Nathan Lewis: The Magic Formula – Book Review

The Anti-Economist

Nathan Lewis explains economics in an easily understandable way that cuts through the econobabble.  Like most citizen economists, he approaches economics from a reference of common sense rather than academic haughtiness.  It is surprising how many economists in their theoretical quests lose sight of the primary role of an economy.  An economy exists not to celebrate statistical increases in manufactured indexes but to produce more goods that satisfy human needs with less effort.  Lewis brings the foundation for successful economies back into focus.  After reading Lewis, one may wonder: Why does the economics profession make economics seem like a foreign language that requires interpretation by degreed professionals?  Why are economic theory and its corresponding lexicon so dense that it appears to the layman as gibberish?  Why do failed, centuries-old discarded economic ideas get recycled into new, denser explanations under a new name?  (Spend some time looking at MMT.)  Why take an inherently understandable behavioral science and academic it up into an unintelligible hard science that requires credentialed economists to guide us through an economic Labyrinth?  Ultimately, the answer is that there is no reason.  The Magic Formula makes the case that economics should return to its common sense roots.  

Lewis finds that conventional economic wisdom is severely lacking.  History shows that economists applying their theoretical levers in practice are far more clueless than omnipotent.  Others have explained economics in simple, easily understandable terms.  Henry Hazlitt’s Economics in One Lesson is required reading as an economic primer.  Lewis goes further in his common sense explanation of economics by backing his economic explanation with historical data.  He is willing to do the hard work and delve into the most arcane economic data—from detailed observation of the Bank of England’s balance sheet over centuries to a microscopic litany of German tax rate policy during the 1930s.  With Lewis’ common sense explanations backed by data, it becomes impossible to ignore his conclusion for what makes economies work.  He has distilled it down to four words.  Stable money, low taxes. The magic formula.  

Call Lewis the Anti-Economist.  While Lewis is expertly versed in the history of economics and could hold his own in a debate with any of the various economic schools of thought, he has looked behind the economics curtain and understands that conventional economic theory upon which we have built our financial system is not working for the benefit of global citizens. The magic formula is the proven solution for what bedevils economists and the global financial system.

Low Taxes and Stable Money

The Magic Formula makes the case for creating a foundation for economic success based on stable money and low taxes.  In the chapter, Low Taxes, he compares the history of tax rates and their level of revenue generation.  It is no surprise that Lewis shows that high, progressive tax rates lead to less economic growth and greater demands on government at the expense of the private sector.  This conclusion is not an opinion.  Lewis compiles the data that shows the various levels of economic growth with corresponding levels of taxation.  Not all taxes are created equal.  Raising taxes that affect the formation of capital and savings are the most destructive to economic growth.  Lewis explains the litany of taxes, their various effects, and examines the combination of taxes and rates that best create economic growth.  He concludes:

The best way for a government to raise revenue is with low taxes that foster a healthy, growing economy.  Over time—usually, not very much time—the increased revenues from rapidly expanding GDP will overshadow anything that could have been accomplished with a high-tax strategy.  Since you have to receive revenue before you can spend it, the best way for a government to spend more is to tax less.

Lewis has written widely on the subject of gold, so it is no surprise that he finds gold the foundation of stable money.  He examines the history of gold and its use as money in the chapter, Stable Money. Lewis’ trilogy of books on gold and his compilation of the historical data supporting gold and gold standards no doubt make him the preeminent expert on the subject.  There is a four-century history of success with monetary systems linked to gold and Lewis finds that on gold standards:

. . . no significant problem seems to have arisen from this policy.  In that time, a simple pattern emerged: governments which maintained their currency value at gold parities tended to succeed, and those that did not tended to have difficulties.

The Spiral of Success and Decline

Lewis traces the success and failure of national economies in the chapters, The Spiral of Success and The Spiral of Decline.  He shows the success of countries that adopted the magic formula and the decline of empires that squandered it. Central to his examination of decline is a detailed look at the empires of Rome, Spain, and Great Britain.  All three countries built empires on the foundation of the magic formula and their subsequent decline followed in lock step with their abandonment of stable money and low taxes.

His chapter on “Austerity” and “Stimulus” looks at the preferred method to combat budget deficits, recession, low growth, and high unemployment.  Under the guise of taking one’s dose of economic pain, the government solution to fight budget deficits is to impose austerity—a combination of tax increases and spending reductions.  This combination has the effect of further slowing the economy, which then requires “stimulus.” The government usually accomplishes stimulus via spending and easy money.  The result under our floating system is currency devaluation.  Interludes of relative stable money and low taxes, between bouts of austerity and easy money, have defined our economic system since Nixon ended Bretton Woods in 1971.  The decades of historically low growth rates from which we continue to suffer are a result of the absence of a sustained return to stable money and low taxes.   

Lewis concludes The Magic Formula with a look at the current state of the world.  He summarizes the political and economic problems that are so obvious but to which we seem to have no answers.  He proposes many common sense solutions for the national debt, Social Security, pensions, healthcare, education, and welfare.  Lewis notes that “a wide variety of postwar-era institutions and forms of organization have become rotten, problematic, or simply played-out and exhausted.”  Because of this rot, it is difficult to envision any preemptive solutions coming from our increasingly corrupt and entrenched institutions.  The magic formula is the antithesis of our current system.  Those empowered by our current system will cling to it for as long as possible.    

Americans have ingrained a sort of collective consciousness that we are rich, and therefore, we will always be rich.  As if it is our divine right.  Lewis’ chapter on the spiral of decline vividly exposes this fallacy.  Lost to most is why our wealth exists in the first place.  The U.S. reign at the top of the global economic pyramid has no more guarantee of sustainability than any other empire that formerly existed.  After 48 years of chaos from the abandonment of stable money and an incomprehensible tax system, the U.S. is at an inflection point for its economic future.  The U.S. is neither preordained to a spiral of decline nor to a continued spiral of success.  The answer to sustaining our economic success is as simple as the four words that define the magic formula.  A return to the magic formula will extend U.S. economic dominance for as long as we adhere to it.

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