How Supply-Side Economics Trickled Down...

Bruce Bartlett's piece on supply-side economics:

How Supply-Side Economics Trickled Down - New York Times: AS one who was present at the creation of “supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy...

sparked an interesting and useful debate at Mark Thoma's Economist's View (which I previously noted).

After thinking about it, I want to weigh in again--on the side of Bruce Bartlett as opposed to Paul Krugman. It's not that Paul says anything wrong about what he and his MIT colleagues thought at the end of the 1970s, but IMHO he underestimates the intellectual gulf between Cambridge and Washington.

There are two issues here--stabilization policy and growth policy.

On stabilization policy, Bartlett says that the Keynesians around 1980 believed that full employment should be produced via fiscal policy--spending increases and tax cuts, preferably spending increases, to boost aggregate demand--and that inflation should be controlled via incomes policy--jawboning unions to restrain wages and businesses to keep a lid on prices, tax penalties for price increases, excess-profits and other taxes to provide incentives to keep wages and prices close to previous nominal anchors, and the threat and perhaps the reality of wage and price controls. Monetary policy, Bartlett says they said, was next to useless in controlling aggregate demand. And the principal effect of fiscal policy was not its impact on the supply side--on incentives to work and invest--but its demand-side impact on the volume of spending.

Krugman protests that what he and his Keynesian colleagues at MIT taught around 1980 was very different from Bartlett's parody of modern Keynesianism. MIT's Robert Solow had argued for JFK in the early 1960s that a good fiscal policy needed to pay at least as much attention to the supply side as the demand side. And certainly those teaching macroeconomics at MIT at the end of the 1970s--Stan Fischer, Rudi Dorbusch, and company--placed enormous stress on the power of monetary policy to affect aggregate demand, shape expectations, and control inflation. All this is true. And yet, and yet...

Matthew Shapiro of the University of Michigan perhaps puts it best. He went to Yale as an undergraduate in the late 1970s and to MIT as a graduate student in the early 1980s. He says (roughly, this is my memory and not verbatim):

At Yale in the 1970s, I was taught that the Chicago School was bad and wrong because they believed that monetary policy had powerful effects on production and unemployment. Then I get to MIT in the early 1980s and was taught that the Chicago School was bad adn wrong because they believed that monetary policy did not have powerful effects on production and unemployment.

The second Chicago School was made up of the rational expectations revolutionaries of the late 1970s. The first Chicago School was that of Milton Friedman's monetarists who thought that controlling inflation was simple: don't use open market operations to expand the money supply. They were opposed by Old Keynesians who thought that monetary restraint was ineffective, by those who thought that monetary restraint was too effective (i.e., would cause too much unemployment), and by those (like Arthur Burns) who thought monetary restraint was impossible (i.e., that the Congress would never allow the Federal Reserve to stop inflation by generating a recession the size of 1982). My take on this story is found in J. Bradford DeLong (1997), "America's Peacetime Inflation"; and J. Bradford DeLong (2000), "The Triumph? of Monetarism"14%3A1%3C83%3ATTOM%3E2.0.CO%3B2-G). The first Chicago School by and large won the day, and Paul Krugman takes their substantial victory as natural and inevitable, and it did indeed seem that way from MIT in 1980, but not frm the trenches of the Joint Economic Committee where Bruce Bartlett wallowed in the politicial trench-warfare mud in the late 1970s. So it seems to me that Bruce is more right than Paul.

I'm less sure that Bruce Bartlett was on the side of the angels on growth policy. I was taught that one sought to have cyclical deficits in recessions, but a budget in balance or surplus on average over the business cycle, so that the mix of policy tended toward a tight fiscal-easy money configuration that would produce high investment and rapid wage, output, and productivity growth, and one paid attention to high marginal tax rates and the deadweight losses they caused. Nothing that Bruce would disagree with there. And certainly I am on Bruce's side against those who focused exclusively on how high marginal tax rates were a good thing because they improved the distribution of income, and those who focused exclusively on fiscal policy as a manager of aggregate demand.

But in practice... it seemed to me that Bruce's political masters like Jack Kemp were excesssively eager to throw the "budget in balance or surplus on average over the business cycle," and that the eager embrace of deficits and their crowding-out of investment did more harm than the focus on reducing marginal tax rates did good. We can argue about that, however.

