Sunday, April 12, 1981
The Michigan Daily
Hocus pocus: It's Reagan economics
By Stewart Mandell
Second in a two-part series
Every show has its stars, and so it
is with the administration's supple side
magic show. The stars of this show are
the Laffer Curve and the Kennedy Ad-
ministration's personal income tax
cuts. Allegedly, these are the reasons
supply side economics will work.
The Laffer Curve says that when tax
rates are too high an inverse relation-
ship develops between tax rates and tax
revenue. At that point higher tax rates
produce lower tax revenues and lower
tax rates produce higher tax revenues.
THE LAFFER CURVE'S premise is
that when the government taxes exhor-
bitant amounts of income taxpayers
lose their incentive to work which
causes national income and tax
revenue to decline. Supply siders
believe that present federal tax rates
have reached the point where lower tax
rates will increase tax revenue.
But, there is no proof that today's tax
rates have surpassed the point of
maximum tax revenue. The Laffer
Curve argument assumes the con-
clusion. In a Newsweek interview
Prof. Laffer conceded that there is
more than a reasonable probability that
he is wrong.
Furthermore, Prof. Don Fullerton of
Princeton University recently com-
pleted a study which repudiates the
Laffer Curve argument. Prof. Fullerton
simulated the economy with higher and
lower tax rates than presently exist. He
found that higher tax rates provide
higher revenue and that lower tax rates
reduce federal revenue.
SUPPLY SIDERS would argue that
Fullerton is wrong because his model of
the economy underestimated the in-
crease in labor supply resulting from
lower tax rates. Supply siders believe
the increase in the supply of labor
following lower taxes will be over ten.
times what Fullerton predicts.
In technical language, the response of
labor supply to higher real wages is
called the elasticity ,of labor supply.
supply siders believe labor supply
elasticity is ten times larger than the
number Fullerton used.
Fullerton's position is easily defen-
ded. He carefully estimated the
elasticity of labor supply using all of the
empirical studies which analyzed this
issue. He even gave the supply siders
the benefit of the doubt by using an
estimate which was higher than what
the empirical evidence indicated. Sup-
ply siders claim a responsiveness of
labor supply to lower tax rates which is
unproven by any of the empirical
THE ADMINISTRATION also claims
that lower tax rates will increase
government revenue because this oc-
cured when the Kennedy ad-
ministration reduced personal tax
rates. Contrary to the Reagan Ad-
ministration's assertions, the Kennedy
administration's tax cuts did not, on
balance, increase government revenue.
In this respect, the administration is
shamefully misrepresenting the truth
to the public.
Arthur Okun, chairman of President
Johnson's Council of Economic Ad-
visors, has provided the best estimate
of the effect of this tax cut. Okun showed
that the $13 billion dollar tax cut in-
creased gross national product ap-
proximately $36 billion.
Edward Gramlich, a University
economist, estimates that the federal
government probably recaptured bet-
ween 25 percent and 30 percent of this
amount. Thus, as best the federal
government regained $10.8 billion-$2.2
billion less than the $13 billion cut.
THE FACT that the president himself
and members of the Cabinet would
federal revenue more than $13 billion is
outrageous. Prof. Walter Heller ex-
plained more than two years ago in The
Wall Street Journal that there was no
proof that the 1960's tax cuts had on
balance increased federal tax
revenues. In that article he explained
that data, allegedly showing that the
tax cuts had on blaanced increased
federal revenue, had been
manipulated. He condemned the guilty
parties saying they had, "done them
and the cause of rational debate a
serious disservice." In relying on such
data, the administration has shown it-
self either inept or deceitful.
When the supply side magic show
opened in Congress many
Congressional critics greeted it with
scathing reviews. As the ad-
ministration was caught making un-
proven assumptions it shifted to a new
justification for supply side magic:
"The tax cut is a gamble, but one
necessitated by economic conditions."
The game is changing from magic to
gambling. Unfortunately, the ad-
ministration's personal income tax
proposal is not even a gamble. It is a
Stewart Mandell is a third-year
Law student at the University.
-THE L.AFFGR WHEEL
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Edited and managed by students at The University of Michigan
Vol. XCI, No. 157
420 Maynard St.
Ann Arbor, MI 48109
AiTC V4t1 cS
Editorials represent a majority opinion of the Daily's Editorial Board
Thurmond rides again
THE CONSERVATIVE wave in
Washington is having its effects in
more areas than the federal budget.
