Big inflation series: a revolution initiated by a group of gluttons and drunkards!

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Author: President Qinghe wechat official account: zhibenshe (id:zhibenshe0-1)

On august4,1981, Congress passed President Reagan’s economic recovery and tax act. Wanniski hurried to the white house without stopping, holding a five page document on which a note was written: “I wish you a brilliant success in tax law.”

“I know that the president is busy with tax cuts and budget cuts, but that’s not the problem right now,” vanniski said when he handed the document to Anderson, a core member of the Reagan team

Anderson said: “yes, we will focus on regulation next.”

“No, no, No.” Vanniski interrupted Anderson and said seriously, “the problem now is money.”.

At this time, the U.S. economy is experiencing the worst period since the great depression. A revolution that has been brewing and planning for nearly a decade has come to an end


Mike one

At the end of 1974, at 6 p.m. on Monday, Mike 1 Restaurant:

“What is the root cause of stagflation? Commerce? Capitalism? System?”

Mundell gulped down the remaining Bourbon in his glass and went on:

“No, the root cause lies in the government. If the government prints money without restraint, it will cause inflation. If the government raises tax rates, it will hurt capital accumulation and cause unemployment. Finally, unemployment is doomed.”

“Yes, the more taxes you collect, the less you get.” Laffer, who was sitting on the edge, interposed.

Vannisky got up, added whisky and ice to Mundell’s glass, and asked, “Professor (Mundell), what’s your solution?”

“Thank you!” “Combined fist, stabilize the dollar and cut the tax rate.” Mundell blurted out.

“What about the deficit?” Bailey, who had been silent for a long time, asked bluntly, still holding half a martini in his hand.

“Don’t worry, the Arab rich, the Japanese and the federal Germans will all fill these gaps… Go to Miami,” Mundell said, and the logic became more and more confused. However, we are used to it. It is alcohol that works.

“Professor, Arthur, Bailey, Lehmann, come on, together.” Vanniski is responsible for making the rounds at this time every time, and then drinking and talking at the scene, getting drunk in the night

This is an ordinary party at Mike’s No. 1 restaurant. This restaurant, painted with brass and reddish brown flowers, is located in lower Manhattan, New York. At this time, it is under the shadow of the American stock exchange – stock market crash, high inflation and high unemployment.

From the end of 1974 to the beginning of 1976, this group of “drunkards” met about once a month, and the time was chosen at 6 p.m. on Monday.

In addition to the members of the Standing Committee of the Seventh National Congress of the Communist Party of China, there are also a group of anxious wall street people and Washington people who are attracted by their fame. They “sit on the velvet armchair, have a drink against the back of the chair, or go into the ribs restaurant”, and point out a dream, “as if the trading lists for the next few years were in front of them” (Robert Bailey’s original words).

This group of “outlaws”, “Wall Street stars” and “promising young arrogants in the financial sector” gathered by Mike 1 tried to launch a Don quixotic attack on stagflation. But at that time, they could not have predicted that this group of unreliable people would succeed in the end. Otherwise, someone would surely buy Mike 1 and collect it.

Later, people named this group of people and their “nonsense” the “supply school”, and this time they called it the “supply side revolution”.

The “seven standing committee members” who initiated the revolution included Robert Mundell, Arthur Laffer, Jude wanniski and Robert Bailey, as well as Charles Parker, Lou Lehmann and Jeffrey bell.

Among them, Parker is an investment bank, and he basically pays for every dinner. Bell is a conservative political activist who has just returned from Vietnam. Lehmann was an outstanding drugstore entrepreneur. Later, Lehmann Research Center was established in the upper east district and hosted the party.

Bailey, short, wearing thick glasses and plain and tidy clothes, is the leader of this organization. He was a very successful media man. He just turned 37, but he controlled the editorial page of the Wall Street Journal, the largest commercial newspaper in the United States.

Bailey came from a middle-class family and was a native of the Midwest. He was strictly trained in speech and manners since childhood. He always disdains the kitsch of Ivy League and thinks that people in the Midwest are more rigorous and good at thinking, but he has hired many Ivy League top students in the newspaper. Unlike wanniski’s eloquence, Bailey didn’t speak much, even spared no words. His article was concise and comprehensive, and his style of writing was sharp.

Bailey has been immersed in Wall Street for many years and has been dealing with young brokers and senior executives for a long time. He has a very strong sense of news sensitivity. In the two years since the outbreak of stagflation, Bailey found that a large number of young people were very tired of the government’s useless new terms of “lowering expectations”, and they wanted to hear new voices.

