “repeal and replace” ObamaCare, now claim they’ll just repeal it and see what happens. Don’t count on that. At root, they don’t really mind ObamaCare and the “single payer” system (government medicine monopoly) to which it leads. Abominable as it is, they accept it philosophically, so they also accept politically. Trump and most Republicans condone the socialist principles latent in ObamaCare. Perhaps they even realize it’ll continue to erode the better aspects of the system and lead to a “single-payer system” (government monopoly on medicine) –which Obama [and Trump] have always said they wanted. Nor do most American voters today seem to object to this monopoly. They might object to it decades from now, when they realize that access to health insurance doesn’t guarantee access to health care (especially not under socialized medicine, which reduces quality, affordability, and access). But by then it’ll be too late to rehabilitate those freer elements that made America medicine so great in the first place.

The Inequality Debate: Senseless Without Consideration of What is Earned -- Forbes, February 1, 2012

Instead of debating the truly monumental questions of our troubled times – namely, What is the proper size and scope of government? (answer: smaller), and Should we have more capitalism or more corporatism? (answer: capitalism) – political media instead are debating the alleged evils of “inequality.” Their shameless envy has run rampant lately, but the focus on inequality is convenient for conservatives and leftists alike.  Mr. Obama accepts a false theory of “fairness” that rejects the common-sense, merit-based concept of justice that older Americans might recognize as “desert,” where justice means we deserve (or earn) what we get in life, if by our free choice. Legitimately, there is “distributive justice,” with rewards for good or productive behavior, and “retributive justice,” with punishments for evil or destructive behavior.

Capitalism Isn't Corporatism or Cronyism -- Forbes, December 7, 2011

Capitalism is the greatest socio-economic system in human history, because it’s so moral and so productive– the two features so essential to human survival and flourishing. It’s moral because it enshrines and fosters rationality and self-interest – “enlightened greed,” if you will – the two key virtues we all must consciously adopt and practice if we’re to pursue and attain life and love, health and wealth, adventure and inspiration. It produces not only material-economic abundance but the aesthetic values seen in the arts and entertainment. But what is capitalism, exactly? How do we know it when we see it or have it – or when we haven’t, or don’t?  Capitalism’s greatest intellectual champion, Ayn Rand (1905-1982), once defined it as “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” This recognition of genuine rights (not “rights” to force others to get us what we wish) is all-crucial and it has a distinctive moral foundation. In fact, capitalism is the system of rights, liberty, civility, peace and non-sacrificial prosperity; it’s not the system of government that unjustly favors capitalists at others’ expense. It provides a level legal playing field plus officials who serve us as low-profile referees (not arbitrary rule-makers or score-changers). To be sure, capitalism also entails inequality – of ambition, talent, income, or wealth – because that’s how individuals (and firms) really are; they’re unique, not clones or inter-changeable parts, as the egalitarians claim.

Holy Scripture and the Welfare State -- Forbes, April 28, 2011

Many people wonder why Washington seems forever mired in a stalemate about what policies might cure excessive spending, budget deficits and debt. We're told that the root of the problem is "polarized politics," that "extremists" control the debate and preclude solutions that only bipartisan unity can deliver.  In fact, on many issues both "sides" wholly agree – on the solid basis of a shared religious faith.  In short, not much changes because both sides agree on so much, especially about what it means to "do the right thing" morally. It's not widely reported, but most Democrats and Republicans, whether from the left or right politically, are quite religious, and thus tend to endorse the modern welfare state. Even if not all politicians feel so strongly about this, they suspect (rightly) that voters do so. Thus even minor proposals to restrain government spending elicit accusations that the proponent is callous, heartless, uncharitable, and un-Christian – and the charges ring true to most people because Scripture has long-conditioned them to embrace the welfare state.

Where Have All the Capitalists Gone? -- Forbes, December 5, 2010

After the fall of the Berlin Wall (1989) and dissolution of the USSR (1991), almost everyone conceded that capitalism was the historic "victor" over socialism. Yet interventionist policies reflecting largely socialist premises have returned with a vengeance in recent years, while capitalism has been blamed for causing the 2007-2009 financial crisis and global economic recession. What explains this seemingly abrupt shift in the world's estimate of capitalism? After all, apolitical-economic system, whether capitalist or socialist, is a broad and persistent phenomenon that cannot logically be construed as beneficial one decade yet destructive the next. So where have all the capitalists gone? Curiously, a "socialist" today means an advocate for the political-economic system of socialism as a moral ideal, yet a "capitalist" means a Wall Street financier, venture capitalist or entrepreneur – not an advocate of the political-economic system of capitalism as a moral ideal. In truth, capitalism embodies the life-enhancing, wealth-creating ethic of rational self-interest –of egoism, of "greed," if you will – which is perhaps most blatantly manifested in the profit motive. So long as this humane ethic is distrusted or despised, capitalism will suffer unearned blame for any social-economic ill. The collapse of socialist regimes two decades ago didn't mean capitalism was finally being hailed for its many virtues; the historic event only merely reminded people of capitalism's productive ability – an ability already long-proven and long-acknowledged even by its worst enemies. Persistent animosity toward capitalism today rests on moral, not practical grounds. Unless rational self-interest is understood as the one moral code consistent with genuine humanity, and the moral estimate of capitalism thus improves, socialism will keep making comebacks, despite its deep and dark record of human misery.

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