A good deal of the problem is that there were so many factions. On the left side, there was the Solow tight fiscal-easy money tradition; the Musgrave progressive-redistributive-tax-system tradition; the vulgar Keynesians who never met a deficit or a price control they didn't like; the New Keynesian faction to which Krugman belongs, and others. On the right side, there were Bruce Bartlett and company; the neoconservatives who wanted rhetoric but didn't care about getting economic policy right; those who were loyal to Reagan whatever Reagan would decide but had no clue about policy; David Stockman who hoped that cutting taxes now would produce a wave of revulsion against deficits that would enable him to cut spending later; the Buchanan-Niskanen "we are betrayed" faction that protested against the embrace of deficit spending by the Republicans; and the "starve the beast" faction. "What the supply-siders thought" depends very much on who is included in the charmed circle, and when. And the same applies to "What the Keynesians thought."

Comments

[Gabriel Mihalache]

Maybe I'm wrong but...

1st Chicago School: Knight & Viner

2nd Chicago School: Friedman & Stigler

3rd Chicago School: Lucas (& Becker?)

4th Chicago School: Levitt? :-)

[Robert]

Your post is valuable even beyond the shock value of reading Brad DeLong siding with Bruce Bartlett vs Paul Krugman (and that is saying a *lot*). However, Bartlett seems to be attempting to claim that "supply siders" discovered monetarism.

I think this is simply false. It may be that Friedman hadn't convinced policy makers in 1980, but that does not imply that supply siders deserve any credit at all.

As you conclude there are many groups and many debates.

One is fiscal vs monetary stabilization policy. It is clear that Friedman convinced Cambridge MA by 1980. It is clear that he hadn't convinced Washington DC in 1980. It is clear that no one has convinced Washington DC yet (see your post on the second Bush tax cut and Saturday night live). Keynesian arguments for high spending and or low taxes are arguments for high spending and or low taxes and will be applied in ways that would outrage Friedman and Keynes. On this, I think the supply siders were sympathetic with Friedman, because he was generally libertarian, but didn't contribute seriously to the debate in any US city.

Another issue concerns the incentive effects of taxes. It may be that they were ignored in Washington DC before 1980 (except you explained them very clearly in a way which no one has surpassed in 1979 in Spring Valley Washington DC). Supply siders made unsupported arguments that such effects are huge. They continue to make them in the face of overwhelming evidence that they are not huge. Their contribution to this important debate was uniformly awful (and that goes for Feldstein too). It is an important issue. Making wild claims with no evidence and sticking to them as holy doctrine when discussing an important issue is not a feather in anyone's cap.

Finally, there is the coincidental interest in the idea of Ricardian equivalence. Separate from supply side economics and prior to Reagan. Now that was a very bad idea. Good thing Robert Barro proved it was nonsense in the footnotes of his classic paper. Too bad too few people read the footnotes. The idea that "deficits don't matter. Ronald Reagan proved that" is probably the most damaging result of the supply side experiment (but far from the most damaging contribution to public policy from Richard Cheney).
As you argue much more briefly and eloquently than me, the supply siders (not including Feldstein this time) performed a great dis-service when they embraced that argument.

[Bruce Bartlett]

I think some people are forgetting just how serious a problem inflation was in the late 1970s and just how clueless many people were about its cause and cure. There were very strenuous debates going on in real time about whether inflation was fundamentally a monetary problem or caused by a lot of bad luck--OPEC, bad harvests, etc. We supply-siders always viewed monetarism as part of our model. Where we thought monetarism was lacking was in not having a growth component. This was supplied by Mundell, who said that a tight money policy needed to be married to marginal tax rate reduction so that stagflation--our principal concern--could be attacked on both the demand side and the supply-side. In Washington, we also viewed deregulation as an important element of the supply-side strategy. We tended to overemphasize the tax element because there were lots of people already talking about monetarism and deregulation and we didn't see any reason to repeat what they were saying. The tax element was new and hard for many Republicans to swallow because they saw inflation caused primarily by the budget deficit and because they were at that time still wedded to a hard balanced budget rule, at least in principle. It would have been better if someone had explained how the pieces all fit together. But things were happening so fast, there simply wasn't time.