Out of his professional sensitivity, Bailey began to explore critics and skeptics everywhere, trying to gather them together to drink Martell and eat steak on Mike 1, and then criticize the current shortcomings and point out the country.

Bailey realized that he had to find a capable assistant, so he recruited the talented vanniski under his command.

Wanniski, one year younger than Bailey, has dark skin. His black shirt and white tie are his standard. Wanniski is a famous “local leader” in the wall street news circle. He also came from a middle-class family. He got a doctor of journalism from the University of California. At the same time, he was also infected with the wild smell of Western cowboys.

In 1962, waniski drove the Buick Riviera and wore a lame suit to the national observer. A Las Vegas long legged singer (his wife) was sitting in the co driver’s seat.

On the day when I first came to the newsroom to report for duty, my colleagues tried to play tricks on this “worker’s son” who revealed the flavor of Eastern Europe. A colleague told him that there was a lost Latin American next door (in fact, it was Warren Phillips, CEO of Dow Jones, a political Journal of Dow Jones at that time, which was published by the Wall Street Journal).

As a result, vanniski invited Philip out for a glass of whisky and got on well with the biggest boss. Since then, waniski has made great efforts in the wall street news circle, bringing his unparalleled emotional intelligence and keen talent to the extreme.

Vanniski knew nothing about economics, but he loved reading, making friends and talking, and was keen to get to the bottom of the matter. Bailey transferred vanniski to the editorial page of the Wall Street Journal. After wanniski joined Bailey’s newspaper, they both lived in temporary dormitories. After dinner after work every day, they walked together in lower Manhattan. Wanniski always talked about the past and the present.

Mike 1 was the base where the supply side revolution was launched, Bailey was the chief planner, wanniski was the liaison and activist, and the Wall Street Journal they controlled was the revolutionary propaganda machine, mobilization machine and seeder.

The other two, Mundell and laver, are soul figures and relatively reliable “heavyweights” in the team.

Laffer, 34, is the most normal looking person in this group, having worked as a budget clerk in the federal Treasury Department. He was a little short and fat, dressed neatly and smiled brightly, but these appearances were obviously deceptive. He likes to tell dirty jokes and can’t help himself. A strange bird often sits on his shoulder. It’s totally funny. He was so popular in the California anti tax movement in 1978 that he often appeared in the meals of the press circle.

Mundell is Laffer’s teacher, 42 years old, born in Canada. He has just come to Columbia University to teach economics, but he has long been famous in the academic circle. Mundell, though the oldest of them, was an old-fashioned hippie. He has long hair and shawls. He is dressed strangely and wears color makeup. His whole body is full of rebellion. He has no style of academic professor.

Curiously, the professor from Canada speaks vaguely, uses words fluently, and occasionally speaks with a Canadian accent. He often takes advantage of the wine after three rounds of drinking, which leads to frequent strange stories and lively discussions, because people often don’t understand what he is talking about. Critics of the supply side like to laugh at Mundell’s theory as coming from “alcoholism”.

Mundell is talented, but he is naturally playful and unexpected. Once Bailey rushed for help to explain the problems of the international monetary system, while Mundell read a poem by the pope before making use of the topic. To be sure, Mondale did not drink this time.

Mondale and Laffer are both teachers and friends, and they have a deep affection for teachers and disciples. They have fought side by side for a lifetime. As a professor of economics, Mundell pursues the essence, has complete theory, and is full of the temperament of a “romantic” revolutionary; Laffer focuses on empiricism, is good at data analysis, and is more like a scholar doer.

Waniski, a bohemian, has great energy in the Wall Street circle. As early as 1971, when Laffer was President Nixon’s budget officer, vannis gene got to know Laffer by delivering political announcements. Later, Laffer introduced Mundell to vannis key. When the stagflation crisis came in 1974, Bailey and vanniski actively invited Mundell, Laffer and this group of gourmets to Mike 1 for dinner.

The joining of these two “heavyweights” gradually attracted a group of Wall Street traders and young people to stop at the restaurant, order a glass of whisky and listen to the professors’ talk quietly. Mundell and laver soon ruled the entire Mike 1. Vanniski played the role of master of ceremonies at the party. He greeted the gourmets, ordered steak and poured wine for them, and another important task was to try not to let Professor Mundell run away, and then translated the professor’s “nonsense” to the audience.

