Domitrovic on Warsh's Smoot-Hawley analysis.

Econoclasts author Brian Domitrovic responds to David Warsh's recent dismissal of Jude Wanniski's theory that the Smoot-Hawley tariff bill triggered the Great Depression:


David Warsh has said imponderable things about supply-side economics in the past. Mundell won the Nobel "for the work he had done in the 1950s,” in contradiction to the Nobel citation and any plain reading of the citation’s works cited. Similarly, it takes defiance to adduce approvingly Ben Benanke’s fawning before Milton Friedman, given that Anna Schwartz has specifically called Bernanke out for grossly misreading A Monetary History.

I too hope that one day “An ambitious historian of thought may someday make it clear that a spillover from a strange guerilla battle at the University of Chicago…caused the ‘supply side’ movement to take the form it did – but only after the news pages of the WSJ…quietly chose up sides.” But I think we should add something, namely, “…so as to make Econoclasts obsolete.”

I’ve fingered through the new book enough to say that it looks like Warsh has put words in Douglas Irwin’s mouth. Why we would expect anything else I don’t know. Warsh zeroes in on Jude Wanniski while Irwin discusses the man in Peddling Protectionism about a tad more than I discuss Warsh in Econoclasts. A little bit, but in all quite lost in the cascade of everything else.

As for the “political pop culture,” in the shibboleth lesson the score gets evened with pop philology. The fact remains that Jude Wanniski profoundly advanced the discussion on the Great Depression, and this is not to suggest that he was anything but correct.

Here was the problem in 1930. Farmers were still getting killed, as had been the case for decades, and they had set up quite an extensive lobbyist shop in Washington. These operatives had been banging on Congressional doors in the interest of a tariff in favor of their clients to little effect for some time, but in 1930 two big things were added to the arsenal. The first was industrialists looking at their year-over-years from 1929 to 1930. They wanted to do something big and quick to goose the bottom line. They saw the tariff lobbying establishment in DC and joined it. When people of their caliber came a calling (not just the farmers), Congress listened.

But also, and boy does Warsh miss this, given progressive taxation (even at the low Mellon rates), the deflation that had kicked in made the decreases in federal receipts more than real. Hoover was in desperate straights to raise revenue to finance the debt, and here’s a tariff with renewed prestige with the eastern businessmen in tow. In other words, the persistence of progressive taxation had something to do with the passage of Smoot-Hawley. And when Smoot-Hawley didn’t work as a revenue source in the face of negative bracket-creep, marginal rates were tripled in 1932.

So to say S-H didn’t cause the Depression is not quite on the mark. It was part of an array of faulty moves on the fiscal side that accelerated the slide in the absence of the raising of the price of gold. No Milton Friedman here, mind you, but lots of Mundell at the Nobel podium.

Then there's Warsh’s obliviousness to the international banking effects. In 1925, the US had guaranteed the Versailles reparations scheme. The deal was that Germany would trade in the US and use half the dollar receipts to pay off the loans from the US banks that had covered the reparations once and for all.

Well, if you’re going to make the viability of the US banking system dependent on international trade, you’d better not pass Smoot-Hawley and expect that system not to hit quite a rough patch. It is inconceivable that had Coolidge somehow been president in 1930 he would have permitted the destruction of one of his VP's masterstrokes, the Dawes plan. And this is not to mention the banking failures down the prairie that have been shown in the lit to correlate to the tariff. Douglas Irwin mentions Jude Wanniski en passant for three pages, and David Warsh says this changes everything. I am sure I am not alone in preferring a new seriousness on this important issue.

Weekend round up.

In The WSJ, Art Laffer proposes an agenda for stronger growth but minimizes the centrality of monetary reform.

On Forbes, Econoclasts author Brian Domitrovic exposes the flawed analysis of gold's critics.

Also at The Journal, Stephen Moore discusses the politics of extending the Bush tax cuts:




On Forbes, Paul Hoffmeister suggests the President’s support for quantitative easing may cost him reelection.

