The supply-side solution?
By Chris Clancy
When President Warren Harding took office, way back in the 1921, he appointed Andrew Mellon as his Treasury Secretary. Harding set Mellon the task of reducing the huge federal debt from World War I. On paper the solution was simple – increase tax revenue and/or reduce spending.
However, Mellon had a problem with the "increase tax revenue" part of the solution. He later wrote:
He used the example of William Rockefeller (brother of J D Rockefeller) as an illustration. When he died in 1922 his estate totaled $51 million. Of this more than $44 million was in tax-free, tax-avoidance investments
Wiki adds: If the rates were set more reasonably, taxpayers would have less incentive to avoid paying. His controversial theory was that by lowering the tax rates across the board, he could increase the overall tax revenue.
And this is what he did.
Fast forward to 2012 and the RNC. Romney's pick for VP was interviewed by Larry Kudlow. His words could as well have been spoken by Andrew Mellon ninety years before. What Mellon did, and what Ryan proposes to do, are examples of supply-side economics.
For many and varied reasons, supply-side economics fell largely into abeyance from the 1930s until the 1970s. During this period Keynesian demand-side economics was king. By 1980 it was clear that Keynesian economics was seriously flawed and supply-side economics re-emerged under President Reagan.
With few exceptions (eg..Clinton's first term) it remained favoured policy until the onset of the global financial crisis and the election of Barack Obama as President. What happened then was not just a return to Keynesianism, but a lurch to the Left the like of which is still hard to believe.
George Wallace's dictum no longer applies. The GOP and the Dems are now two very different animals trying to head in two very different directions.
In his DNC speech Obama came out with one of his pearls:
Sounds great, and delivered brilliantly, but where is the substance? What "path" is he talking about and what exactly is this "better place"? Is he really saying all he can offer Americans is four more years of the same – that he wants Americans to, "choose that future"?
Whatever in the hell that future is?
A future totally bereft of ideas; throw in a few more billion in QE – never mind where it comes from – then fold your arms, cross your fingers and hope that something good will come of it.
The Romney/Ryan economic plan offers a realistic alternative.
Recovery through real economic growth – not more pie-in-the-sky stimulus spending – not yet more debt.
Critics say what they propose is mathematically impossible – that the reductions in revenue cannot be recouped through growth – the same sort of thing was probably said to Mellon.
Ryan believes sufficient new revenue will be generated if they achieve an average target growth rate of 4% pa in their first term. This, he estimates, will put twelve million people back to work.
Can it be done?
Nothing is certain, but my instinct is that it can. The lack of confidence and weakness in the economy is caused by regime uncertainty – no-one knows what's coming next – least of all the Obama administration.
Therte's no shortage of cash both at home and abroad waiting to find its way back into the US economy. And God knows there's no shortage of talent waiting in the wings to make good use of it.
Given the right incentives, this can deliver Ryan's critical 4% average growth figure.
But only if Romney is at the helm, providing the kind of leadership and direction which the country so badly needs.
Chris Clancy lived in China for seven years. Most of this time was spent as associate professor of financial accounting at Zhongnan University of Economics and Law in Wuhan City, Hubei Province. He now lives in Thailand where he spends his time reading, writing, lecturing and, whenever he gets the chance, doing his level best to spread Austrian economics.