01 Feb Heroic Ideas, Heroic Men: The Supply-Side Has Never Looked so Right
One can argue that history is essentially the study of heroes and villains. Heroism and villainry are often personified in the forms of living, breathing people like Winston Churchill (hero) or Adolf Hitler (villain). Malignant evil can also be embodied in a school of thought (Marxism) just as heroic virtue can be portrayed through a simple idea (the golden rule). Timelines and milestones are an interesting part of the study of history, but only to the extent that they chronicle or earmark the doings of a hero (or villain). Brian Domitrovic’s new book, Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperty, is a perfect chronicle of heroism in both personal and idea form. For supply-side economics has surely been a champion for liberty in our lives, and the men who developed it and ultimately implemented it are the textbook definition of heroes. Yes, Econoclasts is a history book, and a monumentally important one at that
I am not tired of biographical material on Ronald Reagan, and I have been deeply moved by much of what is already out there. Reagan, who guided our country out of the misery of the 1970’s and into the “morning in America” of the 1980’s is not lacking in historical rememberances (and deservedly so). However, some of the key individuals behind his economic operation are the furthest thing from household names. Domitrovic takes the economic thought leaders (Mundell, Laffer, Simon, Rutledge, etc.), the conveyors of the message (Bartley, Wanninski, Novak), and the political leaders who championed the cause legislatively (most notably, Jack Kemp and William Steiger), and unpacks their entire story in this fascinating chronicle of the economic school of thought that quite literally changed the world.
In its simplest form, supply-side economics was the ultimate rebuttal to the Keynesian malaise of the 1970’s. Supply-siders believe that most modern economic woes have been created by the combination of government mistakes monetarily (the weak medium of exchange they create thoroughly excessive printing of the U.S. dollar) and fiscally (the stunting of economic growth caused through excessive taxation on capital and investment). The supply-siders prescribed the remedy to the stagflation brought about by the 1970’s (beginning with the woeful policies of Richard Nixon and carried on through Ford and Carter). And unlike so many of their co-belligerents in the cause of freedom economics (especially the Austrians), the “supply-siders were dedicated to, and good at, getting things done in practice.”
I really would prefer that every single person I know read this book. But since I doubt that will happen, a few key tenets of supply-side economics are worthy of review. It is incomprehensible to us today that 70%, and 80%, and even 90% marginal tax rates were ever part of American life. The idea that any argument ever had to be made against confiscating $8 of the last $10 a given person made seems surreal to me. But I owe this incredulity at the 1970’s tax code to the work of the supply-siders. They laid the groundwork for sweeping marginal tax reductions that not only allowed a generation of earners to keep far, far more of their hard-earned dollars, but they did so while for at least 20+ years seeing the inflation rate in our country plummet. They turned economic orthodoxies on their head – particularly the idea that unemployment and inflation were part of a constant trade-off (the so-called Phillips Curve). Supply-side economics re-introduced the doctrine of incentives to economics. Incentivizing good behavior creates more of it. Punishing bad behavior creates less of it. Art Laffer developed the concept of the “tax wedge” (the additional product that the government compels people to make if they want to make some other product to begin with). These so-called wedges were squashing production and innovation. And to top it off, business that was getting done was being increasingly devalued by the insidiuous presence of inflation, and then taxed even more through “bracket creep” (earned dollars creeping into higher tax brackets, but only with inflated dollars that actually had less real value). It is a true testimony to the scandalous spending habits of 1970’s politicians that even with bracket creep and monumental tax rates, deficits persisted regardless. The supply-siders said “enough was enough”, and the tax revolt angst of that decade that led to Proposition 13 in California, the Kemp-Roth bill in the Congress, and ultimately, Reagan’s passage of the largest reduction of marginal income tax rates in history, all were a by-product of the work this movement produced. Mundell did not compromise in his unpopular assertions that the perfect policy mix involved fiscal ease to get more production out of the economy, in combination with monetary restraint to stop inflation.
These men were not unlike any cadre of economic leaders, elected politicians, media personalities, and other cultural figures that existed in other arenas. They were not monolithic, but they agreed to forfeit their smaller disagreements for the cause of passing the most important agenda item they had: Marginal tax rate reduction. The cariacture of supply-siders that paints them as tax rate obsessives is only partially untrue (in fact, it is simply incomplete; the real pioneers were equally concerned with stabilizing the dollar and creating price stability). The importance of monetary restraint in supply-side economics is not often talked about in the history books, but Paul Volcker’s decision to use a price rule in setting monetary policy curtailed the practice of excessive money creation, and broke the back of inflation (at least until another central bank successfully re-creates it). Central banks not hindered by some of the many sensible supply-side rules available at their disposal (the Taylor Rule which calls for the systematic increasing and decreasing of rates within bandwidths of GDP movements; price rules wich call for rate and money creation policy to be held accountable by the prices in the market – notably gold and commodities, etc.) are practicing reckless behavior. Unhinging monetary policy has been a disaster, and it represents a complete betrayal of all the supply-side pioneers believed in.
The book describes the huge political battles these men went through to win the election of 1980 and earn leadership positions within Reagan’s economic cabinet. It provides a glimpse at the awful politics and jealousy that took place between different divisions of Reagan’s team (council of advisors, OMB, Treasury, etc.). Most significantly, it explains the narrative of how internally focused (self-interested) the U.S. businessman and taxpayer were in the 1970’s (and must always be). Policymakers continued to bank that class envy and populist rage would keep the status quo of Carter policies in line forever (sound familiar?); but they did not appreciate how focused the American taxpayer was on his own situation. We were all being pummeled by bracket creep, rising deficits, inflation, and a de-motivating tax policy that hampered capital investment. “Taxpayers were far more concerned with how much they were paying than how little their neighbor was paying.” The same is true today, all rumors of populist rage notwithstanding. We are, and ought to be, individual economic actors, seeking the best situation for ourselves and our families. Distinctions obsessed with inequality are bad economics. “We do not need to rail against the fat cats; we just need to create policies that assure all people the opportunity to be one.”
Finally, it provides observers of the 2008-2010 economic dialogue an incredible sneak preview into some of the very economic considerations taking place today. When it comes to Keynesian notions of unwanted state-spending reviving the economy, the supply-siders have the cure. When easy monetary policy is being touted as a surefire way to re-liquify the system, and we are told that it can happen with no downside effect on the U.S. dollar, the supply-siders know better. Our economy needs the exact same thing today that we needed 30 years ago: A respect for the power of the markets, a strong and stable medium of exchange, and a tax system that does not punish productivity. Adding to business endeavors at the margin by reducing the plethora of “tax wedges” would make this current President look like the best economic leader since, well, Ronald Reagan. The unbelievable GDP growth he saw, followed up with even more and more real GDP growth is possibly never to be repeated again. But one thing we do know for sure: if it isn’t, you won’t have the supply-siders to blame.
This is an excellent book on so many levels. Economic history and powerful ideology all rolled into one – some may even call it, “heroic”.