The definitive history of supply-side economics—the most consequential economic counterrevolution of the twentieth century—and an incredibly timely work that reveals the foundations of America’s prosperity at a time when those very foundations are under attack.
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“Should serve as a roadmap to revitalizing the private sector. This sharply written, thoroughly-researched narrative weaves together financial history, economic doctrine, and character study so skillfully that recent decades’ policy debates become not only comprehensible, but at times, downright exciting. . . . A vivid and deeply researched look at the forces that unleash prosperity, move history, and enhance great nations. In our time of loose money and rising taxes, supply-side’s second revolution may begin with this book.”
—Real Clear Markets
—Real Clear Markets
“Couldn’t be more timely. Econoclasts reminds us of what’s wrong with current policy. Domitrovic adds significant value in his review of Carter- and Reagan-era economics.”
—Amity Shlaes, bestselling author of The Forgotten Man: A New History of the Great Depression
“A brilliant look at America’s last economic crisis and Ronald Reagan’s supply-side solutions that finally ended it. The same free-market incentive model would work today. This is the book Americans need to read now, as our leaders rush forward to deal with the present crisis without consulting the lessons of the past.”
—Larry Kudlow, host of CNBC’s The Kudlow Report
“I’ve never read anything on the subject of economics that surpasses this extraordinary book for its lucidity, richness, depth, intelligibility, savvy, and sheer intellectual excitement. Its publication could hardly come at a better time, as the fatal attraction of statism seems to have reemerged, one more time, from the murky depths to which it had been consigned.”
—Wilfred McClay, award-winning historian, SunTrust Bank Chair of Excellence in Humanities at the University of Tennessee at Chattanooga
“Fascinating. Domitrovic has corrected a glaring intellectual deficiency with his new history of the supply-side movement. He is to be commended for his masterful gathering of evidence and his capturing of the feel of the era, of the passion of Arthur Laffer, Robert Mundell, Bob Bartley, and the other supply-side pioneers.”
—Richard Vedder, distinguished professor of economics at Ohio University, author of Going Broke by Degree
Book Description
Ever since America descended into economic crisis the comparisons to the Great Depression have come fast and furious. Incredibly, we have heard almost nothing about a much more recent economic calamity: the ruinous “stagflation” of the 1970s—the second-worst decade in American economic history. But now, in the riveting, groundbreaking book Econoclasts, historian Brian Domitrovic reminds us that the twentieth century’s greatest economic counterrevolution emerged in response to that crisis: supply-side economics.
In a pulsing narrative, Domitrovic tells the remarkable story of the economists, journalists, Washington staffers, and (ultimately) politicians who showed America how to get out of the 1970s funk and ushered in an unprecedented quarter-century run of growth and opportunity. Here we meet Robert Mundell, the brilliant economist who held court over martinis in a Manhattan steakhouse; his gregarious cohort Arthur Laffer, chief economist on the president’s budget staff at the tender age of thirty; Robert Bartley, the Wall Street Journal’s reticent editorial-page editor who became the first impresario of supply-side economics; Jack Kemp, the football-star-turned-congressman who led the fight to turn supply-side theory into practice; Jude Wanniski, the eccentric, hot rod–driving reporter whose best-selling book touched off the supply-side revolution; and a host of other fascinating figures who helped upend the economic establishment.
Based on the author’s years of archival research, Econoclasts explodes numerous myths about supply-side economics, including its “creation myth”—the famous incident in which Laffer sketched a simple curve on a napkin. Domitrovic conclusively demonstrates that supply-side advocates did not invent a doctrine out of whole cloth. Their central insight was that the two massive means of governmental intrusion in the economy—the income tax and the Federal Reserve—play the primary role in starting and perpetuating any economic crisis. What’s more, Domitrovic shows that the specific combination of tax cuts and stable money had an unbroken record of success long before it went by the name “supply-side economics”: in 1962, when JFK ended the economic sluggishness that had brought three recessions in Eisenhower’s eight-year presidency; in 1947, when the United States embarked on the postwar boom; and in 1922, when Treasury Secretary Andrew Mellon inaugurated the Roaring ’20s by imploring the Fed to keep the price level stable and arranging for Congress to slash income-tax rates.
Econoclasts is a masterful narrative history in the tradition of Amity Shlaes’s The Forgotten Man and John Steele Gordon’s An Empire of Wealth. It is also impeccably timely: this is a story we must know if we are to understand the foundations of America’s prosperity—foundations that are now under increasing attack.
