Staving off stimulus disaster: 'The Great Money Binge' argues for a return to supply-side policies

George Melloan, who spent 54 years at The Wall Street Journal, many of them on the editorial page, is no fan of giant government stimulus packages to restore America's economic fortunes. Far from it. In "The Great Money Binge: Spending Our Way to Socialism," published in November by Simon & Schuster, Melloan argues that government intervention will only bring grim consequences, and policy makers should return to supply-side economics to save off disastrous inflation and global depression.

GUEST BLOGGER: George Melloan

In less than two years, Congress has passed three bills authorizing $1.3 trillion in "economic stimulus" by the federal government. We have very little to show for this massive application of the Keynesian theory that government spending can cure a recession. Unemployment still hovers at 10 percent and the numbers of long-term unemployed continue to rise. A weak recovery began in the third quarter last year but, given the enormous federal deficit, its sustainability is in doubt.

Keynesian economics, hugely popular among politicians, academics and journalists over most of the past 80 years, is getting another black eye. The last time was in the 1970s, when
Keynesianism was discredited by economic stagnation and double-digit inflation.

It was in those dark years of stagflation that supply-side economic theory gained currency as the antithesis and antidote to Keynesianism. I had a secondary midwife role as deputy to Robert Bartley, editor of The Wall Street Journal. Bob recognized the logic of the supply-side thesis and gave its proponents liberal access to the Journal editorial page. He shaped and focused their arguments through his own editing and writing, winning a Pulitzer Prize.

Economist Herbert Stein coined the term "supply-side fiscalism." The "fiscal" referred to the emphasis advocates placed on reducing the high tax rates (up to 70 percent) that then applied to earners in the top income brackets. Economist Arthur Laffer won notice with his claim that such reductions could often result in higher, not lower, tax revenues, an assertion that has since been proved. Art was simply applying to taxation the law of diminishing returns. Merchants for centuries have known that if you set your price too high, you sell less.

But there was more to supply-side than the "Laffer curve." It was classical economics, or in other words, common sense: A society has to produce before it can consume, or in the words of the 18th century French theorist Jean-Baptiste Say, "goods buy goods." The best government policies leave people free to apply their energies, imagination and willingness to take risks to produce goods and services that others will buy. Only their labors, whether they be hourly workers or rocket scientists, can sustain their consumption. Government handouts or easy credit are no substitute for productive human effort.

Keynesianism, by contrast, assigns a much more pro-active role by the government, applying high tax rates to the most successful strivers to further social and political goals of income and wealth redistribution. The use of government's police powers to regulate market processes included, during the New Deal, a virtual takeover of private industry by means of the National Industrial Recovery Act, declared unconstitutional by the Supreme Court in 1935.

Price controls in the 1970s, installed by Richard Nixon and a Democratic Congress in a futile attempt to stifle the inflationary consequences of easy money, was yet another gross misuse of government police power that discouraged production.

Supply-side ideas elected Ronald Reagan in 1980. He killed off the remaining price controls, backed Paul Volcker in the painful task of restoring the soundness of the dollar and reformed the tax system so that it no longer punished success. The result, after 1983, was 25 years of unparalleled economic growth and rising living standards for a large proportion of the American population.

Unfortunately, Keynesianism has made a thundering comeback with the present Congress. It only remains to be seen whether the supply-side revolution of the early 1980s can be repeated.

By Steven E. Levingston |  January 14, 2010; 5:30 AM ET Politics , Steven Levingston
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"A society has to produce before it can consume ..."

This is one of the silliest statements I've read. If there is no demand for a good, it doesn't matter how cheap or plentiful it is nobody will buy it. Thus while there is demand for things like better transportation, the money wasn't there until the stimulus package helped start some projects that will help us all in the long run to be more productive and get where we want to go without current delays.

And as for the "25 years of unparalleled economic growth and rising living standards" the author claims followed the Reagan era tax cuts, I'd say it was more Bill Clinton's push to balance the budget, including modest tax increases, combined with restraint by a Republican Congress, that produced the most growth. And living standards have been stagnant ever since.

Posted by: lpryluck1 | January 14, 2010 2:35 PM

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