Supply-Side Forum

[Dick_Fox]

INTRODUCTION

We have received permission from the publisher and from Patricia Wanniski to begin a discussion of Jude's masterpiece, The Way The World Works. I will be writing a summary of each chapter with a new posting about every two weeks, but this depends on how the discussion progresses. If there is a particular chapter that generates interest then I will not post a new summary until the discussion has run its course.

The summary will of course leave out portions of each chapter. You are encouraged to get a copy of the book and read the chapters for yourself then post your own opinions. My summaries will be what I see as the most important points Jude makes so at times my interpretation may differ from your interpretation. I encourage you to discuss points I may leave out or points that may differ from your interpretation or opinion. Let's flesh out the essence of Jude's Supply Side theory so that our discussion brings Jude's ideas to life in a real way.

Patricia Wanniski is attempting to put all of Jude's work on line and I told her that we would support her effort. She was very supportive of our discussion of Jude's work so we will be working together.

Thanks to Bob Churchill for all of the work he puts into this site and for his invaluable advice and encouragement.

So enough. Let's get started.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Ed Hanson]

Dick

Please give warning ahead the time you start Chapter 2. I think this is one of the best ideas brought to SSF, but I am procrastinating picking up the book again. I hope that is the reason that others have not vigorously joined in to the discussions with lots and lots of post. This is a very important book.
_________________
Politicians will ask you what you want,
Economists will ask you what you want more.
Ed H

[Dick_Fox]

Ed,

A couple of things.

First, I am planning to post chapter 2 this weekend because of the limited response to chapter 1 and the fact that chapter 1 & 2 are companions in some ways.

Second, Jude has a much more concise and better summary of each chapter printed at the beginning of each chapter in the book. You may not need to reread the entire chapter to refresh yourself.

I am attempting to keep my own ideas out of my summaries but I am sure I will fail at times. Please, keep me honest.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

EdH has asked that I give advanced notice of when I will post the next chapter. I intend to post a summary of chapter 4 this weekend.

I would encourage you to read chapter 4 because I will leave out many of Jude's illustrations. His illustrations are very important in understanding his concepts and I will included some that I think are helpful, but there is much rich material that I simply had to leave out of a summary.

This is an important and instructive chapter in understanding Jude's Supply Side theory of capital and how the political class should think concerning capital especially as it relates to taxes, a topic we will study more in future chapters.

If you do not own the book here is a link to purchase The Way The World Works. Anyone interested in economics should include this book in your library.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I have posted Chapter 5. My summary is about 3 times as long as was my intention, but the chapter was so filled with information I simply could not trim it down. Even with over 1,000 words I have left out what I consider as important information especially Jude's examples.

My approach to the summary was to use generic and general terms. Jude used examples and names. His examples are much more descriptive so I once again encourage you to read the chapter.

If you do not have the book buy it. As I study the chapters I realize even more how important The Way The World Works is to economic literature.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I now have a new computer that makes it easier for me to complete these summaries.

Chapter 6 is perhaps the most important chapter in Jude's book. There is so much information in the chapter that I am breaking it down into three parts. I posted the first part today and intend to post part 2 in two weeks.

As in the past I encourage you to get a copy of the book and actually read what Jude has written. I have left out most of his illustrations. They are a great help in understanding the concepts.

I have to say that coming back to Jude's work I have an even greater appreciation for insights. If it is possible I am even more of a Jude Wanniski supply sider than when I started these summaries.

Enjoy and discuss!
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I have posted Part 2 of chapter 6. I intend to post the final section of chapter 6 in two weeks.

Once again I encourage you to get a copy of the book and read the chapter. Even in three parts I have to leave out fantastic illustrations and discussion. I have attempted to pull the essence of the chapter but I am sure that there are things I have left out that might enlighten you.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I posted Part III of Chapter 6. This is the most importand discussion concerning supply side. Reading through this section you see that nearly all those in the press have no idea what supply side actually is. Both those who attempt to support supply side and those who criticize supply side usually attempt to push the theory into a demand side model.

Supply side gets back to the very fundamentals of why a society organizes and the purpose from a very basic level what is desired. The assumption that money is a magic potion that will cure economic ills is endemic in our society today and the poison of the distortion of the unit of account flows through every policy decision and discussion of economic wellbeing.