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Brian Domitrovic holds a Ph.D. in history from Harvard University, where he also did graduate work in the economics department. He earned his bachelor's degree at Columbia University, studying history and mathematics. An assistant professor of history at Sam Houston State University, he has written for numerous scholarly and popular publications. He is the author of Econoclasts:The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity. His blogs are "Past & Present" at Forbes.com and "Supply-Side Economics Today" at econoclasts.net. Domitrovic lives in Texas with his wife and children. His website is econoclasts.net
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36 of 40 people found the following review helpful
Format:Hardcover|Amazon Verified Purchase
One day in December 1974, while dining with some prominent officials from the Ford Administration, economist Arthur Laffer sketched his now-famous "Laffer Curve" on a napkin to illustrate the idea that, at some point, lowering taxes could actually increase tax revenues.
By retelling lore and providing lively anecdotes and insights like this one, Brian Domitrovic introduces the major characters, the "econoclasts," who were instrumental in the ascendency of supply-side economics in the modern era: economists, journalists, and politicians. In addition to Laffer, these include Robert Mundell, ultimately a Nobel economist; Robert Bartley, Wall Street Journal editorial-page editor; Jude Wanniski, a reporter whose book, The Way the World Works: How Economists Fail and Succeed, spurred the supply-side movement; U.S. Representative Jack Kemp, the former pro football player who championed supply-side theory and won passage of legislation putting the theory into practice; and more.
Domitrovic provides a well-researched and detailed account of the political struggle to assert supply-side policies in the late 1970s and early `80s. He tells about how, by the time Ronald Reagan became president, proponents of supply-side economics had succeeded in the marketplace of ideas to such an extent that even Congressional Democrats were largely in favor of providing tax cuts to spur economic activity. Domitrovic speculates on how, if the Carter Administration had not been so whetted to an objective of creating tax "fairness"--an objective that had no constituency--and had been more sympathetic to providing tax "relief"--which is what most Americans cared about--there might not have been a groundswell of support for Reagan's candidacy.
Of course, Carter's policies served only to exacerbate the stagflation that had characterized the American life in the 1970s. When Reagan and his supply-side advisers got to Washington, they applied the "policy mix" of stable money and tax cuts (a.k.a. "Reaganomics"), which is, as Domitrovic explains, the secret to escaping stagflation. Still, it took time for the policy mix to have an effect, because people had become so accustomed to the stagflation paradigm and were therefore so skittish about moving into the real economy. By 1983, he explains, with inflation low and returns and investment increasing, tension had built to such a point that the recession of 1981-82 could not last. Indeed, the asset-shifting that started at that time was to continue, nearly unabated, for two decades.
In light of the recent economic crisis and some uninformed observers' attempts to blame Reaganomics, Domitrovic suggests that revisiting the policy prescriptions that brought the United States economy out of the economic crisis of the 1970s, rather than hearkening back to the Great Depression, would be instructional. He provides a plan of action for the Obama Administration that he says would allow Obama to emulate John F. Kennedy, who applied the supply-side policy mix--before the paradigm had a name. He notes that Kennedy's attitude was that he was "going to have spectacular growth on his watch, no matter whom he had to cut deals with... and was clever enough to assign credit for his policy mix to his assistants, but the documentary record is clear that his Council of Economic Advisers got mugged by reality and over-ruled by its president" (292-293).
Thus, Domitrovic deftly explains the supply-side economics that has been dominant in American life in recent decades and he explains its relevance for the current economic situation.
Yet, even more important, Domitrovic provides a thorough explanation of the economic history of the United States, beginning with the phenomena that arose in 1913--the income tax and the Federal Reserve--and which allowed supply-side economics to be developed in the first place. To wit, he writes, "The income tax and the Federal Reserve... have shaped life as we have known it in the century since 1913. One thing is certain: there would have been no supply-side economics without the changes of 1913. For restraining the institutions created that year... is the essence of supply-side thinking... Without institutions like the Federal Reserve that can make large, sustained mistakes in monetary policy, and without an income tax that can significantly reduce the operating room of the private economy, there can be no policy levers for supply-side economics to manipulate" (27, 37).
For the excellent, detailed explanation of economic policies enacted and economic conditions that arose throughout the 20th century, this book should be required reading for students in American economic history courses. Domitrovic explains the intricacies of economic policies in lucid style and in plain terms.
This book is written in clear prose and in terms that can be understood by a layperson, and it focuses on the people and intrigue behind the supply-side movement. Consequently, this book would be a pleasure for the casual reader who wants to understand American economic life since 1913.
By retelling lore and providing lively anecdotes and insights like this one, Brian Domitrovic introduces the major characters, the "econoclasts," who were instrumental in the ascendency of supply-side economics in the modern era: economists, journalists, and politicians. In addition to Laffer, these include Robert Mundell, ultimately a Nobel economist; Robert Bartley, Wall Street Journal editorial-page editor; Jude Wanniski, a reporter whose book, The Way the World Works: How Economists Fail and Succeed, spurred the supply-side movement; U.S. Representative Jack Kemp, the former pro football player who championed supply-side theory and won passage of legislation putting the theory into practice; and more.
