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Supplying the Right Remedy
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12405 |
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Section : |
SPECIAL SECTION
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| Issue
Date : |
1 / 1987 |
5,823 Words |
| Author
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Jude Wanniski
Jude Wanniski, a former associate editor of the Wall Street
Journal, is president of Polyconomics, Inc., in Morristown,
N.J., a supply side consulting firm. Mr. Wanniski was an
economic advisor to the Reagan campaign of 1980 and wrote the
monetary plank of the 1980 Republican platform. |
The dramatic change in U.S. economic policies after President Reagan took office in January 1981 reflected widespread disenchantment with the failed economic experiments of 1968 to 1980. The Reagan Revolution began with the defeat of a Democratic president, Jimmy Carter, but the experimentation had spanned the presidencies of Nixon and Ford as well. It was a stroke of historical luck that an aging political leader was around who had learned his economics in an earlier era. Ronald Reagan could thus understand what had to be done to end the terrible inflation and global economic stagnation that developed in the 1970s.
Influenced by a relatively new theory, President Nixon in 1971 had unhinged the dollar from gold; exchange rates had been allowed to "float." The price of gold, which had been held at $35 an ounce for 40 years, quadrupled in the following two years, followed by a quadrupling of the oil price as the Arab sheiks of OPEC refused to accept the cheapened U.S. currency at the old rates. The resulting inflation--the worst in peacetime history--pushed more and more taxpayers into high tax brackets once reserved for the very affluent. This smothered labor and capital incentives. The widespread use of U.S. dollars throughout the world, along with the fact that progressive tax systems are almost universal, led to the global spread of U.S. inflation and economic decline. The "stagflation" that resulted sapped the world's largest economy of its vitality and shook the confidence of the United States in itself as well as in the idea of democratic capitalism.
How had this happened? The 1970s began as a wonderful new era for economists. Freed of seemingly old-fashioned constraints like the gold standard and fixed exchange rates, the experts promised to manage the world economy from Washington. They would use elaborate computer models to advise how to stimulate spending, and this new demand for goods would magically create its own supply. The promises and predictions were lavish indeed. In President Carter's budget for 1979, the forecast was that the economy's real output would expand by 4.9 percent a year for eight years in a row, from 1976 to 1983--even though federal taxes were predicted to rise from 18.2 to 21.4 percent of Gross National Product (GNP), implying a tax increase of over $100 billion a year. The economy was to be taxed into prosperity.
The theory behind these "demand-side" ideas had been building for almost 50 years, afflicting liberal Democrats and conservative Republicans like. This was something new. For most of the history of the United States, economic policies were predicted on the assumption that the
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