In addition to unanimously denying the economic policies of the federal government at that time, this group of gourmets voted unanimously against the prohibition of alcohol. Bailey likes martinis. Vanniski doesn’t choose and has the best drinking capacity. Mundell is a well-known “drunkard”. He likes to drink two mouthfuls of whisky before he starts performing. He will keep panting and smelling of alcohol. When people don’t understand it, they always blame it on the nonsense caused by alcohol.

On one occasion, the Secretary of Nixon’s advisory group came to visit. Before lunch, he had three glasses of double Bourbon Whisky with ice cubes, and had another cup of single Bourbon Whisky at dinner. There was no nonsense in the whole process. This is the business style of that era. Those who only order Kimberly and soda or dry white are cowards who are looked down upon. Few men have ordered iced tea.

This is the real “70s show”. The society is open, democratic, self-centered, crazy, rebellious, and full of whisky, drugs, sex, rock, disco, hippies and “heavy metal taste”.

However, it was this group of non partisans, “disco academicians”, rebels in Washington, Wall Street and the press that saved the United States from a decade of stagnation. Almost all of them were under the age of 40 and spontaneously gathered on Mike 1.

This restaurant, in 1874, was a doghouse of the second echelon of Wall Street. It no longer exists, but it was the birthplace of this revolution at that time.

How do these gluttons seek political support? And how to save this country from danger?


“My time”

American actor and “father of new journalism” Tom wolf called the 1970s “my age”.

In the narcissistic culture (1979), the philosopher christopherrash pointed out the root of “my age”: “high inflation urges people to spend money quickly, giving birth to a kind of” narcissistic “mind that only cares about the present”.

Since the outbreak of the oil crisis in 1973, inflation has soared rapidly. People are spending money and borrowing money. The demand for money is amplified. The Federal Reserve has issued more dollars. The inflation rate and leverage ratio are getting higher and higher. The U.S. economy has fallen into the negative feedback of “self inflation”.

In the face of hyperinflation, the US dollar continued to depreciate, and global investors panicked. Where is Noah’s Ark? Where is the straw?

People finally found that the most reliable is the earth. In addition to the sun, rain and dew, the earth’s greatest gift to mankind also includes commodities. When human beings play too hard, commodities are still hard currency. A large amount of money is invested in gold, oil, natural gas and land. Overnight, gifts from the earth become extremely scarce and prices soar.

At this time, the planned economy of the Soviet Union was on the verge of collapse, but the large territory occupied by “chauvinism” and underground mineral resources once again saved the country. The Soviet Union’s mines were at full power, oil was continuously exported, and the dollar fell from the sky.

With the support of the US dollar, the Soviet Union extended its hand to Afghanistan, Vietnam, Latin America and Africa. Its fangs were exposed and it was aggressive. At this time, the United States has completely lost its great power style. The stock market has plummeted, the market bond has defaulted, the dollar has depreciated, capital has fled, the economy has stagnated, inflation remains high, and the unemployment rate has risen.

From 1972 to 1973, the price of eggs rose by 49%, and then the price of eggs rose. Chickens, ducks, fish, cattle, sheep, pigs and other animals jumped up, and the overall price of meat rose by 25%.

A Texas farmer drowned 40000 chickens in a pond, leaving television viewers across the country dumbfounded. The reason was that the price of poultry was not high enough to receive subsidies.

In april1973, housewives in the top half of the sky launched a week-long national meat boycott campaign. In October, the meeting of the organization of Petroleum Exporting Countries (OPEC) was held. The Nixon Administration attributed inflation to greedy Arabs. Subsequently, scientists and scholars drew out an old whitewash – El Nino – caused disaster.

On the 20th of that month, on Saturday night, Nixon abused his power to “massacre” the Ministry of justice, shocking the United States; On the 31st, the house of representatives started the impeachment proceedings against Nixon.

President Nixon was a supporter of Keynesianism. “I am now a Keynesian economically.” in 1971, he told the New York Times that I was preparing to devalue the dollar. According to the Phillips curve, he reduced the unemployment rate through the depreciation of the dollar, and then controlled inflation through price manipulation.

This seems to have the best of both worlds, but Nixon spent a whole year trying to control prices and “freeze” food prices. As a result, prices got out of control and he was trapped in a “Watergate”.

In may1974, the overall annual price increase increased by 11%, the economy continued to decline, and the unemployment rate continued to rise.

At this time, people dug up the statistical data of a “weather announcer” – Arthur Okun, chairman of CEA during the Johnson Administration in the 1960s. Okun imitates the method of meteorological temperature and humidity to express the comfort index, and combines the inflation rate with the unemployment rate to form a “economic discomfort index”. The index rose from 6 to 18. People joked that this was no longer “uncomfortable”, and then renamed it “pain index”.