Jude ends the chapter recognizing that "contemporary policymakers have been confounded by the obsolete demand model." Our current crisis and the reactions of policymakers makes this abundantly clear. Phillip Swagel has written an expose of how decisions were made in the Bush Treasury Department leading up to the infamous TARP plan. The striking observation that is lost on most is that over and over Swagel points out that policy makers were either confounded or wrong in their analysis, but he does not have the understanding to determine why. The supply side model gives the answer.

As always I encourage you to buy Jude's book if you do not have a copy. A summary simply can only crudely capture the richness of The Way the World Works. The following chapters are examples of how policy makers were confounded in the 20th Century pointing us to errors of today.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I just posted the summary of Chapter 7. This chapter includes Judes outstanding analysis of why Smoot-Hawley was the cause of the Great Depression.

The credit crisis of the 1920s is woefully under-reported - when it is it is usually misreported. To understand the credit conditions that made the Smoot-Hawley tariff so destructive See this article by

Benjamin Anderson
Economist of the Chase National Bank of the City of New York
The Chase Economic Bulletin, Vol. IV, No. 3, August 4, 1924

I also recommend one (or all) of the following books

Benjamin Anderson's Economics and the Public Welfare

Milton Friedman and Anna Schwartz's A Monetary History of the United States, 1867-1960

Garet Garrett's A Bubble That Broke the World
This book can be accessed on line here

Henry Hazlitt's Will Dollars Save the World
This book can be accessed on line here

The parallels to today are very interesting. I will only mention two. I found it typical yet amazing that congressmen on both sides of the issue had such hubris that they believed that their inaction was causing the problems manifest in the stock market declines. It is reflective of the number of times recent actions have been justified with the statement "Well, we have to do something."

I also found it interesting that markets declined when it appeared Smoot-Hawley would be successful. Then when the Senate appeared prepared to stop it the markets rallied. The when the Senate reversed itself and passed the bill the markets tanked. This is a great parallel to what happened with the TARP bill in 2008 in the Bush administration. When the House defeated what was to become the TARP funding the markets rallied, but when the Senate passed the bill and the House reversed itself the markets tanked and the 2008 recession was in full swing.

Then one last observation about the chapter. Jude points out that the Roosevelt-Morgenthau money (gold) manipulation was as destructive as the Smoot-Hawley tariff. Today there is not much talk of tariff protectionism but there has been a huge amount of take about monetary protectionism especially as it relates to China. Do not miss that monetary protectionism is as destructive as tariff protectionism and will have the same impact. For evidence look at this article by Menzie Chinn. There are other trade articles on this site but be aware that Menzie is an avid Keynesian. Regardless the data is important.

As always I highly suggest that you read the chapter from Jude's book. Even with this lengthy summary I have left out much detail that others may find invaluable. And as I have said before Jude's example bring supply side theory to life.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I just posted the summary to the first part of chapter 8. I remembered when I first read TWTWW I was very interested up to chapter 7 but the latter part of the book did not hold my interest as well. Now that I have learned more and studied more, especially about the Great Depression, each chapter has taken on new meaning.

I would like to make a few observations about chapter 8. First, it is interesting that Jude had the foresight to see communist China as it exists today. The direct quote is:

[Dick_Fox]

I just posted the second part of Chapter 8. I have a lot of comments on this posting but do not have time right now to post them all. I will be posting more later.

Let me say that this chapter especially the second part has change my thinking. Jude does rip monetarism but he has helped me understand that it is not the policies of either Keynesian nor monetarists that creat problems in our society. It is the reaction of those in power and the lack of leadership. When leaders do not understand the importance of free trade between individuals. Any actions that either hinder the effects of lubricating media (stable money for example) or create wedges are destructive. It is not always the case that socialism, Keynesianism, nor monetarism cause problems in society.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

In an Econtalk interview on April 27, 2009 Keynesian professor Ricardo Reis of Columbia University made an interesting claim. He stated that the New Keynesians and the monetarists were on and the same page. Ries went on to say that Miles Kimball of Harvard has stated, when speaking of New Keynesians, that differences are between the New Keynesian and the classical models not between the New Keynesians and monetarists. Reis now considers himself a monetarist as well as a New Keynesian. He states that monetarists talk of imperfect information while New Keynesians speak of sticky prices, two sides of the same coin. I wonder how many people know that Jude made this observation in 1978 in the midst of the battle of words between the monetarists and Keynesians.

In Chapter 9 Jude is clear about the theoretical base of monetarism, money illusion, and how close it is to Keynesian bond illusion. The differences between monetarism and Keynesianism are more a matter of degree than substance.

