Few historians have the chance to write a history of something no one else has ever written about.
For Brian Domitrovic, an assistant professor of history at Sam Houston State University, writing Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (ISI Books, 2009) was that chance.
For readers it is a chance to learn about the economists, newspaper columnists and editors, lawmakers, and others who helped bring about the “supply-side” revolution in economic thinking that President Ronald Reagan embraced to shake the country out of the economic malaise of the 1970s. That decade’s chief economic feature was “stagflation,” a combination of high inflation, high unemployment, and economic stagnation.
“I had been thinking about this topic since the Reagan years, since I was in high school,” said the 41-year-old Domitrovic. “Throughout the late 1980s and ’90s I maintained an interest in supply-side economics. When I decided to write the book in 2005, I had done the background reading. It was a matter of doing the archival work.
“It was fun because I just had to write a narrative. I realized I didn’t have to worry about others’ original scholarship, because no one has written on this. It was just go to the Hoover Institution [at Stanford University], look it up, and write it.”
Familiar and Obscure
Some of the thinkers and writers from those days are well-known, such as economist Arthur Laffer, whose “Laffer Curve” illustrated how rising tax rates can result in less government revenue and vice versa. Others, such as Robert Mundell, are not widely known but exercised tremendous influence.
“I just read an article in the New York Daily News on a speech Mundell gave in 1971. He predicted with perfect accuracy the stagflation decade,” Domitrovic said. “He wrote hundreds of articles, yet there was almost nothing in the historical scholarship” regarding his work.
Economics might be known as “the dismal science,” but this is a lively book, largely because Domitrovic steers away from musty economic theory. He explains economic concepts in ways someone with no economic training can understand, and his focus is on the ideas and personalities behind them, and how they came to carry the day, bringing inflation down and sending employment and prosperity up.
“The Reagan revolution produced a 25-year run of prosperity. It’s in this current crisis when the free market and Reagan have been thrown under the bus,” Domitrovic said. “One thing that scholarship and economic punditry have not done is translate economic concepts into the everyday vernacular. It’s one of the great reasons we, as a nation, are largely economically ignorant.”
Low, Simple, Sound
In doing his research Domitrovic learned the foundation for supply-side economics had been laid long before anyone had heard the term. He said the lessons of the book include the importance of low tax rates, a simple tax system, and sound money.
“At one point in the book, I point out when economies function well, you won’t find an economist around,” he said. “We saw this in the 1800s. There was no reason for there to be economic explanations. If you saved money for retirement in 1840 and took it out of a jar in 1880, it was worth the same. Now in these days of inflation and high taxes, you have to be a genius to figure out how to save for retirement.”
He places much of the blame for this on two events in 1913: the creation of the Federal Reserve and the imposition of the federal income tax. Fed policies have slashed the value of the dollar, and the income tax has hindered wealth creation and redistributed wealth that is created.
“The most vicious effects of taxation and inflation have been on the lower-income groups,” Domitrovic said. “The rich know how to hide income. One of the primary hedges in the 1970s was to buy life insurance. Life insurance pays dividends not subject to tax.
“Warren Buffett is one of the biggest sellers of life insurance,” Domitrovic added. “His business boomed” from government policies that hurt millions of people. Buffett is the multibillionaire owner of Berkshire Hathaway, a holding company with various subsidiary companies, including insurance company GEICO, perhaps best known for its commercials featuring the GEICO gecko and others featuring modern-day “cavemen.
Lessons for Today
Domitrovic said the lessons learned in the 1980s should be applied today.
“The American people are far smarter than their leaders, but that competition is not a stiff one,” he said. “The Obama stimulus plan is laughable. [Federal Reserve Chairman] Ben Bernanke’s monetary policy is in blatant violation of almost all consolidated wisdom in economics. I entirely reject the thesis that the American consumer was irresponsible” for the real estate collapse and current economic crisis.
“It was for one reason only that consumers behaved as they did and invested so heavily in real estate,” Domitrovic said. “The Fed kept interest rates negative in real terms. The only logical response was to hedge that in land. The government demanded that consumers take out housing debt. The sins are all on the government’s side.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.