Econoclasts: how Reagan saved the economy

Sound money and low taxes.

Here’s a review of the new book about the history of supply-side economics. I suggest any candidate, Republican or Democrat, read the book for a simple explanation of what makes the economy stop and go, and an untangling of the failed theories which keep driving us into the ditch.

As Americans contemplate slow economic growth and a spiraling dollar, Brian Domitrovic’s new book, “Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity,” 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…

Domitrovic recounts that early in his career, Mundell realized that major periods of U.S. growth and prosperity such as the Gilded Age and Roaring Twenties coincided with the “policy mix” of sound money and tax cuts. Moreover, Mundell understood this was historically true, noting the rise of great nations, even empires, corresponded with these policies.

Mundell argued monetary policy was an arrow only able to hit one target, and it was best aimed solely at currency stability. Fiscal policy, specifically tax rates, should target employment.

Mundell’s analysis ran counter to the economic establishment’s consensus in the 1960s and ’70s. Keynesians Paul Samuelson and James Tobin argued employment should be targeted with loose money, while taxes should be raised to check inflation. On the right, monetarists led by Milton Friedman argued steady money supply growth would stimulate demand.

The Mundellian policy mix was different from its Keynesian and monetarist competitors because it put the producer, supply, rather than the consumer, demand, at the framework’s center. Supply-siders believed if investors, entrepreneurs, and business owners were incentivized to work, save, and invest at the margin – i.e. to take new risks – expansion would result. In this view, production led to consumption and was therefore paramount.

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