Additionally Jude makes the obvious observation that the monetarist’s solution suggested after the Great Depression was in fact the policy that Roosevelt followed based on the theories of Irving Fisher. Monetarists even recognize that these policies do not work in the real world, but they continue to make these policy recommendations.

But perhaps the one point that Jude makes that has me reevaluating my approach to economics is that neither Keynesian theory nor monetarist theory is the problem. The problem is that when and economic scheme fails the frustration of those in the school of thought work not to change their theory but to change the world.

The classical system, especially as it is manifest in supply theory, is not powerful because it gives us a plan to be implemented but because it calls for freedom and integrity in economics. What supply theory does give us is a very simple tool to determine whether we are helping or harming the economy and that is the Laffer curve. From chapters 8 and 9 it is clear that Jude did not see the Laffer curve limited to tax rates thought he does talk of it in terms of taxes. Jude recognized that excessive spending actually moves the economy into the prohibitive range of the Laffer curve because the electorate understands that excessive spending must be paid for with future taxes, just as the Keynesian solution of issuing bonds must be paid for with future taxes, just as monetarist theories of inflation, whether 2 or 4% as recommended by Friedman, or 6% as recommended by Mankiw and Rogoff, act as a future tax.

I am in the process of trying to move my thinking from a Keynesian/monetarist way of thinking about the economy to a freedom way of thinking about the economy as it is reflected in the Laffer curve. Going back through The Way the World Works has shown me how easy it is to fall into the thinking that has been programmed into us through the media. Supply side theory is revolutionary in more ways than one because it actually requires a “born again” experience to actually change your way of thinking from the inside out.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Judith]

from Dick:
"But perhaps the one point that Jude makes that has me reevaluating my approach to economics is that neither Keynesian theory nor monetarist theory is the problem. The problem is that when and economic scheme fails the frustration of those in the school of thought work not to change their theory but to change the world.

The classical system, especially as it is manifest in supply theory, is not powerful because it gives us a plan to be implemented but because it calls for freedom and integrity in economics. What supply theory does give us is a very simple tool to determine whether we are helping or harming the economy and that is the Laffer curve. From chapters 8 and 9 it is clear that Jude did not see the Laffer curve limited to tax rates thought he does talk of it in terms of taxes. Jude recognized that excessive spending actually moves the economy into the prohibitive range of the Laffer curve because the electorate understands that excessive spending must be paid for with future taxes, just as the Keynesian solution of issuing bonds must be paid for with future taxes, just as monetarist theories of inflation, whether 2 or 4% as recommended by Friedman, or 6% as recommended by Mankiw and Rogoff, act as a future tax.

I am in the process of trying to move my thinking from a Keynesian/monetarist way of thinking about the economy to a freedom way of thinking about the economy as it is reflected in the Laffer curve. Going back through The Way the World Works has shown me how easy it is to fall into the thinking that has been programmed into us through the media. Supply side theory is revolutionary in more ways than one because it actually requires a “born again” experience to actually change your way of thinking from the inside out."

Yes, yes, yes! Very well stated Dick.
It seems that the electorate wants the 'best' redistributionist until the next: "The leader who finds the way to push the economy down the Laffer Curve will find success that will surprise the political class, whether that leader is Democrat or Republican".

I want that leader now!

Meanwhile we are stuck with a bunch of economists and ~leaders~ who are trying to change the world. Makes me think of that mythological story about the guy who had to keep pushing that boulder up the hill, only to have it roll back down again.......

[Dick_Fox]

I have posted the first part of chapter 9. The most interesting thing about this chapter for me is how nations rise and fall based on their response to Laffer curve signals. Throughout history there have been brilliant people who understood the implication of the Laffer curve intuitively. These leaders were great success stories, the greats of history. But those who fail to heed the warnings of the Laffer curve almost always fail, I say almost because there are those like Musollini who did not understand why his nation was successful in the 1920s but was lucky enough to choose a finance minister who did.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I jsut posted part b of chapter 9 with part c to follow. As with other chapters, chapter 9 is so rich in material that I was forced to split it into three parts.

In the chapter there are things that Jude implies but does not explicitly say. For example he implies that the income tax is actually a better tax vehicle to respond to the Laffer curve than most other options especially tariffs. Attempts to use changes in interest rates and money supply have created havoc in our economy. On the other hand changes in the tax code can easily be made when it appears there is a need for revenue. Using the tax code as a tool congress can immediately reduce income taxes driving the economy down and out of the prohibitive range of the Laffer curve.

