The Seven Fat Years and How To Do It Again.

How the prosperous eighties came to be--and how we can get back there

Let me make one thing clear at the outset: I believe in low marginal tax rates. In fact, they are one reason I'm willing to write this review for a not-so-princely sum of money. There was a time, just over a decade ago, when various tax authorities would have collected the lion's share of the proceeds--provided, of course, that I had bothered to write the piece at all. Today, thanks to the tax-rate cuts of the eighties, I will part with only a lion cub's share of the fruits of my labor. And for me, the government, and the economy, therein lies a world of difference.

It was with that bias that I turned to this retrospective look(*1) at the U.S. economic boom that took place from 1983 to 1990. I assumed, as would any regular reader of The Wall Street Journal's editorial page, which Robert Bartley commands, that this book would be a stirring apologia for America's brief walk on the supply side. Bartley doesn't disappoint: His thesis is that the mix of tax cuts and tight money the supply-siders advocated almost singlehandedly produced the Seven Fat Years of his title. Moreover, at least Seven Lean Years will probably follow, because America has strayed from the one true path.

My advice, updating Abbie Hoffman to the eighties Bartley so loves: Buy this book--and then deduct the purchase price, if you can. Not because this is the definitive account of what triggered and sustained America's longest peacetime expansion; that will be the work of a far more disinterested observer. And not because Bartley's analysis of almost any subject he tackles, whether the federal budget deficit or the S&L scandal, is flawless. Rather, the reason to read this book is that it contains vital seeds of economic truth that must be digested by anyone genuinely interested in improving the well-being of Americans. Among them: Taxes and tax rates aren't everything in a market economy, but they still matter. Capital formation isn't everything, either, but it matters a lot. Economic statistics may be accurate, and still be misleading and meaningless. And federal spending is truly out of control--a "coast-to-coast soup line," as David Stockman put it in 1980, before he became Reagan's budget director.

Above all, Bartley's book conveys a message that seems especially noxious to most liberals, but shouldn't be. It is indeed possible to conceive of a period of economic growth that could benefit a broader cross section of American society than the eighties did. But as The Seven Fat Years suggests, no one has yet figured out a way to really help the poor and the middle class over the long run without markedly benefiting the holders of capital--a.k.a. the rich.

Granted, a determined reader has to wade through plenty of pages of Bartley's own palaver to find these truths. The book uses the tired old device of the man from Mars who lands on earth in the mid-nineties and wonders why so many Americans are predicting the apocalypse when things seem to be going so well. And the many self-serving excerpts from Bartley's own editorials are a bit excessive even for a journalist. There is even some supply-side Bible analysis in Bartley's book: He suggests that the "seven fat years" originally described in Genesis ended because Joseph, who had prophesied them, shook down all of Egypt for most of its money and goods. In other words, blame it on "Joseph's confiscatory tax policy." What a knee-slapper. This sort of thing must have passed for humor among the founding fathers of the supply-side movement as they knocked back their cocktails.

Supply sliders 

The core of Bartley's book is nonetheless a compelling account of what buzzed in the brains of this crowd as their thinking evolved in the late seventies and early eighties. Much of it did, in fact, take place over cocktails; indeed, Bartley and the rest of the supply-side gang, including economists Robert Mundell and Arthur Laffer, formed a kind of pro-market, gin-swilling Bloomsbury Group, debating economic theory at Michael 1, a pseudo-swish lower Manhattan restaurant that I recall as being heavy on the Naugahyde. Actually, Bartley eschews the phrase "supply side," coined in derision by mainstream economist and Republican eminence grise Herbert Stein. He prefers "new classical economics," apparently to play down the aura of faddishness and more firmly establish the movement's links with pre-Keynesian classical economists like Jean-Baptiste Say.

Indeed, the popular interpretation of Say's famous law--that supply creates its own demand--provided the primary ideological basis of the thinking going on at the Michael 1. In other words, markets consist of people wishing to make purchases as well as sales, and nothing can ever be produced that will not be sold if the price is low enough. "Unless the government gets in the way, for example by fixing prices, markets will clear and everyone will live happily ever after," Bartley writes. The key to economic growth is thus to stimulate the production side, rather than letting the government fool around with boosting demand, as John Maynard Keynes advocated during the massive unemployment of the Great Depression.

The Michael 1 crowd whipped up its own unique brew by blending Say's law with unrelated strains of economic thought. Seizing upon so-called rational expectations theory, they argued that multi-year tax cuts would prompt investors to sink money into markets on the basis of an expectation of lower tax rates in the future. These optimistic bets would trigger so much additional output that, instead of inducing more inflation and higher interest rates, the tax cuts would actually be "self-financing." Bartley insists that this didn't mean the tax cuts would actually produce higher tax revenues--the extreme version of the "rosy scenario" that became the mass-market take on supply-sidism. Rather, it meant that higher output would create a broader pool of wealth and savings that would allow the resulting higher deficits to be readily financed through government borrowing.

What's more, though the supply-siders weren't orthodox monetarists focused narrowly on money-supply measures, they nonetheless embraced tight monetary policy--preferably engineered through a "price rule," or the targeting of specific prices for sensitive commodities like gold. This enthusiasm for tight monetary policy helps to explain why the portrait Bartley paints of former Federal Reserve chairman Paul Volcker, who kept a tight grip on the money reins for most of the eighties, is positively hagiographic.

