Brian Domitrovic’s Econoclasts documents the rise, implementation and success of the supply side economic theories that launched the Reagan revolution. The theory that developed from Robert Mundell and is often associated with Arthur Laffer, generally states that a policy of stable money and low taxes is the key to a successful economy. The Phillips curve which noted a tradeoff between inflation and unemployment dictated the disastrous policy of the 1970’s and was discredited by the stagflation most noted under Jimmy Carter.

Looking back on the last 100 years only four presidents got the policy mix right: Coolidge, Kennedy, Reagan and Clinton. In every case economic growth resulted.

Calvin Coolidge

But what happened under George Bush?

The tax cuts of 2001 and 2003 made for a mini boom but the other half of the mix, stable money, never came. Money was too loose sending commodities like gold and oil to record levels. The loose money also fed the housing boom and bust, not to excuse the banking industry’s lousy judgments and activities.

In 2006 and 2007, the Fed started to increase the interest rates, but at the same time the voters were expecting the 2003 tax cuts to expire, especially as the Democrats eventual victory became clearer. In the light of the financial collapse that the voters were blaming more on the greed of the wealthy than the incompetence of the government, few expected the tax cuts to remain.

George W. Bush

Thus on the eve of the election the policy mix was tighter money and the expectation of higher taxes; the opposite of the recipe for success that Mundell and Laffer enacted under Reagan.

The ensuing contraction served to expose the reckless leverage and incompetent regulation that had infected the financial system.

Assuming the tax cuts were the cause of the crash gets it wrong; it was the expectation of the tax cuts expiring that helped bring the recession on. The tax cuts succeeded in increasing revenue, but Bush failed to control spending, and the Fed failed to stabilize the dollar.

The current administration seeks to throw out what worked and double down on what failed. Arthur Laffer’s expanded formula is:

Sound money
Low taxes
Low regulations (I would clarify that as consistent and clear regulations)
Free trade

Unfortunately this administration is headed in the opposite direction.

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