No advisor who didn’t live through it can imagine the horror of stagflation in the 1970s.
When the Bretton Woods international monetary system came a cropper beginning in the late 1960s – because the U.S. was assiduously debasing the dollar – inflation roared even as economic activity collapsed. Under the Keynesian synthesis, this was supposed to have been impossible.
The essential problem was the phenomenon of bracket creep: even as they sought higher incomes to offset inflation, people were pushed into progressively higher tax brackets. Companies’ and individuals’ real earnings fell even as nominal incomes rose. The Misery Index (inflation plus unemployment) peaked at 22 in the last year of the Carter presidency. Financial assets turned into wallpaper: in the dozen years after 1968, the real value of the Dow Jones Industrial Average declined more than seventy percent.
But beginning in the late 1970s, a new “supply-side” economic synthesis – relatively tight monetary policy accompanied by significant permanent cuts in marginal tax rates – began to gain currency. In the event, the combination of Reagan tax cuts and Paul Volcker’s wringing inflation out of the economy touched off one of the greatest sustained economic growth spurts in American history.
We are again at a moment when a president seems about to propose significant permanent reduction in marginal tax rates; a majority in Congress will, at least in concept, support such an initiative. The “progressive” forces arrayed against it (who most recently presided over a doubling of the national debt combined with the slowest economic recovery ever) will bemoan the short-term deficit increases which may ensue, and decry the benefits appearing to go disproportionately to “big corporations” and “the rich.”
This therefore seems the perfect time for the thoughtful advisor to read Brian Domitrovic’s classic 2009 book, Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity. It is not merely the definitive account of the movement, although it is surely that. In an even larger sense, it’s the most rigorous yet accessible history of monetary and tax policy in the twentieth century available to the general reader. Today more than ever, Econoclasts is a must-read.
© 2017 Nick Murray. All rights reserved. Reprinted by permission. Nick reviews current books, articles and research findings in the “Resources feature of his monthly newsletter, Nick Murray Interactive. A new sample issue may be downloaded at www.nickmurraynewsletters.com. His latest book is Around the Year with Nick Murray: Daily Readings for Financial Advisors.