Most of Bruce Bartlett’s new book is an account of American macroeconomic policy from the Great Depression to today. Bartlett offers the valuable perspective of a real inside witness, having served on the staffs of several key members of Congress and as a senior policy analyst in the administrations of Ronald Reagan and George H. W. Bush. He is, moreover, a good economic historian and provides a well-documented summary of the last 80 years of American macroeconomics.

But Bartlett is not a good macroeconomic analyst, and at various points this undermines his case. His most important mistake—one made by many others—is to accept the Keynesian explanation of the Great Depression: “the Fed’s effort to expand the money supply was like pushing on a string,” he says. “Fiscal stimulus was necessary to compensate for the collapse of private spending in the economy and thereby mobilize monetary policy.”

In fact, federal expenditures increased by 47 percent from 1929 to 1933. The 46.1 percent decline in nominal Gross National Product during these years was the result of the Fed’s mistake of reducing M2, the broader money supply, by 30.9 percent at a time of substantial decline in the velocity of money, rather than any inadequate fiscal stimulus.

Economic growth was unusually high from 1933 to 1937, a consequence of a dramatic change in monetary policy that involved increasing the dollar price of gold in 1933, the implementation of deposit insurance in 1934, and a substantial increase in the money supply. Fiscal stimulus was inadequate to prevent the decline in nominal GNP from 1929 to 1933 and unnecessary to increase economic growth from 1933 to 1937.

The same Keynesian perspective leads Bartlett to endorse Obama’s 2009 fiscal stimulus plan. By the time this review is published, however, it will be clear that the initial distribution of the stimulus spending increased private savings but has had no effect on private consumption or investment through the second quarter, and that the recent recession ended long before most of the stimulus expenditures were distributed. Monetary policy was again the most effective macroeconomic policy instrument and was not dependent on a corresponding fiscal stimulus.

To his credit, Bartlett recognizes that Keynesian economics is “mainly a rationale for things that governments everywhere wanted to do anyway.” That appears to have been the guiding principle for Obama’s stimulus package: as White House Chief of Staff Rahm Emanuel put it, “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before.” But The New American Economy goes on to claim that Keynes should be regarded as a conservative, based on Bartlett’s view that good macroeconomic policy would reduce the political demands for microeconomic policies—such as the Smoot-Hawley tariff and the National Industrial Recovery Act—that reduced the growth of output and employment. (He should also have mentioned that Keynes opened his Cambridge home to Friedrich Hayek when London was subject to German bombing during World War II.)

Liberal Democrats certainly were not alone in embracing Keynes; Richard Nixon famously declared in 1971, “We are all Keynesians now.” Bartlett documents that a Keynesian perspective dominated U.S. macroeconomic policy through the 1970s and became suspect only after it failed to prevent the recessions of 1974-75 and 1980 or the rapid increase in inflation through 1980. Even in 1981, the major critics of President Reagan’s economic program claimed that his policies would lead to increased inflation and slow growth—just the opposite of what happened.

The book’s best passages are those on the conservative revolution in economic policy, probably because Bartlett was directly involved in those events. This revolution, he explains, was a combination of changing monetary policy to control demand and using marginal tax-rate cuts to increase economic growth—the first promoted by Milton Friedman, the second by Robert Mundell, both from the University of Chicago and both recipients of the Nobel Prize. By the late 1970s, their perspective was shared by many members of Congress, supported by the Wall Street Journal’s editorial page, and endorsed by a prospective Republican presidential candidate. As president, Ronald Reagan gave Fed chairman Paul Volcker strong support to reduce inflation and won the approval of a divided Congress for a major reduction of income-tax rates. As a consequence, the consumer price inflation rate fell from 12.5 percent during 1980 to 3.8 percent during 1982, and economic growth was unusually strong for the remainder of the decade.

In later chapters, Bartlett summarizes how the supply-side of this revolution came apart—primarily because it promised too much. Some supply-siders claimed that tax cuts would increase output enough to avoid a reduction of tax revenues; others said that tax cuts would reduce federal spending by “starving the beast.” These two defenses were, of course, incompatible. And, as it turns out, neither is consistent with the evidence since 1980. These perspectives led too many Republicans to be casual about the sustained political discipline necessary to control federal spending, especially during the administration of George W. Bush, and inculcated a strong party opposition to any tax increase, forgetting that Reagan approved several tax increases in the early 1980s. The monetary element in the conservative revolution in economic policy, of course, has been at least temporarily threatened by the revival of a case for fiscal stimulus in response to the financial crisis.

Bartlett goes on to address tomorrow’s economic crisis, and his arguments on this topic will probably prove to be the most controversial elements in this book. He reports that while the explicit federal debt is now about $16 trillion, the implicit debt for Social Security and Medicare is about $90 trillion. He concludes, “Large tax increases will be necessary to pay for all the promises that have been made. Instead of opposing them entirely, supply-siders should use their insights to design a new tax system better able to raise higher revenues at the least possible cost in terms of economic growth and political freedom.”

From there, Bartlett argues in favor of a value-added tax. But there are at least two questions that should be resolved before jumping from the awesome estimates of the U.S. federal debt to the case for an American VAT. First, what are the comparative costs of alternative means to reduce the burden of the federal debt other than an increase in taxes of any kind? Possible measures include the deferring of the age for full retirement benefits, changing the nature of the benefits that would be acceptable to the current voting population, and adopting policies that would increase economic growth. Second, what types of taxes would be most effective in limiting the political demands for government spending? The U.S. time-series evidence suggests that government spending has been a negative function of the tax share of GDP, given the nature of our tax system. The cross-country evidence, however, suggests that government spending is a positive function of the average VAT rate. A more visible tax, such as an income-based consumption tax, is likely to lead to a lower level of government spending than a nearly invisible VAT. Such a tax may be the most efficient way to collect a given amount of fiscal revenues, but it would probably lead to a higher level of government spending.

I am prepared to accept Bartlett’s argument through to its arithmetic conclusion that “Large tax increases will be necessary to pay for all the promises that have been made.” But I want the above two issues to be addressed carefully before concluding that our future should include a VAT. One final comment: the subtitle of Bartlett’s book refers to “The Failure of Reaganomics,” but his book never makes that case. Reaganomics substantially reduced the inflation rate within two years, substantially increased the rate of economic growth for the rest of the 1980s, and set the terms for economic policy for the rest of the century. I wonder what additional evidence would be necessary to convince Bartlett to agree with me that Reaganomics was an outstanding success, even if it did not resolve all of our major economic problems. 
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William A. Niskanen is the senior economist and former chairman of the Cato Institute.

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