Supply-siders believe that individual people's ingenuity and skill drives economic progress. Tax cuts to encourage that ingenuity are supply-siders' favourite tool.
The post-war state-run economy ended with the winter of discontent
For the first twenty-five post-WWII years politicians across the globe became unquestioning believers in the economic prowess of the state. The state expanded its role throughout the economy. It nationalised industries and attempted to micro-manage the level of economic demand.
It seemed to work until the 1970s and then Britain was struck by the three-day week and the winter of discontent. In the decade of Abba the big state met its Waterloo. State-owned industries began to make huge losses and governments’ attempts to spend their way out of recessions only produced job-destroying levels of inflation.
The Reagan and Thatcher era
Ronald Reagan and Margaret Thatcher’s economic revolution swept the post-war consensus away. It was a revolution rooted in the idea of supply-side economics. Pure ‘SSE’ says that economic success depends solely on the quality and enterprise of an economy’s most important raw material – its people. Enterprise-encouraging tax cuts were the principal weapon of supply-side economists. Mrs Thatcher made modest tax cuts in order to be consistent with her fiscal conservatism. Reagan had greater faith in the wealth-creating power of tax cuts. He gambled that fiscal goals could be sacrificed in the short-run because of the long-term revenue boost that would characterise a low tax economy.
Supply-siders believe that government has a foundationalist but limited role in giving people space to flourish. It must guarantee:
- a low inflation environment
- a tax regime that rewards their efforts
- a system of property law that protects their inventiveness
- a robust competition policy and
- an education system that provides people with basic skills…
But, say supply-siders, government cannot micro-manage the economy.
Labour and supply-side economics
New Labour has made a greater conversion to fiscal conservatism than to SSE. The conversion to SSE is characterised by a big residual faith in the power of government. For example, New Labour’s state thinks it knows the skill sets that tomorrow’s economy will need. Gordon Brown is even thinking of 'teaching enterprise' in schools. In reality it is better for the education system to turn out well-rounded students and private industry can then, throughout adult life, equip workers with new skill sets.
Ingenuity, wit and creativity are as important in today’s knowledge economy as hard work and know-how. These should be rewarded by tax and legal systems. Labour’s love of red tape and stealth taxation endangers the creativity that will produce tomorrow’s wealth.
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