Yet ideas like these needed an even more powerful champion than St. Volcker if they were to be transformed into public policy. The champion who emerged was Ronald Reagan. Bartley's depiction of Reagan is far more detached, however, than his adoring portrayal of Volcker. Bartley even takes pains to distinguish supply-side policies from Reagan-omics, perhaps because Reagan eventually signed onto tax hikes that, among other things, actually increased taxes on capital. The one exception to Bartley's generally lukewarm view of the former president is his insistence that Reagan actually remembered much of the economics he supposedly mastered as a student at Eureka College in the thirties. If so, this is a mighty testament to the power of long-term memory, since a few years later Reagan couldn't recall even major episodes in the Iran-contra scandal.

At any rate, beginning in 1981 under Reagan and Volcker, the tax cuts and monetary policy that the supply-siders espoused were gradually implemented. It is intriguing to read Bartley's explanation of why the magic the supply-siders predicted didn't happen instantly--and, in fact, why what followed was the deepest and longest recession American had experienced since the thirties. First, there was a "timing mismatch": Volcker was bearing down hard on the money supply at just about the same time that Congress passed Reagan's deep cuts in income tax rates. Then, too, out of fears of looming deficits, the actual 25 percent cut in tax rates was stretched out over four years instead of over the planned two and a half. Because of offsetting "bracket creep," the tax cuts didn't really pack much punch until 1983. It's a darn shame, Bartley writes. "If the tax policy had been bolder, if it hadn't been diluted by fear of the deficit, it's likely the recession could have been avoided."

The end of this saga is a well-known story. The "hellacious deficits" that resulted did prove self-financing, if by "self" you're willing to include the entire world. Investors rushed in from all over the place --fortunately for us, the Japanese had already done considerable saving--to take advantage of real interest rates on Treasury securities that had reached all-time highs. The dollar soared in relation to foreign currencies, clobbering America's export industries, a reality that the Reagan administration ignored for several increasingly painful years. And a massive trade deficit, the direct consequence of the investment inflow, so inflamed protectionist sentiments that it set back U.S. trade policy for a decade. Oh well. In spite of everything, we got seven years of growth that added the equivalent of the 1980 West German economy to American output by the end of the decade.

While Bartley is expansive in his description of the glories that accompanied the boom--a bull market in venture capital, the flowering of the biotechnology industry--he ignores or skimps on the other important factors that fed it. The Carter-Reagan defense buildup gets almost no attention, even though it explains much of the growth that took place in Southern California and New England. There's little discussion of stretched-out depreciation schedules enacted in 1981 and how they triggered a fantasy-land boom in real estate development.

Bartley doesn't even really bother to refute noted Keynesian economist Robert Eisner, whom he cites as having made a persuasive case that the Reagan deficits constituted Keynes' old-fashioned demand-side stimulus cloaked in supply-side rhetoric. What's more, Bartley's discussion of today's record deficits seems naive, notwithstanding his legitimate attack on runaway government spending. His simplistic solution is to give the president a line-item veto so he can strike out silly expenditures laid on by Congress. But the real time bombs lurking in the federal budget are popular entitlement programs like Medicare and Social Security, which not even the Bush administration will touch with a 10-foot pole. We're faced with Tocqueville's tyranny of the majority-- the entitled classes. Against that formidable force, it's difficult to believe that a line-item veto would make much of a difference.

Jobs training

So what's to like about Bartley's book? Living in Washington, I appreciated his skepticism about industrial policy, back in vogue again after several years in the ideological doghouse. He offers a quick quiz: "Rank in order the most likely recipient of capital from an industrial planning bureaucracy: (A) Steve Jobs' garage; (B) IBM; (C) A company in the district of the most powerful congressman." Of course, the truly scary thing is that until recently, even an industrial planning bureaucracy not beholden to the most powerful congressman probably would have bet on IBM.

What's more, you needn't be a true believer in the merits of cutting capital gains taxes to appreciate Bartley's discussion of the dire need to boost falling rates of capital investment. He correctly attacks the Treasury Department's and Congress' static revenue analyses of tax cuts, which assume no revenue feedback from higher growth, as a barrier to enacting investment incentives. Unfortunately, Bartley doesn't really suggest a way to break the deadlock.

Most of all, serious people wouldn't argue with Bartley's fundamental premise: that despite the economic setbacks that affected many during the eighties, it is critically important to understand why the fat years were so rosy for so many people. I happen to believe that the explanation has even more to do with latent human creativity, spiked with heavy doses of education, than it does with tax rates; in other words, I don't think for a minute that Steve Jobs sweated it out in his garage because he was contemplating the bountiful capital gains that lay ahead. But if we genuinely care about elevating the poor and middle class, or most pressing task is to develop a better understanding of why Jobs and other economic growth hormones accomplish what they do. Then, whatever the reasons turn out to be--tax-related or not--we'll have to enable, bribe, persuade, or otherwise motivate more Americans to do the same thing in the fat years to come.

(*1) The Seven Fat Years and How To Do It Again. Robert L. Bartley. Free Press, $22.95.