Throughout the long 1970s, the two American governments were busy with imposing price controls, preventing trade unions from raising wages and controlling consumer desires. Academic economists and government economic advisers, in addition to being “ashamed”, argue every day. The result is that they hope the people will give them more time.

At this time, Samuelson copied a compound word “stagflation” invented by a British politician in the 1960s, which accurately described the special economic phenomenon at that time, but it was also extremely humiliating. At this point, the discussion of economic issues seems to have become “national entertainment”, of course, there is no lack of teasing Samuelson. In economics, however, a serious mass fighting movement is breaking out.

Before the outbreak of stagflation, Samuelson was the leader of the global economic circle, and his neo classical comprehensive school had unlimited scenery. The theoretical banner of this school is the famous “Phillips curve”. This curve tells us that high unemployment and high inflation cannot exist at the same time.

Phillips curve was originally invented by williamphillips, a New Zealand economist. Later, after Samuelson and Hansen improved it and named it “Phillips curve”, the economist became famous.

Samuelson not only helped the younger generation, but also incorporated the Phillips curve into the neo classical synthesis school as the “treasure of the town”. He used the Phillips curve to tell the government bureaucrats, monetary authorities and the entire economic community that if they want to reduce unemployment, they can increase inflation. The candidate finally solved the most difficult political question of unemployment, and the Phillips curve was unparalleled throughout the 1960s.

However, at this time, high unemployment and high inflation coexist. How could Neo liberalism, which has been suppressed by Keynesianism for decades, miss such a good opportunity. As a result, various sects, mountains and caves poured out, and a wonderful and fierce battle was inevitable.

The most representative is Friedman. The short economist buried the Phillips curve with theory, data and experience, and almost stepped on Phillips to the peak of mainstream economics in the 1970s with his own strength, setting up camp for monetarism in the era of a hundred flowers blooming and a hundred schools of thought contending.

This economist from Australia was led by Samuelson. He once enjoyed all the glory and now suffered all the grievances. This group of Neo liberals threw all their grievances onto the Phillips curve and beat Phillips up. Phillips really could not quarrel with this group of Americans who were eager to try and “usurp the throne”. Later, he returned to Australia, his quiet hometown, and started his new subject – the study of China’s economy.

However, mainstream economists are fighting with immortals. Ordinary citizens do not understand or care about it. They just want to get rid of this terrible situation.

“I’m crazy as hell. I’ve had enough!”

In 1976, TV station wind and cloud issued a roar in the hearts of the people.

Affected by the “lipstick effect”, a large number of citizens poured into the cinema, intoxicated, paralyzed and comforted themselves in the film. “King Kong”, “Star Wars”, “flying over the madhouse”, “Godfather”, “airport”, “Exorcist”, “Jaws”, “killer bee”, “burning skyscrapers”, “super century spy case” and other doomsday and thriller films became popular, creating that brilliant blockbuster era.

Never admit defeat, turn the tide and personal heroism are the eternal themes of American films in every era. The people who came out of the cinema were tired of the platitudes of the blackboard economist (Coase once criticized Samuelson as a “blackboard economist”) and longed to be like the “Rocky” hero played by Stallone (Rocky 1976). They dared to fight and save the United States without asking the source.

Mike No. 1, a group of “quack doctors” who are difficult to be elegant, is like rocky. He has few words and studies. He is not even qualified to participate in the “group fight” against Phillips. He is sometimes ridiculed for his amazing words.

In 1971, as a budget officer, Laffer’s prediction of the national production composite index of that year set off a storm in Washington. The whole wall street news circle was discussing this young man from the management and budget office. At that time, wanniski, who was also a reporter of the National Observer, called him. From then on, the two wrote a great friendship.

Since he started his career on Wall Street, wanniski has met all kinds of “big people” almost every day. However, when he met Laffer, he was like a child. He grabbed Laffer and asked a lot of questions, “what is the law of supply and demand?” “It was all silly questions,” wanniski later recalled.

But because of this prediction speech, Laffer was brutally attacked by Samuelson, the top economist at that time. Samuelson even used the derisive title “why everyone laughs at Laffer” on the podium of the Economics Department of the University of Chicago.

At that time, a student of martinanderson, who was on the stage, recalled: “Samuelson’s speech, especially the title, was cruel enough to destroy the academic reputation of young scholars…. what he did to Laffer in Chicago that day was a very typical style of learning.”

