At the beginning of Bruce Bartlett’s career, the U.S. economy was gripped by failure and crisis: high inflation, sluggish economic growth.
Three presidents had struggled with the problems of the 1970s, and three had failed.
President Nixon had gripped the economy with price controls: that had not worked.
Gerald Ford had (unsuccessfully) attempted to cut government spending, while exhorting Americans to consume less. Failure again.
Jimmy Carter had spent money on job creation schemes while proposing central planning of the energy sector. Three-quarters of the way through his presidency, he abruptly reversed course, tightening money while trying to balance his budgets.
Through those painful years, a small group of dissident economists had developed a new set of ideas about to reignite non-inflationary growth. Their ideas came to be nicknamed supply-side economics. Much of Bartlett’s new book, The New American Economy, consists of a sophisticated defense of the supply-siders’ intellectual and policy achievement.
Today again the U.S. economy has tumbled into crisis. Today again the policies of the president do not look very effective. Today again the country craves a credible conservative alternative.
But the more you understand why supply-side economics succeeded in the 1980s, the more ill-directed it looks as a response to the problems of today.
Back then, neo-Keynesians insisted that inflation and recession counter-acted each other. It was impossible to suffer both at the same time. But what was impossible in theory was occurring in reality. Why?
The supply-siders noticed that inflation was pushing people into higher and higher tax brackets. In 1979 the tax code prescribed 11 brackets, if I remember right. As Eugene Steurle details in his all-important book, The Tax Decade, a typical American family paid a marginal tax rate of 20 or 22% at the beginning of the 1970s, and a rate almost double by the decade’s end.
Here was the secret of the stagnation that attended inflation, the supply-siders argued. They recommended instead a policy combination of tight money (to quell inflation) and marginal tax cuts (to stimulate growth). The Nobel-winning Yale economist James Tobin complained that such a combination would be like trying to board two trains at the same time, one bound for Boston, the other for New York-. Bob Bartley of the Wall Street Journal would later taunt Tobin: “yet here we are, arrived in both Boston and New York.”
Bartley and the supply-siders had reason to feel vindicated. For a quarter-century after 1983, the United States enjoyed strong (and sometimes very strong) growth without inflation, punctuated by only two very mild recessions, in 1991 and 2000.
Supply-side tax cuts were not a universal elixir, prescribed for all ailments. They were elegantly designed to counter stagflation. Other problems required other solutions. And boy, do America and the world now face other problems: deflation, debt, and the failure of economic growth to translate into rising incomes for most Americans.
A free-market economic policy for our time would stress reflation to combat deflation and a payroll tax holiday to spur job creation. It would propose health reforms to control costs and thus boost middle class incomes and slow the rise in government spending. It would, as Bartlett has done, call for consumption taxes to balance the budget and avert the payroll and income tax increases that will otherwise befall.
Such a policy would depart from present conservative orthodoxy. But the supplysiders departed from the conservative orthodoxy of their day, and we admire them for it! We do not honor them by refusing to emulate them.