At the Economic History Association, Brian Domitrovic reviews a biography of French gold standard advocate Jacques Rueff.

At Cato, Dan Mitchell critiques the deficit commission’s recommendations.

On The Kudlow Report, Don Luskin is bullish after last week’s market selloff:




At New World Economics, Nathan Lewis considers political and economic developments from an international perspective.

On The NY Sun, Seth Lipsky supports Sarah Palin’s sound money advocacy.

At the Atlas Sound Money Project, Tom Duncan reports on a recent panel on the dollar.

Thursday update.

At Supply-Side Economics Today, historian and Econoclasts author Brian Domitrovic counters The WSJ’s argument that China should stop monetary sterilization.

On The Kudlow Report, Don Luskin discusses gold’s rise.



On Minyanville, Terry Yoo expresses disbelief at the Fed’s claim that inflation is too low.

At The Atlantic, Keynesian James Galbraith argues the national debt problem is over-stated.

Also on Kudlow, U.S. Rep. Cathy McMorris Rodgers (WA) outlines the Republican policy agenda. Sound money isn’t on the menu.



At The American Spectator, Frank Schell highlights the role of incentives in the economy.

On Asia Times, David Goldman outlines his investment recommendations.

At Big Government, Dan Mitchell calls on the President to eliminate unneeded programs.

Friday items.

Historian and Econoclasts author Brian Domitrovic responds to yesterday's Reihan Salam column.

In The WSJ, Peter Ferrara suggests tax reform followed by lower spending is best to lower deficits.

On The Kudlow Report, David Goldman diagnoses the weak economy.

Also on Kudlow, Kevin Williamson debates taxes and deficits.

On Fox, David Malpass discusses deficits and taxes.

U.S. Rep. Paul Ryan (WI) makes good points in an interview with Ezra Klein, though he leaves out the unstable dollar.

Don Luskin explains why the market recently improved.

At Forbes, Michael Pento argues that deflation isn't the problem.

The WSJ examines what happens if the Bush tax cuts expire.

Reuters reports China has become the world's second largest economy.

Wednesday round up.

At The American Spectator, Peter Ferrara presents a terrific review of Brian Domitrovic's Econoclasts.

Hilariously, The Spectator heads this supply-side history with a photo of monetarist Milton Friedman, rather than supply-side pioneer Robert Mundell.

Cato's Alan Reynolds repudiates Alan Blinder and Mark Zandy.

Brian Wesbury advocates fiscal austerity.

At The Kudlow Report, Dan Mitchell debates deficits and tax cuts.

Also on Kudlow, Stephen Moore discusses job creation.

At Noot's Observatory, noot rebuts Martin Wolf's recent attack on supply-side economics.

Again, what Wolf sees as a failure of supply-side I see as a failure by Republican and Democratic leadership alike to reduce spending, especially in the entitlement area. Sure, “starve the beast” is a farce, and Republicans did nothing about spending when they had the chance — save their effort to privatize Social Security — but if you subtract the “tax cuts pay for themselves” element from the rest of supply-side theory, are you left with nothing? Or are you left with the idea that low taxes on businesses and individuals foster economic growth without producing mass inflation? I don’t see that those ideas are dependent on one another, and I don’t see how the deficits of the Bush and Reagan years are evidence of the abject failure of supply-side economics.

The WSJ reports a poll that says a plurality favors extending the Bush tax cuts to all income groups.

A Reuters poll indicates dollar strength is the second indicator after employment for rating the economy (question 7).

Progressive Matthew Yglesias suggests supply-side policies leads to lower growth.

Mint.com features an interesting graphic on U.S. debt ownership.

Tuesday items.

John Tamny explains the wealth gap is part of dynamic growth.

Historian and Econoclasts author Brian Domitrovic critiques the financial reform bill.

