Do you remember supply-side economics? That’s the doctrine that claimed that lowering taxes (especially on the wealthy) would cause a gusher of growth and bring in more new revenue than it lost.
It wasn’t true, as the Reagan and Bush tax cuts demonstrated, according to research conducted by
William G. Gale
Andrew A. Samwick
for the Brookings Institution. Early returns on the Trump tax cuts show they have done little to stimulate growth as well. But certain supply-side policies really could be counted on to augment aggregate supply and increase output. Some of them were even tax cuts. There was good reason to believe, for example, that making depreciation deductions for business equipment and machinery more generous—part of the 2017 tax law—would boost investment and enhance the capital stock. In fact, the results look disappointing. The share of investment moved up, but only a little.
But many of the most promising supply-side policies involve government spending, including investment in physical infrastructure like roads, bridges, ports and airports.
The argument for more public investment is essentially the same as the argument for more private investment: If the returns are high enough, future benefits outweigh upfront costs, leaving some “profit” to the investor. All such arguments are strengthened by today’s superlow interest rates, which reduce the cost of capital. Now is the time to invest in the future—both in the private sector and in the public sector.
Selecting the right projects, however, is crucial. This means not limiting ourselves to physical investments like factories and roads, because investments in human capital offer many of the highest returns. Fortunately, much of President Biden’s American Jobs Plan and American Families Plan pushes in that direction.
Take two important examples: pre-K education and paid leave. We have known for decades that high-quality education for 3- and 4-year-olds pays handsome dividends. A comprehensive review of existing studies by the Council of Economic Advisers in 2015 concluded that society can gain as much as $8.60 for each dollar invested.
But you have to be patient. Harvesting these large gains takes a generation or more because so many of them accrue in the form of higher earnings in adulthood. Mr. Biden’s proposal for a national partnership with states to offer free high-quality preschool to all 3- and 4-year-olds is likely to pay off long after he has left office.
Paid family and medical leave get less attention, but they are important parts of the Biden agenda. They are clearly supply-side policies because they would increase labor-force participation, especially among women. The pandemic has shined a bright light on the need for paid leave because so many people, especially women, were forced to drop out of the labor force when illness struck or to care for loved ones.
But the need long predated the pandemic. The U.S. is the only industrialized nation that doesn’t guarantee some form of paid leave to its workers at the federal level. Paid leave is an insurance policy against adversities that many millions of American families face every year. A breadwinner gets sick. A child or other family member, perhaps an elderly parent, needs care at home. A new baby arrives. A mom or dad gets deployed for military service.
These are normal parts of life. Some can be handled by making child care more available—another part of Mr. Biden’s agenda. But many require someone to stay home from work, perhaps for weeks or months.
The good news is that the pandemic awakened Congress to the need for paid leave. In 2020 it passed emergency-leave measures in two different Covid-relief packages. The bad news is that what little remains (tax credits from the American Rescue Plan, passed this March) will expire at the end of September. America needs something permanent.
The Biden team proposes to phase in a plan over 10 years that would offer at least two-thirds of average weekly wages for up to 12 weeks of family or medical leave, up to a maximum of $4,000 a month. There will be arguments about whether these numbers should be larger or smaller, but this plan is better than what we have now—which is nothing.
The largest gains to society will come from providing quality pre-K and paid leave to disadvantaged families. Well-off families already make these investments themselves. It’s the poor and near-poor who can’t afford either quality pre-K or living without paychecks for a time.
Opponents of programs like these often denigrate them as “socialism.” I like to praise them as real supply-side economics.
Mr. Blinder, a professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96.
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Appeared in the May 26, 2021, print edition.