Domitrovic provides a well-researched and detailed account of the political struggle to assert supply-side policies in the late 1970s and early `80s. He tells about how, by the time Ronald Reagan became president, proponents of supply-side economics had succeeded in the marketplace of ideas to such an extent that even Congressional Democrats were largely in favor of providing tax cuts to spur economic activity. Domitrovic speculates on how, if the Carter Administration had not been so whetted to an objective of creating tax "fairness"--an objective that had no constituency--and had been more sympathetic to providing tax "relief"--which is what most Americans cared about--there might not have been a groundswell of support for Reagan's candidacy.
Of course, Carter's policies served only to exacerbate the stagflation that had characterized the American life in the 1970s. When Reagan and his supply-side advisers got to Washington, they applied the "policy mix" of stable money and tax cuts (a.k.a. "Reaganomics"), which is, as Domitrovic explains, the secret to escaping stagflation. Still, it took time for the policy mix to have an effect, because people had become so accustomed to the stagflation paradigm and were therefore so skittish about moving into the real economy. By 1983, he explains, with inflation low and returns and investment increasing, tension had built to such a point that the recession of 1981-82 could not last. Indeed, the asset-shifting that started at that time was to continue, nearly unabated, for two decades.
In light of the recent economic crisis and some uninformed observers' attempts to blame Reaganomics, Domitrovic suggests that revisiting the policy prescriptions that brought the United States economy out of the economic crisis of the 1970s, rather than hearkening back to the Great Depression, would be instructional. He provides a plan of action for the Obama Administration that he says would allow Obama to emulate John F. Kennedy, who applied the supply-side policy mix--before the paradigm had a name. He notes that Kennedy's attitude was that he was "going to have spectacular growth on his watch, no matter whom he had to cut deals with... and was clever enough to assign credit for his policy mix to his assistants, but the documentary record is clear that his Council of Economic Advisers got mugged by reality and over-ruled by its president" (292-293).
Thus, Domitrovic deftly explains the supply-side economics that has been dominant in American life in recent decades and he explains its relevance for the current economic situation.
Yet, even more important, Domitrovic provides a thorough explanation of the economic history of the United States, beginning with the phenomena that arose in 1913--the income tax and the Federal Reserve--and which allowed supply-side economics to be developed in the first place. To wit, he writes, "The income tax and the Federal Reserve... have shaped life as we have known it in the century since 1913. One thing is certain: there would have been no supply-side economics without the changes of 1913. For restraining the institutions created that year... is the essence of supply-side thinking... Without institutions like the Federal Reserve that can make large, sustained mistakes in monetary policy, and without an income tax that can significantly reduce the operating room of the private economy, there can be no policy levers for supply-side economics to manipulate" (27, 37).
For the excellent, detailed explanation of economic policies enacted and economic conditions that arose throughout the 20th century, this book should be required reading for students in American economic history courses. Domitrovic explains the intricacies of economic policies in lucid style and in plain terms.
This book is written in clear prose and in terms that can be understood by a layperson, and it focuses on the people and intrigue behind the supply-side movement. Consequently, this book would be a pleasure for the casual reader who wants to understand American economic life since 1913.
16 of 16 people found the following review helpful
Format:Hardcover|Amazon Verified Purchase
Well, if you're like me you have never even heard of Robert Mundell. "Robert who??" And, by the time you finish reading this excellent book, you'll wonder why you have never even heard the name of this brilliant, Nobel-prize-winning economist, and his major contribution to economic theory and practice, generally called "supply-side economics."
But first, we need to go back in time, to 1913. It was in 1913 that the last goals of the "Progressives" made it into the Constitution and the law: specifically, the Federal Reserve Bank of the United States, and the income tax. Your first lesson in understanding "supply-side economics" is that it makes no sense without the Fed and the income tax.
In fact, it becomes clear that the "Progressives," although they had nothing but the best of intentions, created two gigantic "toys" they had no idea how to handle. Should the Fed raise interest rates to 25%, or lower them to zero? How about printing money? Could we just print as much as we liked?
And the income tax. Obviously, setting it at 100% would be a bad idea, but how about 90%? Or 15%?
Did anybody have a clue? Not very much. In fact, the Harding administration got lucky in making Andrew Mellon Secretary of the Treasury; he pressed the right levers and created the Roaring Twenties. But then came the stock market crash, and everybody started pressing the levers at random, leading to eleven years of misery.