Mundell had already stood out among the academies, but like Laffer, he was not liked by the academies, let alone appreciated by the government staff. As early as the Kennedy administration, Mundell had made suggestions to the Federal Reserve, but was criticized by the latter and IMF executives.

In fact, the term “supply economics” is originally ironic. Comedian Ben Stein once joked about “supply side” in “spring is not a day for reading”. In 1976, his father herbertstein, an economist, a federal government adviser and a Republican worried about budget deficits, coined the term “supply side financier” at a heavyweight conference in the economic circle. He said with great disdain that there were only about two believers in this theory, and he came to Washington again and again to try to develop the bureaucratic believers of Mundell and Laffer.

Vanniski was not happy to hear the word “supply side financier” at first, but when he reacted, he immediately praised the subtlety of this statement. Wanniskeith thought about it and modified it into “supply economics”, which can compete with the “demand economics” of Keynesian School (Keynesianism based on insufficient effective demand).

The term “supply economics” is so vivid that it seems to imply a special remedy for the legacy of Keynesian policies.

Fortunately, it was a free and fanatical “my age”. Every little man had the opportunity to “dance in space” like Michael Jackson, or “become famous” like Elvin Johnson.

In 1974, the second year after the American economy fell into stagflation, this group of supply schools composed of hippies, alcoholics and “local snakes” spontaneously gathered on Mike 1 and set out in a state of wandering and drunken, with a few rocky heroes and a bit of “Godfather” (Godfather 1972) gangster like Romanticism.


an unnoticed talent

Mundell is the most accomplished and mature among these gourmets.

Mundell has a unique talent in economics. At the age of 23, he received the economist doctor of Massachusetts Institute of technology. At the age of 29, he published the theory of optimal currency area with only eight pages – Mundell won the Nobel Prize in economics in 1999 for the theory of “optimal currency area”. The European community founded the euro based on this theory. Mundell is also known as the “father of the euro”.

In 1963 (31 years old), Mundell published his epoch-making paper, capital flow and stability policy under fixed and flexible exchange rates. This paper examines how monetary and fiscal policies change in a floating exchange rate environment in a global open economy.

It is strange that at that time, in the Bretton Woods system, almost all countries’ currencies were fixed with the US dollar, and few economists would pay attention to the floating exchange rate. Why did Mundell study the floating exchange rate? Mundell’s move is like studying polygamy under monogamy. What is the significance?

Later, Mundell recalled that in the 1950s, his hometown Canada used the rules of the Bretton Woods system to adjust the exchange rate of the US dollar, which inspired him to pay attention to the floating exchange rate. In addition, the “Triffin problem” made him aware of the difficulty of maintaining the Bretton Woods system.

In 1971, Nixon announced that the dollar was decoupled from gold, the Bretton Woods system disintegrated, and the world entered the era of floating exchange rates. The historical evolution reflects Mundell’s foresight. At the same time, it also means that the era of Mundell has come (but Mundell supports a fixed exchange rate).

In april1971, Mundell explained his ideas to the world’s top economists in Italian at the global inflation conference in Bologna, Italy.

Mundell put forward the principle of thumb (diembergen’s law), that is, one goal, one policy. “Yang Ma” does Mom’s business, and “Cai pa” does Dad’s business. Monetary policy is most suitable for controlling the flow of US dollars, while tax policy focuses on regulating economic activities. Together, they can turn things around, that is, maintain price stability and cut taxes on a large scale.

This is the combination fist policy to solve stagflation.

At the meeting, he predicted an economic disaster in the next decade.

In fact, Mundell’s thumb rule and the idea of stabilizing prices are similar to the limited principle of monetary policy put forward by Walt orgen, the founder of Freiburg School in Germany.

However, the thinking and thoughts of most economists at that time were still in the era of Bretton Woods system. Faced with the turbulent world of floating exchange rate and credit exchange rate, academies are hard to adapt and do not know how to build new rules of the game. The economists present, naturally, could not understand Mundell’s proposition.

“Mundell, are you kidding? Monetary tightening and tax cuts are going in the opposite direction. How to solve the deficit problem?” Asked habler, an economist at Harvard University.

Mundell believes that overseas funds can break the contradiction between monetary tightening and tax reduction.

Habler said, “are you crazy?” The two men quarreled, and Mundell said he was parroting.

After the meeting, the media nicknamed him San Sebastian (too many arrows).

A month later, the Princeton department’s international finance anthology published Mundell’s speech entitled “the dollar and policy portfolio: 1971”. Years later, economists found this important article neglected.

