Book Reviews

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Supply Side Economics WHEN John Maynard Keynes pro posed "government investment" as the cure for a sluggish economy, he thought of it as a flywheel. It would have a "multiplier effect" as boon doggle or bail-out money moved into consumption that might turn up as investment the second time around. But the Keynesians failed to reckon with the. fact that "divisor effects" might be more powerful in the long run than anything coming from the multiplier. Keeping a marginal farm going might sell a few hoes, maybe even a second-hand tractor. But it also might divert perfectly good in vestment money into sterile subsi dies that would deprive some inven tive soul somewhere of the capital needed to start a new business. For years, in pushing the "aggre gate demand" resulting from the combination of government and private spending, the Keynesians quite overlooked the impact of their poli cies on supply. l1hey did not see the distortions in pri¢es that were caused by inflation and. high taxes. And so they ran us into ahigh-cost economy in which the tax "wedges" and the bite of inflation <jlestroyedmore pur chasing power til-an they created.

Thus the stage was set for the emergence ofthe!"supply siders." The phrase may be :$isleading: econom ics' being fluid, qannot afford to for get that supply apd demand are both parts of an integral process. But af ter forty years of pumping up "ag gregate demand" by policies that have severely l!estricted entrepre neurship, it is time that someone should speak u.p for the tax-ha rassed and infl~tion-bedeviled pro ducer. To explain the current situation, 001 382 THE FREEMAN June six economists have collaborated on a stimulating though sometimes cloudy book, Essays in Supply Side Economics, edited by David G. Ra boy and with a foreword by Edwin J. Feulner, Jr. (Published by the In stitute for Research on the Econom ics of Taxation and the Heritage Foundation, 173 pages, $5.Q5. Available from IRET, 1725 K Street, N.W., Washington, D.C. 20006) Feulner, the head of the Heritage Foundation, says in his foreword that the conviction that supply side the ory will work "is for most people a matter of intuitive knowledge." But, aside from Jack Kemp and a few others, we don't send people to Con gress who are long on intuition. We need something to combat what Feulner describes as "the miscon ception that supply side economics is a political movement with little or no economic theory behind it."

Origin of the Concept The second essay in the book, written by David Raboy, traces "the theoretical heritage of supply side economics." Logically, this essay should have come first. Raboy, who is director of research at the Insti tute for Research on the Economics of Taxation, thinks "supply side" is more or less synonymous with clas sical economics in general. The sup ply siders believe that saving is the driving force of investment, and that without investment there can be no increase in real wages. This is what Adam Smith believed. J. B. Say, the French economist, was a supply sider when he argued that the overall level of demand in an economy is depen dent on the level of output and that as investment and production in crease, so will demand. (This is often summed up as "production creates its own purchasing power," which is obvious when you consider that pro duction pays wages and dividends that go into the stream of spending and new investment.) J. B. Sayan ticipated John Stuart Mill, another classicist, when he said that when any transaction is finally closed, it will be found that one commodity has been exchanged for another. Money, when untampered with, performs a neutral role-sales, according to Say, "cannot be dull because money is scarce but because other products are so." It is the multiplication of the "other products" -the supply side that keeps the economic process going.

The "marginalists" -Carl Men ger, Stanley J evons, Leon Walras, John Bates Clark-were all supply siders, as were Alfred Marshall and Vilfredo Pareto. "Menger's analy sis," says Raboy, "provides a crucial building block for supply side eco nomics ... economic decision mak ing occurs at the margin. Then the way in which taxes, monetary the ory, or government spending will af fect economic behavior depends on 1982 SUPPLY SIDE ECONOMICS 383 their effects at the margin, on the valuation of activities or commodi ties." Impact of Inflation on Taxes and Productivity In the opening essay, "Supply Side Analysis and Public Policy," Nor man B. Ture, whp is Undersecretary of the Treasury for Tax and Eco nomic Affairs, says the pertinent question "is how changes in real ag gregate demand can occur without a preceding change in total output." Taxes, of course, alter relative prices or costs. High taxes, reflected in prices, can change the whole "effort leisure tradeoff." Ture provides an intricate analysis of the drag on the economy that comes with Keynesian stagflation. Inflation, he says, aug ments the existing tax bias against effort and saving "by increasing the real marginal rates of income tax."