It’s funny how easy financial reform could be. Stabilize the dollar, and it’ll be amazing how much money will flow into real enterprises instead of hedging. Cut down taxes and loopholes, and all the focus will be on making and selling, at the expense of strategy, artfulness, and the security of too big to fail. If we’re wondering why so many banks look like zombies today, it’s because the spread of the public sector has made so many lending opportunities unreal.

On The Kudlow Report, Rep. Tom Price discusses his proposal to reduce spending and cut taxes.

The WSJ proposes pro-growth policies rather than extended unemployment benefits.

Nobel Laureate Vernon Smith endorses lower taxes, reduced spending and fewer impediments to small business growth.

Author Niall Ferguson challenges Keynesian logic on deficit spending.

Keynesian Brad DeLong sees error in Ferguson's analysis.

Stanford economist John Taylor suggests lower deficits are stimulative.

In The WSJ, Harvard's Martin Feldstein calls for elimination of credits and subsidies in the tax code (full article here).

Tuesday round up.

Stanford's Ronald McKinnon defends China on the yuan.

Historian and Econoclasts author Brian Domitrovic debunks What's the Matter with Kansas?

Louis Woodhill predicts a double dip recession.

John Tamny suggests New York defaulting on its debt wouldn't be bad.

Brian Wesbury analyzes the June employment report.

Don Boudreaux rebuts the claim that manufacturing is declining.

David Brooks thinks demand side economics is washed up.

Paul Krugman disagrees.

Progressive Michael Lind argues the American people want more spending.

Domitrovic on Mundell-Fleming.

Yesterday, historian and Econoclasts author Brian Domitrovic added a comment on Paul Krugman's summary of the Mundell-Fleming model that was so interesting I'm giving it its own post. Thanks Brian.

***

Krugman doesn't get the Mundell-Fleming model right. Here's Mundell in 1963, in the paper that won him the Nobel and founded the model: "fiscal policy has no effect on unemployment under flexible exchange rates."

Furthermore, Krugman makes no mention of the major control in Mundell's model, namely that the major countries have seignorage rights and the minor ones don't. Major country currencies don't depreciate at the rate minor country currencies do in the event of manifestly currency-weakening moves such as the debasement of the currency or extreme budget deficits. (Witness the dollar in the face of near-zero interest rates and the outsized deficits of the last 2 years).

That's why Mundelll said that for major currency issuers (the US and the EU qualify today), the policy toward crisis should be tight money and tax cuts. Tight money incurs a rush of foreign capital into countries with seignorage rights. This money will not merely sit in banks earning the nice new interest but will be lent out if there is a new higher rate of return in the real economy thanks to tax cuts. In turn the major economy will grow, necessitating new net monetary creation. Monetary tightness, it turns out, will not be monetary tightness at all, on account of the accommodation of real growth.

So: stabilize the currency and cut taxes, with no "austerity." This is the solution that the US and the EU could coordinate today and put to pasture this crisis for good.

Weekend items.

Shawn Tully of CNN.com says Milton Friedman was right that the euro was doomed.

Friedman and supply-side father Robert Mundell debated the relative merits of fixed versus floating exchange rates for many years.

Speaking in Azerbaijan recently, here's Mundell:

Large fluctuations between the dollar and the euro pose great difficulties, particularly for countries such as Azerbaijan, Georgia, Armenia. The difficulties caused by the fluctuations are to stabilize one of these major currencies. In particular, a sharp increase in the dollar in the dollar zone can lead to a drop in some economies, he said.

He said that a single global currency can minimize the damage, which brings the fluctuation of rates of European and American currencies. It will help to stabilize the exchange rate of the dollar and the euro soon.

AEI’s Arthur Brooks sees the Europeanization of America.

Ben at The Simple Facts reviews Brian Domitrovic's “Econoclasts.”

Friday items.

Larry Kudlow wants loans and loan guarantees for European banks.

John Tamny argues against immigration restrictions.

Business Life Books reviews Econoclasts.

Heritage provides some great budget and revenue charts.

From last month, Christopher Chantrill reports on Robert Mundell’s view of the 2008 financial crisis.