Here's lesson #1, it's not too long. It's from John L's Supply Side U.
By Jude Wanniski
Memo To: SSU Students
From: Jude Wanniski
Re: Predicting a Victory
A REAGAN LANDSLIDE?
By Jude Wanniski
The presidential campaign will be waged over economic theory and the policies that flow from "demand-side" and "supply-side" theories. Reagan is the first Republican presidential candidate since 1952 to carry the "supply-side" banner. Reagan parallels with Goldwater's 1964 campaign are false; An aggressive Reagan campaign that puts tax-rate reductions and central-bank reform at the center will translate into a Reagan victory and effective control of Congress. The financial markets will respond positively as the scenario unfolds, a bull market getting underway in earnest when the markets gain confidence that supply-side policies will be instituted by a President Reagan. The loss of John Sears was a temporary setback. But President Carter's economic mismanagement plus Reagan's growing confidence in his own platform points to the possibility of a Reagan landslide.
April 1980
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Leonard Silk of The New York Times, the dean of Keynesian economic writers (Lindley Clark, Jr., of The Wall Street Journal being the leading monetarist commentator), began his column on February 29 with the assumption that it would be Carter versus Reagan in 1980. He went on the observation that economic issues would be paramount in the campaign, and the voters would have a distinct choice of economic strategies. Carter continues to rely on policies that flow from Keynesian and monetarist "demand" models of the economy, he said, while "it seems clear" that Reagan has "bought supply-side economics."
The Carter approach thus requires monetary and fiscal restraint (taking money out of people's pockets) to combat inflation, and monetary and fiscal ease (putting money into people's pockets) to combat unemployment. The model provides no simultaneous solution to the problems of inflation and unemployment (you can not put money into people's pockets while simultaneously extracting it, except in a Marx Brothers movie).
The "supply-side" or "neo-classical" model, broadly speaking, uses monetary policy to combat inflation and fiscal policy to combat recession (permitting individuals to keep in their pockets more of what they produce, in the form of hard dollars, thereby encouraging them to produce more).
"The great debate of 1980 could turn out to be demand-side versus supply-side economics -- if the candidates are up to it," said Silk.
This point, "if the candidates are up to it," is the single most important question facing global financial markets this year, especially: "Is Ronald Reagan up to an aggressive offensive on supply-side policy at the center of his campaign for the Presidency?" If he is, and at the same time can diffuse the "warmonger" attack that crippled Goldwater in 1964, Reagan can defeat President Carter. Indeed, he could not only defeat Carter easily, but in proportions that could give the Republican Party effective control of Congress for the first time since Eisenhower's first term. In 1964, remember, the Johnson landslide was built on a platform of economic expansion ushered in by the Kennedy-Johnson tax cuts, which Barry Goldwater and the GOP bitterly opposed, arguing austerity and "fiscal responsibility." Although the terminology was not employed, we can say that the Democrats carried the supply-side banner in that election while the Republicans were demand-siders, a situation that has reversed in 1980. The only other Presidential election since World War II that contained a supply-side banner was in 1952, when Eisenhower vaguely flapped the tax-cut flag urged upon him by Senator Taft of Ohio, a flag Eisenhower shelved as soon as he was elected.
In this ideal scenario, in which Reagan would both attack President Carter's "politics of despair" and ardently press for supply-sider solutions of tax cuts, deregulation and hard money, there are three stages the financial markets must follow in determining whether Reagan is "up to it." The first is the period up to the July convention in Detroit, the second is the period up to the November elections, and the third is the period up to the Inauguration.
ANNOUNCER: Some of our leaders say our country has to stop growing; that our children may have to accept a lower standard of living than we've had. Ronald Reagan doesn't buy that.
REAGAN: This is the greatest country in the world. We have the ability to solve our economic problems...our energy problems -- even our social problems. We have the talent. We have the drive. We have the imagination. Now all we need is the leadership.
"Taxes" :30 seconds
ANNOUNCER: Ronald Reagan believes that when you tax something you get less of it. We're taxing work, savings and investment like never before. As a result we have less work, less savings and less invested.
REAGAN: I didn't always agree with President Kennedy. But when his 30% Federal tax cut became law, the economy did so well that every group in the country came out ahead. Even the government gained $54 billion in unexpected revenues. If I become President, we're going to try that again.
"Good Shepherd" :60 seconds
ANNOUNCER: In the past few years, our income has been eroded by the worst peacetime inflation and the largest tax increases in history. Our leaders tell us that in order to help energy consumers, we have to tax energy producers. And to have lower prices, we have to keep Federal tax rates high. Ronald Reagan doesn't believe that.
REAGAN: If there's one thing we've seen enough of, it's this idea that for one American to gain, another American has to suffer. When the economy is weak as it has been in recent years...everybody suffers...especially those who have the least. If we reduce paperwork and unnecessary regulations...if we cut tax rates deeply and permanently, we'll be removing many of the barriers that hold everybody back. Those who have the least will gain the most. If we put incentives back into society, everyone will gain. We have to move ahead. But we can't leave anyone behind.