A Full Supply

“Inflation Hits 44-year Low” read the recent headline. The problem: 44 years ago the U.S. had high inflation.

Brian Domitrovic’s book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (2009, ISI $27.95) is an excellent introduction to historical economic situations from 1913-1990. Domitrovic goes through the problems, and the solutions (working and not working.) Many of them solutions we could use. As George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

You meet the refiners of the Supply-Side theory: Robert Mundell, Aurthur Laffer, Norman Ture, etc. The publicity: Robert Bartley, Jude Wanniski, etc. And the applicators: Andrew Mellon, Jack Kemp, Bill Roth, Paul Volcker, Ronald Reagan and many more.

The theory: Low taxes and a tight money supply is the road to economic prosperity, as well as maintaining prosperity. Low taxes puts more money in the pockets of consumers and businesses to do as they see fit (the private sector can spend money much better than the government). And the tight money supply (i.e. low inflation) sustains trust in the dollar for investing and spending, foreign and domestic.

This theory, when implemented correctly (the proper “policy mix” Mundell called it) has worked in 1921-1929 and from the 1980’s to the 1990’s (the 90’s was the after taste of the 80’s.)

The 70’s were dismal days (“that 70’s funk” Domitrovic called it). With double-digit inflation, ridiculously high taxes (well above 50%) and business regulations that don’t even makes sense, we were ready for new ideas.

After many failed attempts, tax slashing finally came in 1981 once the Conservatives and Ronald Reagan had sway at the hill. It was the Economic Tax Act (ERTA). The act brought personal tax rates from around 70% to 50%. The problem with ERTA was that it was phased in, it would be three years (81,82 and 83) before the cuts took full affect. So the general consensus was to hold on to your money until the cuts were finished. Without fast success, many claimed this disproved the theory that tax cuts worked. But it was only a matter of time.

The second problem was that the reigning down of the 13% inflation (the kind of inflation we’re waiting for) was immediate. The Fed hit the ground running with reducing inflation, but the tax cuts took their time.

When every thing was finally in place, the economy was a raging bull (pun intended.) In 1982 the Dow jumped by 30% as the opening act. Then jumped another 20%, gave 4% in 1984, then leaped 28% in 1985. (Amazing leaps even today. Since the Dow crashed it has fiddled up and down with 2% and 3%.) Domitrovic states, “Over the next decade, a further 400 percent would be added.” (Emphasis mine.) Bonds recovered, investing increased, and business was more productive.

Have any more questions? Want more information? Go read the book. Econoclasts is an excellent compilation of historical data of what worked in the past and how it happened. You will be sure to be in for an interesting and insightful lesson in economics along with some advice our government could use.

This is vital information as to what solved our problems in the past. And may very well come in handy for future solutions.

-Ben

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