Finally, I would like to emphasize that supply-side economics was never intended as a general theory of growth, but only as a cure for stagflation. In this respect, I think there is a close parallel to Keynesian economics, which came into being as a way of dealing with a deflationary recession in the 1930s. By the 1960s, inflation was the problem and 1930s-style Keynesianism became a source of economic error. In the 1970s, this crude form of Keynesianism died and was replaced by a hodge-podge of pre-Keynesian classical economics that was embodied in monetarism, rational expectations, public choice, supply-side economics and so on.

Collectively, these schools of thought helped us win the war against stagflation. But just as Keynesian economics was misapplied in the 1960s, long after it initial goal had been achieved, so too some elements of supply-side economics are being misapplied today.

[Jonathan Goldberg]

In this posting our host refers to the deadweight losses caused by taxation. This is often stressed by libertarian and reflexive "free-market" types.

I have no idea what the real situation is wrt deadweight losses. Would some well-informed people provide pointers and/or a quick summary of the current view (assuming one view is widely accepted). I see this as an important issue and find my ignorance so annoying that I'd actually go to a library (I'm not affiliated with a university) to do something about it.

Robert, above, refers to "Barro's classic paper." Would you please, for the benefit of the civilians, give a specific reference. I'd appreciate also a reference of the our host's 1979 presentation, if available. TIA.

[knzn]

Surely during the 70s (and before), there was no large contingent on the Keynesian side that thought monetary policy would be ineffective against inflation. The standard cliché was that “you can pull on a string, but you can’t push on one.” When pulling (anti-inflation policy) was the issue, the debate was not whether it was feasible but whether it was worth it (“It takes a heap of Harberger triangles to fill an Okun gap,” said arch-Keynesian Tobin) and if so, whether it should be gradual or shock therapy.

Volcker gave us shock therapy, and history has decided it was worth it, but how do the supply-siders get any credit for that? They just made Volcker’s job harder by giving us a fiscal stimulus which necessitated an even tighter monetary policy. The supply-siders “didn’t see any need to repeat” what people were already saying about monetarism and deregulation, and their theory was intended “only as a cure for stagflation,” but the one idea – tax cuts – that was unique to the supply-siders turned out to be counterproductive in the fight against stagflation.

Regarding the causes (rather than the solution) of inflation, Bruce Bartlett mentions the theory that it was caused by a lot of bad luck. I think that theory was largely right. We did have a lot of bad luck during the 70s (which, in retrospect, includes the productivity slowdown and an outward shift in the Beveridge curve). Granted, there were also policy errors (many of them in the 60s), but the bulk of these were due to political pressure and bad judgment, not to bad economic thinking. The question is, what do you do in response to the bad luck (and, to some extent, the results of bad policy)? Again, the answer was a matter of politics and judgment, not economic theories. If the dovish Keynesians gave the wrong answer, it was because they were dovish and not because they were Keynesians.

[knzn]

Admittedly, incomes policies were a bad Keynesian idea, but they were analogous to the bad supply-sider idea of cutting taxes. (Cutting tax rates might have been a mildly good idea if it were accompanied by a broadening of the base to make up the revenue losses, but this was emphatically not what Kemp-Roth did.) These were both just bad ideas about how to make the transition easier. The monetarists had no bad ideas about making the transition easier, but they had no good ideas either. The only ones who had a good idea (probably for the wrong reason, but the new Keynesian movement hadn’t come along yet to provide the right reason) were the rational expectationsists: all you need is credibility, and Volcker found a way to provide it.

[Robert]

Wow I can debate Bruce Bartlett in a comments thread.

I would first point out that stagflation was not a problem in 1980 (or 1978). The economy was growing with low unemployment and inflation following an extremely brief recession which followed an extremely severe oil shock. I believe the correct term is "inflation" not "stagflation".

I think that saying that supply side economics was an anti-inflation strategy not a growth strategy is very honest. Mainstream growth theory implies strong support for supply sider type arguments (which I find unconvincing see my blog). A correct interpretation of these results is that tax shifting of the type done by Bush and Reagan is very bad policy. However, a mainstream interpretation by extremely respected economists is similar to the view of supply siders.

However, the idea that supply side effects of tax cuts make them a good part of an anti-inflation strategy is not accepted by significant numbers of economists who look at data or solve models.

In practice, the Volker/Reagan deflation included extraordinarily severe short term distortions due to high real interest rates and extreme overvaluation of the dollar.

