A Brief Supply-Side History
The supply-side revolution originated from the economic policy insights of Robert Mundell and Arthur Laffer. Their solution for the 70s stagflation and economic malaise was the dual policy prescription of a return to a stable dollar combined with reduction in tax rates. This was completely at odds with the prevailing Keynesian and Monetarist theory of the time. Demand-side theory promoted currency devaluation and tax hike austerity.
Jude Wanniski and Robert Bartley latched onto Mundell and Laffer’s policy mix prescription and ran with it. Using the power of the WSJ editorial page megaphone, they gave voice to the supply-side revolution. This resulted in the election of Reagan who inherently understood supply-side precepts. Supply-side economics, which became a pejorative under the monopoly of Keynesian thought, is nothing more than an updated version of classical economics as described centuries ago by Ricardo, Smith, Mills, Say and others. The historical record of economic success and growth with the classical model remains uninterrupted—despite misinterpreted and unjust blame for the Great Depression.
Robert Bartley’s The Seven Fat Years and Brian Domitrovic’s Econoclasts, among others, chronicle supply-side history. Jude Wanniski’s The Way the World Works explains the supply-side model. Many others—Steve Forbes, George Gilder, Judy Shelton, Nathan Lewis, Reuven Brenner, John Tamny, Lewis Lehrman, Lawrence Kudlow, Alan Reynolds, Paul Craig Roberts, Wayne Jett—have added their voice to the supply-side library. Gilder’s Scandal of Money and Lewis’ Gold: The Monetary Polaris are essential reading for understanding today’s economic problems and solution.
The supply-side revolution unleashed two decades of global growth. This forced other countries to adopt the growth policy mix of stable money and low taxes or be left behind. The reason we are where we are today is because Reagan was unable to achieve a permanent link of the dollar with gold. Reagan established the Gold Commission early in his first term to examine a return to a reliable monetary standard based on gold. Monetarists, who were hostile to the monetary constraints of gold, dominated the Commission. The final Commission report opposed monetary reform, a return to a gold convertible currency. Greenspan was moderately successful in maintaining a stable dollar during his term as Fed Chairman. Bernanke and Yellen have no understanding of gold’s monetary properties. During their terms the dollar has once again floated untethered into the monetary ether.
Those responsible for today’s economic malaise excuse their incompetence with the economic give-up “secular stagnation”. Supply-siders are comparing the advent of Trump’s administration with Reagan’s. There are certainly similarities. We are coming out of a period of economic doldrums and malaise. Trump promises to cut taxes, regulation, and government similar to Reagan. In one sense the monetary foundation is more stable than at the beginning of Reagan’s term. The gold equilibrium point—that balances creditors and debtors—increased by a factor of ten by Reagan’s term, from $35/oz to $350/oz. It is only up by a factor of three at Trump’s, from $350/oz to around $1100/oz.
The Significant Difference
The implication that monetary policy is more stable today than in the Reagan era is true only when considered in isolation. What differs significantly is that the Reagan years had to correct for only seven years of monetary chaos and its deleterious economic effects. Today, we are at the 45 year point of monetary chaos. The accumulated damage after 45 years is a far greater economic obstacle to overcome than during Reagan’s time.
Comparisons between the economic environment at Reagan’s inauguration and today can be made with national debt, entitlement obligations, pension solvency, student debt, capital misallocation, and every major economic indicator. A significant difference is that interest rates fundamentally and honestly reflected these problems in the 70s. Today, manipulated interest rates by central banks have masked or temporarily distorted these problems. Government actions after the financial crash of 2008 solved none of our systemic problems. Failure and accountability was not considered as an option. The Fed, regulators, and responsible agencies instead papered over the financial sins of those most culpable with liquidity injections, accounting changes, favored legislation, and a pass on criminal liability. The financial system that Trump inherits is far more fragile than what Reagan inherited. Uninterrupted growth in central bank liquidity, interest rate derivatives, TBTF contagion, and hypothecation are the chicken wire that holds the global financial system together.
There are $2 trillion of excess reserves as a result of Fed liquidity injections since 2008. The Fed is unable to normalize monetary policy with excess reserves outstanding. Their demand-side model has no solution for this problem. A return to stable money based on gold is the ONLY solution. The only way that the Fed can adjust its balance sheet to normal without a run on the dollar is if the market and the world understand that the dollar will retain its value as good as gold—no matter what. Excess reserves under current Fed policy are like a mine field where one wrong step will result in a monetary blow-up. With massive excess reserves, anything that reduces dollar demand relative to supply—such that investors lose faith in the dollar—will set off market tremors. A Greenspan-type moderation is no longer an option in today’s environment.
Proponents of fiat money and currency manipulation derisively dismiss those who advocate a return to a gold standard. Stable money advocates should wear this rejection as a badge of honor. It is a choice between fiat’s historical uninterrupted failure and 300 years of successful U.S., British, and global growth under the stability of gold.
The world will work itself back to a gold standard. It has no choice. The vast productive class will always demand stable, honest money over elitist controlled fiat money. If the U.S. does not return to gold, another country or bloc will. The average life span of a fiat currency is 40 years. We are at the 45 year point. Now is no time to go wobbly. A return to gold truly will make America great again.