Mundell was not only familiar with the economic policies under the open economy, but also endorsed his theory from historical cases.

Mundell believes that there are two times in American history that have confirmed his policy mix: the first is the “roaring twenty years” (Coolidge prosperity in 1920s) and the second is the prosperity in 1960s.

In 1914, the United States obtained a large amount of gold reserves in World War I. The Federal Reserve, which had just been established for one year, received the arduous task of managing the international gold standard. As a result, the greedy Federal Reserve actually broke the gold standard and substantially raised the dollar, which led to a rapid rise in US inflation.

Prices rose by 13% in 1916, 18% in 1917 and 20% in 1918, far exceeding the level of the 1970s. From 1920 to 1921, the American economy contracted severely in the great recession. The dollar price fell by 60% and the unemployment rate reached 12%.

This is a typical phenomenon of rapid inflation first and then immediate tightening leading to economic stagnation. Friedman described this improper measure as “pressing the brake” in an emergency.

In 1920, Warren Harding was elected president and appointed Pittsburgh banker Andrew Mellon as his financial secretary. Mellon took office and implemented a substantial tax cut. The upper limit of the marginal tax rate was reduced from 73% to 25% and the lower limit to 1%; At the same time, it is suggested that the Federal Reserve should aim at stabilizing prices rather than blindly tightening.

Mundell believes that Mellon’s measures gave birth to supply economics, that is, the policy combination of maintaining price stability + tax reduction stimulus.

In addition, Mundell attributed the prosperity of the 1960s to the policy mix of supply economics.

From 1962 to 1965, both business tax and personal income tax were cut, which stimulated economic growth. Although Mundell began to emerge academically at that time and put forward the policy mix, after all, he was only 29 years old and was still far away from the decision-making level. No one would associate the policy effect with him.

But in 1965, President Johnson put forward an ambitious “big society” plan and tried to increase taxes. From 1965 to 1969, federal spending increased by 55% in total and 11% annually, compared with only 2% in the previous three years.

President Johnson tried to get fed to pay for treasury, but he was not sure at first. After all, according to federal law, Fed chairman would not obey him.

This year, Federal Reserve Chairman Martin raised US dollar interest rates. Johnson called him to “a woodshed” and explained to him why the Federal Reserve should do as the president ordered. During his tenure, the federal funds rate barely outperformed the rising inflation rate.

Later, Alan h. Melzer, an economist and an expert in the history of the Federal Reserve, exposed the background of Martin, who had presided over the Federal Reserve since 1951. He revealed a specious “fact” with his academic personality: Martin has always believed that the Federal Reserve is the internal department of the federal government and the executor of the government’s will (biased).

“The Federal Reserve must find a way to subsidize the budget deficit. Congress and the executive branch set the budget. The Federal Reserve became an agent of Congress. He (Martin) believed that there was no way to subsidize the deficit without significantly raising interest rates.” Melzer said.

Johnson’s “big society” and the war against Vietnam greatly hindered the increase of government budget and tax revenue, and gradually brewed the stagflation crisis in the 1970s.

Laffer endorsed the supply school from the theoretical origin. Laffer believes that the supply school is a derivation of the traditional theory of classical economics. Laffer told Bailey, “say’s law… Is your faith.”

Sai believes that supply determines demand. Only products needed by the market are produced. The price of new products rises and the price of old products falls naturally. Such a balance can achieve inflation free growth.

The supply school has put forward the slogan of “back to Sai”.

Both Austrian school and Classicism have a high degree of recognition of their ancestors. The former found Catholic thought, ancient Greek, ancient Roman and Spanish scholasticists in the golden age, while the latter is Christian (Protestant) thought and Newton’s cosmology.

It can be seen that the supply school is far inferior to the Austrian school and Classicism in terms of theoretical accomplishments, academic routines and system construction.

Mundell is still far away from the academic school for a long time, just like the “Pearl of the sea” in the economic circle. However, Mundell and Laffer established the elementary framework of the supply school and jointly came up with a plan to control stagflation.

Fortunately, this precious “relic” was discovered by vanniski.


“It’s a good time to cut taxes”

In may1974, Laffer and vanniski attended an inflation summit organized by the American Enterprise Association. The participants were all leaders in the economic circle at that time, including Mundell.

At the meeting, Mundell reiterated his economic policy: “oil revenue does accumulate rapidly, but it also flows back to the international capital market quickly, and on the other hand, it is easy to cause the expansion of financing scale.”

The question that Mundell did not clearly answer was whether the huge oil revenue would soon flow into Western banks and investment accounts and be put into production.