Finally, I would like to contest the claim that inflation was a huge problem in 1980 (again see my blog).

[kharris]

When Bruce B says "We tended to overemphasize the tax element because there were lots of people already talking about monetarism and deregulation and we didn't see any reason to repeat what they were saying" I have to wonder who he is including in that "we"? Brad has picked out Jack Kemp, and that seems like a good choice. Once upon an MSNBC appearance, Kemp was being interviewed by Ron Insana. Stocks had posted good gains the day before, and Kemp claimed the gains were due to an obscure event having to do with tax policy in some Congressional subcommittee. Insana said his impression was that a handful of favorable corporate and economic headlines had led to the rise in stock prices. Kemp got an indignant look on his face and snapped at Insana something like "where do you get your information, the New York Times?" There is a treasure-trove of things wrong with that little statement, but let's focus on Kemp's devotion to the idea that even a hint of a tax change - a hint many had not heard of while busily buying stocks - was more important than anything else going on in the market.

Kemp did not overemphasize tax rates because the other bases were covered. He was and is a tax-cut zealot. Tax cut zealotry lives on today. I dare say the name "Bruce Bartlett" was known to a tiny fraction of the people who knew who Jack Kemp was and what he thought about economic policy. So who is the "we" that was merely filling in the gaps? If it was just the Bruce Bartlett's of the world, I'm not sure the rest of us got value for money in Bartlett enabling Kemp.

I also think it is not really responsive to the point Brad made to say that supply-siders emphasized tax policy because other bases were covered. It is not why tax policy was emphasized that is the problem, but the nature of that emphasis. Extraordinary claims were made, and continue to be made, for the impact of changes in marginal tax rates on economic performance. What may have a sizable impact at a 70% marginal has little impact at 35%, vanishingly little at a 20% rate.

From the point of view of the perpetrator, it may give comfort to say that "things were happening so fast, there simply wasn't time" to tell policy makers the likely impact of the policies they were being sold. For those of us whose careers have not benefited from ignoring simple economic facts of life, "there wasn't time" seems a little tawdry.

If it is true that supply-side economics was aimed at curing stagflation, they why was the set of policies it encompassed not reviewed and modified a decade or more ago, after stagflation was no longer the primary problem? (I'm ignoring kznz's very good points here just for the sake of argument.) Why is it that only now, Bruce B announces that it is time to jettison the name and look for something else?

Now, to acknowledge kznz's very good points, if curing stagflation was the aim of some small platoon in the supply-side army, given that stagflation had pretty much been mopped long ago and that zealots continue to use the arguments handed to them by that small platoon way back when, was it worth it? Was it worth making Volcker do more damage by justifying the bad fiscal policy that immediately resulted from supply-side arguments?

[Matt]

The issue here is mainly rational expectations.

The inflation cycle works until businesses and consumers begin accounting for the phase difference between fed actions at the top and realized inflation at the bottom. Essentially, the federal bank time shifts accounts until it discovers that the private sector is correcting the fraud.

The trick to setting tax rates is to estimate the tilt caused by federal price fixing on services and set the tax rates to equal the federal services received plus the effective tilt. But there is a delay in the correction because the current federal legislature is the monopoly group doing the tilt. Hence another phase shift.

Phase shifts in business accounts lead to cycles.

Government is just the largest of all the business organizations and obeys the same rules except it is a monopoly price fixer, like the fed.

None of these cycles go away as long as we have price fixing at the top. Worse, the two bigest cycles operate 180 degrees out of phase creating growing instability on the 16 year cycle.

The only policy any economist can provide to dampen the cycles is to recommend that information be transmitted rapidly throughout, reducing the apparent gain from price fixing. The real correction always comes from having business process with more accurate linear predictors.

[Matt]

I have to comment on Brad's theory:

"I was taught that one sought to have cyclical deficits in recessions, but a budget in balance or surplus on average over the business cycle"

Brad is right, all business processes need to correct for phase shift, that is, create the inverse filter, remove the volatility.

The problem is that monopoly price fixers are restricted by their imperative to excercise pricing power. This includes the federal government. Monopolies cannot correct their own pricing behavior.

The corollary is that federal corrective action will always enforce the cycle. Or, an apparantly corrective adjustment will move the phase shift to another cycle. Or the federal government will make the proper correction, but four years too late.