Robert Mundell says that announcing a simple increase in the price of gold would have put a stop to all this, and there would have been no Depression, no Hitler, and no World War II. The picture is more complicated than that: there was the idiotic Smoot-Hawley tariff law, which basically cut off all foreign trade and led us into a Fortress America mindset: not TOO bad for a huge country with vast resources, but very bad indeed for countries like Germany and Japan, which did not have vast resources and began to set their military machines going.
So there's a whole fascinating history of the world in this book, plus a clear explanation of the main tenets of supply-side economics. Basically, Mundell says that we should use the Fed to support and maintain the current level of prices, period. No inflation and no deflation. Then we should encourage economic growth by cutting marginal tax rates. (Note well, George Bush and Barack Obama: mailing out checks to everyone is NOT THE SAME. Cutting MARGINAL tax rates encourages growth.
There's a lot more in this book. Perhaps the most surprising is that it is actually the first researched and documented history of one of the most important discoveries of the 20th century. Whatever else you read on the subject is simply OPINION, including the "famous" story of the Laffer curve being sketched on a napkin, the terms "voodoo economics" and "Reaganomics," and all the rest. Supply-side economics has a secure place as a respected extension of classical economics.
The only place where it doesn't seem to be given a hearing is in Washington, D.C., right now, where the current economic mess is either ignored, or treated with some sort of stupid band-aid. This is particularly frustrating because there are millions of Americans who could do better, but no one has ever accused the current POTUS of being open to new ideas. In fact, with all the new taxes he's foisting on the country, he's doing the Jimmy Carter malaise waltz all over again, wasting valuable time and trillions of dollars.
As G. K. Chesterton once observed about England, "It may be a strange spectacle indeed to see the blind leading the blind, but right now in Washington we can observe something much stranger: the blind leading those who can see."
Highest possible recommendation!
But first, we need to go back in time, to 1913. It was in 1913 that the last goals of the "Progressives" made it into the Constitution and the law: specifically, the Federal Reserve Bank of the United States, and the income tax. Your first lesson in understanding "supply-side economics" is that it makes no sense without the Fed and the income tax.
In fact, it becomes clear that the "Progressives," although they had nothing but the best of intentions, created two gigantic "toys" they had no idea how to handle. Should the Fed raise interest rates to 25%, or lower them to zero? How about printing money? Could we just print as much as we liked?
And the income tax. Obviously, setting it at 100% would be a bad idea, but how about 90%? Or 15%?
Did anybody have a clue? Not very much. In fact, the Harding administration got lucky in making Andrew Mellon Secretary of the Treasury; he pressed the right levers and created the Roaring Twenties. But then came the stock market crash, and everybody started pressing the levers at random, leading to eleven years of misery.
Robert Mundell says that announcing a simple increase in the price of gold would have put a stop to all this, and there would have been no Depression, no Hitler, and no World War II. The picture is more complicated than that: there was the idiotic Smoot-Hawley tariff law, which basically cut off all foreign trade and led us into a Fortress America mindset: not TOO bad for a huge country with vast resources, but very bad indeed for countries like Germany and Japan, which did not have vast resources and began to set their military machines going.
So there's a whole fascinating history of the world in this book, plus a clear explanation of the main tenets of supply-side economics. Basically, Mundell says that we should use the Fed to support and maintain the current level of prices, period. No inflation and no deflation. Then we should encourage economic growth by cutting marginal tax rates. (Note well, George Bush and Barack Obama: mailing out checks to everyone is NOT THE SAME. Cutting MARGINAL tax rates encourages growth.
There's a lot more in this book. Perhaps the most surprising is that it is actually the first researched and documented history of one of the most important discoveries of the 20th century. Whatever else you read on the subject is simply OPINION, including the "famous" story of the Laffer curve being sketched on a napkin, the terms "voodoo economics" and "Reaganomics," and all the rest. Supply-side economics has a secure place as a respected extension of classical economics.
The only place where it doesn't seem to be given a hearing is in Washington, D.C., right now, where the current economic mess is either ignored, or treated with some sort of stupid band-aid. This is particularly frustrating because there are millions of Americans who could do better, but no one has ever accused the current POTUS of being open to new ideas. In fact, with all the new taxes he's foisting on the country, he's doing the Jimmy Carter malaise waltz all over again, wasting valuable time and trillions of dollars.
As G. K. Chesterton once observed about England, "It may be a strange spectacle indeed to see the blind leading the blind, but right now in Washington we can observe something much stranger: the blind leading those who can see."
Highest possible recommendation!
23 of 29 people found the following review helpful
5.0 out of 5 stars
Heroic Ideas, Heroic Men: The Supply-Side Has Never Looked so Right
February 6, 2010
Format:Hardcover|Amazon Verified Purchase
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".
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".
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