In Econoclasts author Brian Domitrovic chronicles the rise of the supply side revolution, the economic prescription that ended the stagflation of the 1970’s and sparked a strong economic growth that lasted over 20 years.
Arthur Laffer, of the famous Laffer Curve, and his mentor Robert Mundell who won the Nobel prize in 1999 were the initiating figures but several others joined to bring the new ideas to fruition. Along the way they had to overcome academic stagnation and strong political resistance.
In 1971 serving on Richard Nixon’s economic team, Laffer who was only thirty and still fulfilling his PhD work at Stanford predicted a GNP of $1.065 trillion considerably higher than the consensus forecast.
Nobel prize winner Paul Samuelson (author of my college economics textbook) publicly humiliated Laffer’s excessively optimistic forecast, even noting that he had not yet finished his doctorate. One of the dissertation committee members for Laffer had died and he finished the work later. Samuelson gave a talk called “Why They Are Laughing at Laffer.”
When the GNP numbers were revised in 1976 (revision is a common occurrence) Arthur Laffer’s numbers proved dead on.
Another young economist working during the Reagan years was Paul Krugman one of the supply-sider’s sharpest critics. In a 1982 memo Krugman cast serious doubt that the new policies had seriously ended inflation. He wrote that the low inflation was a temporary result of tight money and high real interest rates. Krugman predicted that the inevitable correction would add five percentage points to consumer prices. He even referred to it as a “conservative” estimate.
Krugman was as wrong as Laffer was right.
If true understanding indicates an ability to predict, then it should be easy to decide who to listen to. Krugman has since received a Nobel prize in economics and continues to express his disdain for the supply side theories that have proved so successful throughout history.
Guess who is writing college text books today? A hint…. It ain’t Laffer.