He could not guarantee this. At that time, the pressure of dollar depreciation was increasing, a large number of capital fled, and the status of the dollar in the world was getting lower and lower. Many Europeans rejected the dollar like an air currency.

In London, a passenger from New York said, “the banks, hotels and shops here are the same. When they see the dollars in our hands, they look like they carry germs.” In Paris, taxis are hung with a sign saying “no more dollars”. Even beggars write “no dollars” on their hats.

Mundell believes that the problem lies in the poor investment environment in western countries, and the main tax rates are too high. He said: “if we cut taxes, yes, it is a tax cut. Then all the oil revenue flowing into Arabia can be converted into real investment and expansion in the western world.”

At the conference, Laffer also delivered a speech and introduced wanniski to Mundell. When wanniski saw Mundell for the first time, he worshiped him as a totem.

After the meeting, the three people made an appointment to discuss. While Laffer and Mundell were talking, vanniski’s talent for journalism burst. He shut up and listened carefully. At the same time, he picked up a paintbrush to draw the two economists. A few weeks later, the slightly hasty pictorial appeared on the Wall Street Journal’s speech page.

Since then, wanniski, Laffer and Mundell have often gathered on Mike 1, including Bailey and a group of other regular visitors. Vanniski actively organized parties, listened attentively, took notes, and asked questions from time to time. Wanniski’s inquisitiveness, studiousness and talent gradually make him a professional “media economist”.

In december1974, after inserting the painting, wanniski launched his column “Wall Street Journal economics”. The column used a timely and catchy title “it is a good time to cut taxes”.

“It is a good time to cut taxes” series of articles described the lessons learned from Mundell in the past few months. Each article was checked and proofread by Mundell before it was published.

In a short time, the smart vanniski absorbed Mundell’s theory on policy mix since 1961, and quickly informed the readers of Mundell’s proposition in a simple and logical way with his genius.

One of the articles wrote: “the level of U.S. taxes has hindered economic growth… The national economy is choked by taxes – it suffocates.” in order to prevent inflation, you need to increase, not reduce, goods. “.

Vanniski’s “it is a good time to cut taxes” perfectly summarized Mundell’s policy plan, telling Americans: stimulate “production” enthusiasm with tax cuts; Tighten the supply of US dollars through monetary policy, and ensure that people hold more scarce and therefore higher value US dollars through tax cuts; Observe the reaction of foreign capital under tax reduction and adjust the effect of monetary tightening.

The supply school relied on Mundell, a master, to teach a “chief executive officer” (Laffer), a group of government policy makers and executives, and of course, two “media economists” (wanniski and Bailey).

In the autumn of 1974, wanniski told Bailey everything he had learned from Mundell. Bailey, who is obsessed with budget balance, has been worried about the government budget deficit. The greatest value of the Mike 1 party was that it changed Bailey’s mind. After Mike 1 drank countless Martinis, Bailey gradually converted to the supply school and wrote an editorial on Keynes is dead in january1977.

In this way, the editorial page of the Wall Street Journal controlled by Bailey has no scruple to “advocate” for the supply school. On Mike No. 1, Mundell’s performance received a group of iron fans. On the Wall Street Journal, twomillion readers read “it’s a good time to cut taxes”:

“Without tax cuts, the government’s deficit may be even larger.”

“The fiscal deficit caused by tax cuts can be made up by attracting international capital.”

Wanniski has repeatedly taught readers that Americans hope to take advantage of commodities to avoid risks and survive inflation, while foreign investors hope to survive inflation with the help of the US dollar. As long as the US dollar appreciates strongly, “the world will rush to buy US dollar denominated assets, especially US Treasury bonds. In this way, the domestic liquidity problem and fiscal deficit problem will be solved naturally.”

After the article was published, “it is a good time to cut taxes” was full of feedback. By the spring of 1975, Mundell’s policy portfolio had been passed down by word of mouth in the financial circles of Wall Street. Therefore, since “it is a good time to cut taxes”, the Wall Street Journal has set off a supply side trend of thought in the United States. In the 1980s, many young scholars who met late joined the movement and published their opinions in the name of “supply economics”. Supply economics and this group of gourmets became famous.

Wanniski was born for big scenes. He was like beating a chicken’s blood. He was excited and struck while the iron was hot. He launched an extended version of “it’s a good time to cut taxes” in Irving Christo’s public interest to finish the series. This article, entitled “Mundell Laffer hypothesis”, presents the propositions of two economists, Mundell and Laffer, in a beautiful style.

