Supply side won't save us this time

David Frum has an interesting review on the Frum Forum on Bruce Bartlett's book The New American Economy.

Bruce Bartlett was one of the original supply-siders. He shows that in the 1970's and 80's, three US Presidents (Nixon, Ford, and Carter) had all tried, and failed, to effectively fight the sluggish economy and high inflation of the time.

At the time, most economists were saying that a recession and inflation cancelled each other out and couldn't exist at the same time, even if the reality was disproving the theory.

A small, "dissident" group of economists came up a way to fight non-inflationary growth: supply-side economics. And it worked. "Carter's Recession" as Reagan called it, ended, thanks largely to supply side economics.

But Bartlett argues further that supply-side is not a cure all. It was a cure for the '70s and '80s stagflation. Supply side economics were "...elegantly designed to counter stagflation. Other problems required other solutions. And boy, do America and the world now face other problems: deflation, debt, and the failure of economic growth to translate into rising incomes for most Americans."

I like the way Frum ends his review:

"A free-market economic policy for our time would stress reflation to combat deflation and a payroll tax holiday to spur job creation. It would propose health reforms to control costs and thus boost middle class incomes and slow the rise in government spending. It would, as Bartlett has done, call for consumption taxes to balance the budget and avert the payroll and income tax increases that will otherwise befall.

Such a policy would depart from present conservative orthodoxy. But the supplysiders departed from the conservative orthodoxy of their day, and we admire them for it! We do not honor them by refusing to emulate them."