Commentary Magazine


Supply-Side Economics

To the Editor:

Irving Kristol’s article, “Ideology & Supply-Side Economics” [April], has amusing echoes of the preconditions for any revolutionary economic theory outlined by the late Harry G. Johnson in his neglected book, The Shadow of Keynes. These were: (a) a nasty policy problem, baffling contemporary orthodoxy; (b) a new theory that actually absorbs discreetly as much as possible of the old; (c) sufficient difficulty in the new theory to deter established economists, while keeping it accessible to their younger, hungrier colleagues; (d) a new and appealing methodology—in the supply-siders’ case, a shift from macroeconomic quantitative to microeconomic qualitative; (e) some empirical relationship measuring which will keep quiet the remote but potentially dangerous tribe of econometricians—here the marginal impact of tax-rate cuts on work and saving.

Johnson gloomily concluded that his own candidate, monetarism, would not completely replace Keynesianism, because unemployment would always be more frightening than inflation. But supply-siders offer an answer to the marriage of both—stagflation.

This is not to disparage Mr. Kristol’s remarkable achievement. Intellectual movements necessarily have a human dimension. In fact, he probably understates his theoretical case. Tax-rate cuts do not require compensating revenue re-flows to avoid an inflationary deficit: they can be financed out of the public’s (hoped-for) increased savings. And the demands of opponents that “academic proof” be supplied to back up supply-side predictions reflect the misapprehension that economics is a physical science rather than a rational abstraction whose essential demand is internal consistency.

Still, it’s the supply-siders’ political acumen that marks them as the heirs of Keynes. The self-conscious network of supply-siders in academe and on Capitol Hill, for example, has unmistakable parallels with the New Deal, when a similar faction not only secured the repetition of its policies when they failed—but persuaded voters and historians that they had worked!

Peter Brimelow
Barron’s
Washington, D.C.

_____________

 

To the Editor:

It is hard to disagree with Irving Kristol’s statement that public discourse on economic policy is disgracefully inadequate, especially after reading his article on supply-side economics. I consider the article to be full of misunderstandings, replete with unjustified innuendoes about the economics profession, and in general a triumph of caricature over fact in discussing economic issues.

The most astonishing example of Mr. Kristol’s misrepresentation of economics is his statement that neo-Keynesian theory regards a combination of inflation and lagging economic growth as impossible. Presumably he means by this that from the viewpoint of modern macroeconomic theory, stagflation is impossible. This is an old charge that simply will not wash. It is true that the Phillips curve implies a tradeoff between inflation and unemployment. But it is incorrect to conclude from this, as too many non-economists have done, that rising inflation and rising unemployment (falling gross national product) are impossible from the perspective of economic theory that takes such a relationship into account.

The Phillips curve relationship is only one of a number of factors that have an impact upon inflation and employment. When these other factors are taken into account, it is quite possible from the viewpoint of economic theory to have inflation and unemployment rising simultaneously. Rudiger Dornbusch and Stanley Fischer, for instance, state clearly in their work on macroeconomics that “there is no law of economics which says the inflation rate and the level of output move in the same direction at all times.” . . .

There are a number of other instances in the article where Mr. Kristol misrepresents things: his assertion about the nature of postwar Japanese and German economic policy; his confusion about the difference between gross national product and an economic model; his exaggerated use of certain anomalies in the national income accounts which are of little practical significance; etc.

But to my mind the most serious problem with Mr. Kristol’s article lies in his explanation of the breakdown of macroeconomic policy in the 1970’s. Mr. Kristol would have us believe that this was due to a breakdown of the Keynesian model. But there are, I feel, cogent reasons for believing that the breakdown of stabilization policy in the 1970’s was not a failure of our macroeconomic or, if you will, Keynesian policy tools. The breakdown occurred because of our failure to apply our policy tools properly in the circumstances we faced and because of our failure to recognize their limitations in dealing with the type of inflation we were then encountering. . . .

John Howard Wilhelm
Carlisle, Pennsylvania

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