Book Review: Econoclasts, a Supply Side History


Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity

This was a very good read, and a contrarian insight into the often misunderstood perspective of supply-side economics. Domitrovic is actually pretty clever and sprinkles the historical narrative with humorous insights and references (e.g., the book opens up with a snippet of the script from James Bond’s Goldmember, comparing the villain’s plan to sterilize gold with what inflation actually did to gold’s value).

It also underscores the importance of the Reagan Revolution, and the economic turnaround of the 1980’s. President Kennedy actually implemented supply-side principles of tax cuts and stable prices to incite the economic boom of the 1960’s, only to have LBJ and Nixon squander it into low growth, high unemployment stagflation through high-inflation, high-tax policies… hence the pessimism of the 1970’s.

In between 1966 and when Reagan was sworn into office, the inflation-adjusted decline in the stock market was as much as the Great Crash of 1929. Yes, emphasis on that.

The reason that budgets were balanced-ish during the 1970’s was because of “taxflation,” or bracket creep. When your employer has to pay you a cost of living adjustment (COLA) just to keep pace with inflation, you’re actually losing money because you’re quickly being pushed into higher brackets with steeper rates.

In this way, inflation was a money machine and an “invisible” tax hike on everyone. When Reagan set out to stop inflation and cut taxes, the big fear was a huge spike in the deficit (and we hear today a lot about the “Reagan deficit”). However–from the book:

“Given the theoretical perspective of “supply side thermodynamics”–Ruthledge’s term for his model–deficits in a low-inflation, high growth world were not catastrophic. For one thing, such deficits would not be inflationary, because the collapse of inflation was the premise of thier existence. As for “crowding out,” this too would evaporate. There was about to be a multitrillion-dollar asset shift into things like bonds, according to Rutledge’s main insight. A “hellacious” deficit in the $100-200 bln range would only bump aside a small percentage of the new money available in capital markets. “Deficits and savings would be rounding errors in the biggest portfolio event of the century.” ” p. 219

So, President Reagan and his allies took a brave leap on this–because double-digit inflation made it dumb to save money or invest it in financial instruments like bonds, people sank their money into commodities (gold, cars, real estate, oil), because they would at least appreciate as inflation raised prices.

But, if prices could be stabilized and taxes cut to make investment attractive, suddenly a huge wave of demand for bonds and debt (that is, in the trillions of dollars) would easily take on the resulting deficit.

Second, about the oft-cited statistic that most of the income gains since 1980 have been for the highest earners:

“Income gains of the rich boomed as the top rates were cut a generation ago and savvy investors moved out of commodities (whose appreciation does not regularly register as income) into financial assets (whose appreciation largely does)–a process that, as John Rutledge calculated, pulled upwards of $11 trillion out of hiding and put it to work in the economy. In turn, the economic opportunities made possible by this immense shift attracted millions of poor immigrants (such as Mexicans) into the country. Realized income grew at the top, and the ranks of the poor expanded, on account of a surfeiet of opportunity.” p. 293

Very eye-opening book, and a fascinating read for anyone interested in economics or political history of the United States.

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