Jude also makes the point that the United Nations is useful in that it is a mock government that forces the United States to face world opinion. Had this been available at earlier times we may have evaded the horrible wars of the 20th Century. I still have reservations concerning this suggestion. The United Nations did not prevent the United States from violating its word concerning the Bretton Woods agreement nor did it prevent the United States from engaging in wars in the latter half of the 20th Century: Korea, Vietnam, or the Gulf wars.

Jude also points out in this chapter that Keynesian policy failed during the Great Depression yet supply side/classical policies succeeded when Keynesian policies were rejected after the war. But my observation is that with Keynesians so deeply embedded in economic academics, in government, and in the media, Keynesian ideas permeate all economic discussions and require constant refutation.

Going back through Jude’s book in much more detail than my first reading I find that I am reevaluating many of my economic positions. I now realize how weak Keynesian and monetarists policies actually are in changing the economy and that the most disastrous economic events have actually been caused by those who attempt to force their expected results through the abuse of government power.

Remember nothing can replace reading the book for yourself.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I just posted the last section of chapter 9. Jude has expanded on the supply side model with real examples then he ends chapter 9 with the question "What went wrong?"

It is amazing to me that the politicians could see the problems but seemed to never be able to discern solutions. In the 20th Century the most elaborate systems were designed in an attempt to control the economy yet as each system was implemented it failed and the economy only returned when the decision makers stepped aside to plan their next actions for the economy. They never connected the dots that when they were planning and doing nothing the economy recovered, but when they implemented their plans the economy declined.

In chapter 10 we will see this repeated once again as Bretton Woods is adopted by the nations of the world. Most intuitively understood the problems but few understood the answers. The result is that over time Bretton Woods fell apart. Not until Ronald Reagan are there real pro-growth policies.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I have posted the first part of chapter 10. Jude draws a contrast between the monetary policy of the Jacksonian error and the Bretton Woods Agreement that makes Bretton Woods much more understandable.

It is amazing how in a few short years there was no one a position of authority who understood monetary policy. The short success of Bretton Woods was almost an accident.

But Jude also demonstrates that over and over protective tariffs bring on economic contractions and the protective intentions actually lead to worse problems than the problems that are being addressed.

Ther is much in these pages that will help readers understand our current situation.

Once again let me encourage you to read the chapter for yourself. The examples Jude uses are priceless in helping understand the concepts.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

A summary of second part of chapter 10 has been posted. I will be posting a third summary of chapter 10 in two weeks.

Reading through Jude’s narrative of the 1960s and 70s really brought back memories. I vividly remember the “British Disease.” There was intense discussion of the British "brain drain" and while the British ruled rock n’ roll the artists were all migrating away from high British taxes following the lead of the Beatles when the very publically made it clear that they were moving to the United States because of high British taxes.

I also always wondered why Democrats started the now infamous entitlement programs. It seems obvious now that such policies eventually bankrupt a nation, but Jude explained the reasoning and it made sense. Liberal Keynesians believe that an economy is stimulated by deficit spending. How better to perpetually stimulate the economy than with entitlement spending, budgets arrive with a built in deficit.

Jude also explained how it is that the Democrats became the liberal Keynesian party and the Republicans became the conservative Keynesian party. When this is understood it is much easier to see why the two parties come up with their polices. While Republicans are identified with tax cuts, as conservative Keynesians their “cuts” are simply Keynesian transfer payments redistributing wealth. The most obvious being the contrast between the first Bush Keynesian tax cut and the second Thomas supply side tax cut.

Today sadly supply siders do not have a political home. We find ourselves fighting both sides as we attempt to influence policy toward the supply model.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I have posted the last section of Chapter 10. This section details the final actions that caused Richard Nixon to blow up the Bretton Woods Agreement. I left more out of this summary than I have others, especially the excellent analysis of the major industrialized nations of the world and their involvement in Bretton Woods.

In the chapter Jude points out that the state banks during the Jackson presidency expanded the money supply funding imports. The foreign monetary authorities redeemed the excess bills at the 2nd Bank of the United States for specie. Nicholas Biddle, the president of the bank, forced the state banks to reduce their bill issues.