The only way to remove cycles is to rapidly transmit information to all businesses that they can create corrections within the time frame of the monopoly phase shift.

[David in NY]

I want to thank Bruce for his Times piece and compendium of politicians' quotes to the effect that "tax cuts raise revenues." In the political realm, I think even more needs to be done to root out this idiocy, and I hope he is not afraid of repeating himself on this point. This canard has become a form of economic religion among many, and its widespread acceptance is an impediment to sound economic policy.

[Bruce Bartlett]

When I say "we" I mean all the people around Kemp during the time I worked for him in 1977-78 who were involved in the development of supply-side economics. Probably no two of them held exactly the same views on any topic, let alone all aspects of what came to be called supply-side economics. Having said that, here are some of those who made important contributions to our thinking: Robert Mundell, Arthur Laffer, Norman Ture, Paul Craig Roberts, Jude Wanniski, Bob Bartley, David Stockman and Bill Roth. There were several staff-types such as myself, Randy Teague, Bruce Thompson, Stu Sweet and others. The curious may consult my 1981 book, "Reaganomics: Supply-Side Economics in Action."

Incidentally, how can any reasonable person say that inflation wasn't a problem in 1980, as one of the posts above asserted?

[Ralph]

I want to thank Bruce Bartlett for weighing in on the historical circumstances that gave rise to the continuing debates over economic thinking that remain controversial to this day. His view that the problem is the tendency for continuation of policies whether Keynesian demand management or monetarist-supply side tax cuts far beyond the era when they were needed seems right to me. It is a lot like the argument that generals who continue to fight the old wars are the reason why wars are lost. I disagree with Robert that the problem of stagflation was largely gone by 1980. I say this despite being left jobless in 1980-2 by the deep recession caused by the drastic Volcker spike in interest rates of those times. I later found an even better more stable job in the public sector as a result. As a retiree, I am grateful that inflation has remained low and mangeable since the late 70s but I fear for signs that inflation is returning as a result of the huge tax cut induced deficits of the past four years.

[Measure for Measure]

Mr. Bartlett: Read Robert's post again. He said that stagflation wasn't a problem in 1980, but inflation was.
--- --- ---
(I revisited the facts and will share them here; apologies to those who know this):

Unemployment tended to rise between Jan 1980 and Dec 1982 (with a flat spell from 6/80-9/81) as the Fed tightened. Jan80: 6.3%. Dec82: 10.8%.

Inflation dropped from around 15% in early 1980 to under 3% in 1983.

[Robert]

"Finally, I would like to contest the claim that inflation was a huge problem in 1980 " Robert Waldmann

"Incidentally, how can any reasonable person say that inflation wasn't a problem in 1980, as one of the posts above asserted?"
Bruce Bartlett

When criticizing it is best to quote accurately. Obviously I know that US inflation 1979-80 and 1980-81 was high by historical standards. I know that inflation was perceived to be a huge problem in 1980. However, I do not agree with the assessment that the problem was huge. I do not consider inflation on the order of 10% a year to be a huge problem. I realized in 1980 that this put me in a tiny minority, but I have found no reason to change my view. My guess (and not only mine) is that inflation was detested, because people thought it referred only to price increases and imagined that, without inflation, nominal wages would continue to grow (without causing unemployment). Clearly people would rather have an extra 10% per year or so of real wage growth. If this was the reason from the popular demand for reduced inflation, it was a big mistake.
That the inflation problem was almost universally considered to be huge is a political fact. That is was huge is a claim which remains contestable.

I for one do not think that the Volker deflation was worth it.

On the currency and falsehood of the idea that inflation was bad luck, I agree with Bartlett. First inflation increased steadily during the Carter/Miller years (for the kids G. William Miller was Chairman of the FED before Volker). This was loose policy not bad luck. I recall a debate in 1980 or so in which Alan Meltzer accused Robert Solow of having a Tolstoyan view of history -- "it's just one damn thing after another". He had a point.