Sen. Strom Thurmond (R-S.C.),
backed by the Reagan administration
and Assistant Attorney General Lowell
Jensen, has proposed legislation per-
mitting the death penalty for some
federal crimes, including espionage
and the killing of a president.
"There are too many bleeding hearts
who seem to forget the victims who
have been robbed, killed, or raped,"
Thurmond's comment leads one to
wonder whether he supports capital
punishment as a means of crime
deterrance oramerelyas a way of get-
ting even with criminals. If he only
wants revenge, then punishment is the
best way to get it short of torture. But,
if he actually advocates killing
criminals as a deferrence to potential
assassins, he should rethink his
John Hinckley, in his infamous let-
ters to actress Jodie Foster,
acknowledged that he might well die in
his attempt to kill Reagan - yet this
did not deter him in the slightest from
trying. Most persons who are willing to
assassinate a president are willing to
die trying, and are not likely to recon-
sider because of the threat of a death
The taking of human life, whether it
is the action of the state through the
death penalty or the action of -an in-
dividual criminal, is inherently wrong
and cannot be tolerated. No individual
or group of individuals should be per-
mitted to terminate another person's
Thurmond, who now holds a power-
ful seat as Senate Judiciary Commit-
tee chairman, has chosen a peak time
to introduce his offensive legislation.
The nation is still stunned over the at-
tempted assassination of President
Although the attempted
assassination is, of course, deplorable,
we must not succumb to some primal
blood lust for revenge. This desire for
revenge may be, in the end, just as
debased as the very crimes that would
be punished by the death penalty.
The death penalty cannot be
tolerated in a modern society. Thur-
mond and the Reagan administration
should not be allowed to ride on the
tails of this national tragedy, and enact
such injudicious legislation.
'I- - c ~ r '
OFE " cz. OFF 1Wx
LETTERS TO THE DAILY:
New grade standards needed
To the Daily:
Your recent article on "The
ABC's of the GPA", brought to
mind a problem faced by many
students - the unequal
distribution of grades in certain
While the majority of
professors have succumbed to
"gradeflation", a minority hangs
on to the old system.
It is not that either system is
better, the problem is receiving
grades from two different
An example of this was last
semester's Economics 406, in
which the gradepoint average
was 1.8. While some classes are
relatively smarter than others,
such a wide variation, especially
considering the level of the cour-
se, is more than random.
There is a point where a
professor should take some
responsibility for what his
I asked the T.A. after having
seen the grade distribution, 3 A's
and 11 B'srout of 43 students, and-
he said under any other professor
one's grade would be at least a
full grade higher.
When explaining someone's
record, there is no way to include
the mean for the class, it is
assumed that all means are
relatively the same, at least
within schools or departments
We need uniform grading stan-
dards, at least within departmen-
ts. Students should not have to
suffer from such bureaucratic
semantics as "gradeflation".
Due to a typographical error on
yesterday's Opinion Page, the
guest editorial, "A magic show of
Reagan economics," incorrectly
reported two statistics. The ar-
ticle erroneously reported that
"The Economic Report of the
President calculated the tax
cut's cumulative effect will be to
increase aggregate supply 20
percent to 60 percent of GNP."
The statistics should have read .2,
percent to .6 percent of the GNP.
WNlrE 1HOMIE FEEDLOT SQIVIE
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yl ... , ; i; k,
to the Daily
Leaflet figure wrong
typed, triple-spaced, with inch
margins. All submissions must be
signed by the individual author(s).
To the Daily:
Yesterday a leaflet put out by
the "Responsible Alternative"
political party came to my atten-
tion. (I was tidying up the floor of
a chemistry lecture hall following
a mass distribution.)
The only number cited in the
entire discussion of budget is so
spectacularly in error that I feel
obligated to correct it. The total
LSA general fund budget for
travel, including faculty travel,
administrative travel, and ap-
plicant travel and moving is ap-
proximately $153,000 not 1.5
million alleged in the leaflet.
-Paul G. Rasmussen
Research and facilities,
will be withheld
unusual circumstances. Letters may
grammar, and spelling.
by Robert Lence!
C/oS 7KHFI4AT A MK Xo
WAIRT WEAESEL ! Dptgi-
1usr ANt aR ZMEnm Rof
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