Then in 1971 Arthur Burns increased the money supply to fund a projected economic expansion. The banks used the currency to underwrite imports. The foreign banks then returned the bills to the United States in exchange for gold and forcing Nixon to close the gold window destroying the Bretton Woods Agreement.

That brings us to the mid-2000s. The Federal Reserve under Alan Greenspan expanded the money supply and lowered the effective Federal Funds Rate to 1% in November 2003. As with previous monetary expansions Greenspan's also funded imports, especially from China. Because we were not on the gold standard, the return dollars did not got to the Treasury in exchange for gold but were used to purchase Fannie Mae and Freddie Mae credit instruments as well as t-bills. This providing the fuel for the real estate bubble. The parallels are sadly amazing. The more things change the more they stay the same.

In the summary I did not go into detail on the international impact of the breakdown of Bretton Woods and progressive income taxes, but while most industrialized nations had a decline in GNP in 1974-75 Canada had an increase in GNP. Canada indexed their tax brackets preventing the taxpayers from climbing up the Laffer curve.

More than ever it is important to read chapter 10 in TWTWW.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I have just posted the first part of Chapter 11. Again over and over as I reread the chapters, passages jump out at me as if Jude is describing what is happening today. It is amazing how governments seem to make the same mistakes over and over.

In Chapter 11 Jude points out the common political mistake of confusing cause and effect concerning British prosperity and the construction of railroads, but it occured to me that this confusion flows naturally from the demand model. Rather than seeking to discover what creates growth, the demand model seeks to discover what enhances "consumption" and naturally settles on redistribution from "savers" to "consumers" as the solution. Also because growth creates the capital that provides the consumer with the abiltiy to consume, the demand model confuses the distribution of capital with growth.

Because redistribution requires forcefully taking from one individual to give to another, as Keynes wrote in his German version of "The General Theory," a strong central government is better suited for central planning and control. This also leads to decisions of production and redistribution to be driven by political rather than economic considerations. This inevitably leads to the misallocation of capital away from production and growth.

Jude also points out that foreign aid uses similar incentives as Johnson used with his Great Society. Countries are offered foreign aid provided they raise a portion of the funding through taxes, and the construction is done by US firms with financing by US banks. Countries accept unnecessary infrastructure construction projects fearing that if they do not take the aid it will go to competing countries. The result is higher taxes on the domestic producers and higher debt to US banks.

Then when the economy falls into contraction economic advisors, banks, and the IMF agree to loans to "bail out" the troubled economy provided the government: 1) balances its budget, meaning reduced spending on more beneficial domestic projects, or while maintaining high or increasing taxes to pay the debt to US banks for the questionable infrastructure projects, and 2) devaluation of the currency (leading to inflation and higher taxes because of progressive tax structures) under the theory of increasing exports.

This will be discussed in greater detail in the next part of Chapter 11.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Dick_Fox]

I just posted the second half of chapter 11. It is interesting and very important when looking at today's world. As Jude describes the problem that faced the third world after Bretton Woods collapsed you can see how the US is making the same mistakes today.

Referring to the book review by Sean Rushton and his comments on Mundell seeing the conditions for prosperity one has to ask if the people in Washington are so blind that they cannot see the same thing. Are they destroying the economy on purpose? If so what purpose?

One other very interesting line in the chapter is the discussion of Vietnam. Jude's analysis of the economic problems of Vietnam leading to the conflict that has tainted our nation for over a generation.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek

[Robert P. Churchill]

While some of Jude's actions were known to elicit well-deserved frustration, I always thought his analyses in this vein were outstanding, among the most original out there. He repeated the same analysis in association with the Balkan conflict of the 90s and his explanations worked as well or better than anyone else's I ever encountered. That may be a highly naive interpretation on my part, but that's my starting point for now.
_________________
Where are we going and why are we in this handbasket?!

Churchill's First Law of Caffeine: If you're not visibly quivering--you can have more.

[Dick_Fox]

I just posted the first half of Chapter 12. As I completed the summary of this chapter my mind drifted to the situation in Zimbabwe and how much of what Jude wrote about Puerto Rico was played out in Zimbabwe to the extreme.

But I also saw our current economic conditions in the economic troubles that Puerto Rico faced and I see our own economic experts making the same mistakes that Jude discusses.

This is a very interesting chapter because Puerto Rico does not have an independent monetary system and so relies on the dollar.
_________________
"We must make the building of a free society once more an intellectual adventure, a deed of courage."
F.A. Hayek