Barro's classic paper is "Are Government Bonds Net Wealth" Journal of Political Economy November/December 1974. My reference is partly a joke, since the paper introduced the concept of Ricardian equivalence and Barro chose to present it as an argument that the claim that deficits have no effect on aggregate demand or saving was reasonable. He put all of the reasons this is false in footnotes. Thus he guaranteed dozens of papers would be written citing the paper and explaining why its conclusion was false. This is excellent strategy. I once heard him tell Alberto Alessina "sometimes a critical cite is more useful than a favorable one. I mean, I'm just speaking from casual empiricism."

[kharris]

Robert Frank has something pertinent (impertinent?) to say in today's NYT.

http://www.nytimes.com/2007/04/12/business/12scene.html?ref=business

[Dean Baker]

Let's have a little fun here and imagine that we have more than one goal for our economic policies. Some of the folks here may have heard of something called "global warming." If not, jump ahead.

Let's hypothesis that high marginal tax rates do have a disincentive effect. They cause people to opt for leisure rather than work. In other words, as the economy gets more productive, high tax rates are likely to prompt people to take more of the benefits of productivity growth in the form of leisure rather than income.

Well, the correlation between income and energy use is about as solid as you can hope to find. This means that countries that discourage work with high marginal tax rates will have lower per capita carbon emissions.

Are these lower emissions worth the economic cost? You'd have to weigh the two carefully, but it is important to keep in mind that the appropriate measure of economic loss in this story is not the lost output, but the welfare loss associated with the difference between gains from higher income that would be obtained in the absence of the distortionary taxes and the value of the additional leisure enjoyed by workers.

I haven't done any calculations, but my guess is that this is a relatively cheap way to reduce greenhouse gas emissions.

[Cal]

As someone standing on the sidelines, and without the econ-cred of others posting and participating, I see the Bartlett piece saying: "Hey, Republicans: shut up already about supply side tax cutting. It is time to address fiscal reality and cutting marginal rates any further won't get us there. And to those who think otherwise: YOU ARE WRONG." To me, this other colloquey, is posturing. That is not to say it is not important, because having your position stated correctly is important and debating the arc of economic thought is important. However, those who are opposed to simple minded supply side yahoos, should pick up Bartlett's argument and run. All the fine points are not interesting to the public. What they will hear is: it's time to move on and they will listen to those who propose policies about how to move on with the ranters and ravers about tax cutting left to the side of the road like Michael Palin playing one of those crazy Brits with the handchief tied to his head and stomping and stammering in the noon day sun.

[Barkley Rosser]

I am not sure if Bruce Bartlett argued what Brad DeLong claims he did regarding the supposed favoring of incomes policies by Keynesians in 1980 as an anti-inflation tool or not. Today, such policies are more identified with Post Keynesians to be more precise.

It must be noted that except for the outright price controls in WW II and the ones briefly imposed by Nixon in 1971, there were very few incomes policies tried in the US. There was no effort to try the tax incentive schemes such as the Lerner-Colander MAP or the like.

Nor were there any efforts (probably impossible in any case in the US) to engage in the sort of collective collective bargaining that one saw for decades in Sweden, Austria, and some other European countries. The historical record on those particular policies is that they were very successful, with those countries having among the lowest "misery indexes" (sum of inflation and unemployment rate) of any countries in the high income, market capitalist world.

So, the ready dismissal of such policies is a ready dismissal of something that was never really tried (full-blown price controls are known not to work) in the US, but which worked very well in some other countries.

[shah8]

I am slightly amused by this thread.

In the late 1970s, the political spoils system was being negatively impacted by the oil crunches, which generated quite a bit of inflation (which affects *wealth*, not income). The people who were used to getting their money weren't, anymores. So there were many effort to find more reservoirs of cash to pay off supporters. So a huge hue and cry for tax cuts was raised in the media. Social Security taxes were raised by a bunch. Along with increased deficit spending, the 80s changed alot of how pork was dealt. At least until the commercial real estate debacle...Then a new game...

This whole thread seems to be utterly ignorant of how much this is a pay for play channel. Much of the economic dislocation NOW, including inflation, is coming from vast amounts of currently successful speculation, and rent-seeking, creating a larger upper middle class of marginal better productivity, which cannot be supported by the base, despite steadily increasing productivity.

A conversation like this, about flavors of economics, is implicitly about how politician reward themselves and their friends. When that fact is incorporated, then maybe we'll get somewheres.

First though, Impeach Bush, and his works.

/me checks the no fly list...