Mai Nguyen Woo, a research as sociate at the Institute for Research on the Economics of Taxation, de velops some of Ture's insights in her essay on "Taxation, Savings, and Labor Supply: Theory and Evidence of Distortions." Constructively, she offers a theory that a tax on con sumption would be a great improve ment over our present "hybrid" tax system that penalizes capital for mation. The remaining essays in the book are rather specialized. David G. Tuerck, formerly with the American Enterprise Institute, talks about "Rational Expec~ations and Supply Side Economics~ Match or Mis match?" He concludes that taxes "distort relative prices by forming a wedge between the price offered by buyers and the 'price received by sellers." This discourages employ :ment "by forcing the worker to hand over to government part of the wage employers offer f@r his services." Richard E. Wa.gner, who teaches at Florida State University, dis cusses "The Enteirprise System, De mocracy, and th~ General Welfare: an Approach to llteconciliation." He makes a distinction between "spe cial interest" de~ocracy and what he calls "consensual" democracy. The "consensual" deJ.I1locratwon't object to government ~pending for "gen eral" benefits sqch as police, fire, sanitation, recre<ition and transpor tation. But, after! digesting the sup ply side messag~, the consensual democrat will oppose "the use of government as a'l vehicle for trans ferring wealth."

Finally, Naom~ R. Lamoureaux, a professor of histQry at Brown Uni versity, offers an essay called "From Antitrust to Supply-Side Economics: The Strange History of Federal In tervention in the Economy." She notes that the "regulatory functions of government", have "destroyed business initiative and diverted the allocation ... of resources away from their most productive uses." i 384 THE FREEMAN EVERYTHING YOU HAVE: THE CASE AGAINST WELFARE by Jerome Huyler (The American Declaration, PO. Box 324, Brooklyn, NY 11219),1980 268 pages - $4.70 paperback Reviewed by Brian Summers THROUGHOUT our nation's history, there have been people who used the government for their private advan tage-a tariff here, a land grant there, a subsidy or two. But until recent decades, such special privi leges were limited to a powerful few. What has been the exception, however, is rapidly becoming the rule. Where Americans once sought a fair field with no favors, their de scendents now demand special ben efits.

This ever-widening system of leg islated privilege, Jerome Huyler shows, is destroying the American dream and bringing our economy to its knees. One man's special benefit is another man's burden. As these burdens have grown beyond the tax payers' willingness to pay, the fed eral government has resorted to def icit financing. When these deficits are monetized, prices tend to rise. And when the Federal Reserve System responds by tightening credit, the economy is plunged into a recession. But the price we pay for welfare exceeds all the taxes, all the Federal deficits, and all the jobs lost through inflationary recession. We also are losing our liberty. What the govern ment subsidizes it soon controls, as Huyler illustrates with the Medi care/Medicaid system. When these subsidies lead to rising prices, every American is threatened with con trols over his wages, prices, and the allocation of essential goods and ser vices. What begins with compassion ends as coercion.

Huyler completes his case against welfare by appealing to the concept of human rights. In some of his most compelling passages, he shows how the welfare state, imposed in the name of human rights, violates the rights of the benefactors while it drains ambition and self-esteem from the beneficiaries. These recipients, reduced to a life of dependency, are the ultimate victims of welfare. And, Huyler concludes, it is the truly needy among these beneficiaries who would best be served by private phi lanthropy. Ii the Freeman VOL. 32, NO. 7 • JULY 1982 Dear America Leonard Franckowiak 387 In praise of liberty. Pay More and Get Less P. Dean Russell 390 How to be hurt by a "favorable" balance of trade. Reaganomics and the Interest Syndrome Elgin Groseclose 395 A money of substance rather than perpetual debt. The Cure for Unemployment Roland WJ Holmes 398 Curb intervention and trust open competition.