[Peter H]

Barkley,

I'm curious as to why you think an incomes policy would be unworkable in the United States. If I recall correctly, Sidney Weintraub proposed a Tax-Based Incomes Policy in the 1970's that would place a tax penalty on firms that raised wages above a certain level. He got several economists, including Henry Wallich, a Republican at the Federal Reserve. I know it's politically difficult to impose (labor unions would hate it, & businesses probably wouldn't like it either), but it's much more humane than inducing a recession.

In some ways, you could say Volcker & Reagan *did* have an incomes policy. Volcker was successful in clamping down on inflation - not by targeting the rate of growth of money supply (which was a total failure), but by inducing a recession that forced workers to moderate their wages claims, and thereby reducing cost-push inflation. Similarly, Reagan also induced wage moderation by breaking the back of labor unions.

[Barkley Rosser]

Peter H

I did not say that the TIP or MAP proposal was unworkable. I said it was not tried. Therefore, the blank dismissal of it is unwarranted. OTOH, it or its variants has not really been tried anywhere.

Price controls have been tried, and except briefly in wartime, or maybe for a single year, they do not work.

What I was referring to was the collective collective bargaining that has been used extensively in a number of European countries and some other places as well. That was very successful for decades in several countries, although it has tended to decay or break down in most of them for various reasons. But this requires having somebody represent "labor" and somebody (credibly) represent "management" for the whole economy to work, and given our low and declining share of workers in unions, this is pretty much out of the question in the US, for better or for worse.

[knzn]

Robert: “inflation increased steadily during the Carter/Miller years” I think one should use the singular: the “Carter/Miller year,” during which the rising inflation was indeed the result of loose policy. But for the other 9 years of that decade, it was mostly bad luck. (You might cite the Nixon-era ease as loose policy, but it was compensated by subsequent tightness. Over Burns’ full tenure the unemployment rate averaged close to a typical retrospective estimate of the NAIRU, which, now that I think of it, makes Burns something of a net inflation-fighter ex ante, since, given the information available at the time, he would have made a lower estimate of the NAIRU.) If you define a neutral monetary policy as one that, in the absence of shocks, should not be expected to change the inflation rate from its previous (or expected) level, then there is no way that policy during the 70s overall was loose enough to get the inflation rate from 5% to 10%. Not unless the Phillips curve was much steeper, or the NAIRU much higher, than anyone has ever thought. And if you define loose policy using Phillips curve estimates that could have been made based on the data available at the time (even with an accelerationist constraint), it would have made only a small overall net contribution to the increase in the inflation rate. (Don't unanticipated shocks to the NAIRU count as bad luck?)

I congratulate you, however, for pointing out that 10% inflation is not actually huge, even though everyone thinks it is. From the point of view of the (hypothetically enlightened) typical American, the real problems with the 1970s were the productivity slowdown, the reversal in the trend in labor’s share of national income, and the deteriorating terms of trade; the effects these things had on real incomes were falsely blamed on inflation.

[Ralph]

This comment is off-topic but since Dean Baker raised it I wanted to reply to his suggestion about reducing global warming gas emissions by disincentivizing future economic activities through changes in the marginal tax rates. The point that struck me about this suggestion is how indirect and generalized it seemed relative to the specific objective. I may be displaying my naivety about economics but it seems to me more direct and much easier to analyze the relation between taxes and fossel fuel emissions if the USG or state governments raised the gasoline tax or more generally imposed a carbon tax. I know that there is some resistance to raising the gas tax but under the current crisis of global warming caused by fossil fuel gas emissions I wonder whether public opinion could not be mobilized to support higher gas taxes. I believe Ross Perot was in favor of this during the 1992 election campaign and he surely is not the only prominent politician who has taken such a position. And how about raising CAFE standards which were not changed for over 20 years until Transportation secretary Norm Mineta announced a year ago that they are pushing for a measly 1 to 2% increase over the next four years?

[David Lloyd-Jones]

Bruce Barlett's years as an editorial writer taught us that he is a fantasiast of the greatest breadth and inventiveness.

I therefore have no reason to take any of his memories of what supply-side nonsense was supposed to be about in any way seriously.

Which reminds me: it was Jimmy Carter (only assisting the mighty effort of the Russian and other USSR peoples), not Ronald Reagan, who gave the Soviet Union its last push over the edge.