“The United States is experiencing an economic nightmare.” Vanniski began by denouncing the official economic policies and think tanks: “the top economists in the United States have been saying that they want to ‘accurately regulate’ the economy… It is clear that the academic community has been in the same crisis as the economy.”

“In the past six years, Nixon injected all the antibodies prescribed by the economic doctors in Cambridge and Chicago into the convulsive economic disease, but his vital signs dropped again and again. Mr. Nixon became a Keynesian, and the ‘full employment’ budget was established. The deficit was both deliberate and unexpected.”

“When the tricks were exhausted, many people began to wonder: is the condition really so serious? Has the prescription aggravated the condition?”

Vanniski seemed to feel that Mundell, Laffer, Bailey, and of course, the gourmets were using the power of public opinion to start an unknown revolution.


“Napkin curve”

In 1974, when Mike began to gather on the 1st, the stubborn aides of Congress actually began to loosen their minds and want to implement tax cuts. A retired professional football player, jackkemp, a young congressman, introduced a tax cut bill. At that time, Paul Clegg Robert, a congressional aide, was responsible for amending the bill.

Laffer and Bailey realized that they must act as soon as possible, win over allies and break into the interior.

Vanniski had already started planning actions a few months before he announced that “it is a good time to cut taxes”.

Vanniski is exquisite in every aspect and has many ears and eyes. He had close contacts with Donald h. Rumsfeld, an aide to President Ford, and Richard Cheney, his deputy.

In August, after taking office in the White House, President Ford was overwhelmed by fierce stagflation, and faced congressional elections three months later. Wanniski realized that the opportunity had come. He went to Rumsfeld and said that he had a plan to help the president win the congressional election.

However, Rumsfeld, who was so busy, did not take vanniski’s words to heart. It was not until the election was defeated that he thought of vanniski. In December, Rumsfeld instructed Cheney to come to two continents’ restaurants two blocks away from the Ministry of finance to meet with wanisky and Laffer.

Rumsfeld knew Ralph as early as the Nixon era and praised him as a “genius”. Rumsfeld assured wanisky that I would tell the president word for word despite your bold proposal to Cheney.

In restaurants on two continents, after half the meal, Laffer has repeatedly stressed that the government needs to cut taxes. But Cheney didn’t find anything new. He said: “the president has planned to reduce taxes by sending a one-time tax rebate check to the taxpayer, or $100.”

Laffer interrupted Cheney: “it’s not a tax rebate check, it’s a tax cut.”

Cheney went on to say, “if the tax rate is reduced, the government revenue will be reduced. The risk is too great.”

Laffer immediately denied Cheney’s claim: “reducing tax rates will not reduce fiscal revenue, but will bring more revenue.”

Seeing Cheney’s incomprehensible and confused face, the anxious laver picked up a napkin at the bar, took out his pen and drew “half a McDonald’s curve” (according to Bailey). The vertical axis is the tax rate and the horizontal axis is the fiscal revenue.

Laffer pointed to the napkin and said, “if the tax rate is too high and exceeds the peak, the fiscal revenue will decrease. If the tax rate is reduced, the revenue will increase.”

This is the famous “Laffer curve event”.

However, shortly after the meeting, the Ford government sent a tax refund check to the taxpayer. Obviously, Laffer and vanniski failed.

At this point, only two people have seen the Laffer curve.

It was not until four years later that vanniski described this story in his best-selling book how the world works in a colorful way that Laffer curve was known to the world.

This is the only famous historical event of the supply school.

But this matter made Laffer extremely upset and embarrassed. All over the United States have seen Laffer’s actions at that time from wanniski’s book. Therefore, economists satirized Laffer curve as “restaurant paper curve” to illustrate the superficiality of his theory. Opponents often define the “restaurant paper curve” as the birth sign of the supply school to illustrate its empiricism.

Laffer recalled that I don’t know whether I was rude or whether I soiled the lovely tablecloths in restaurants on two continents, so as to express my helplessness.

After this defeat, the tax cut bill has been debated in Congress for several times and won the support of some young lawmakers. This has also led to the fame of Robert, who is only 35 years old and is responsible for amending the bill. His popularity soon surpassed that of Mundell and Laffer.

However, no matter the academic economists, the White House or Congress did not support the big tax cuts. The proposition of the supply school is still far away from the core decision-making level.

However, it is gratifying that through the propaganda of the Wall Street Journal, more and more people (including members of Congress) have accepted the ideas of the supply school, at least the idea of tax cuts.

By march1976, there were about 200 “supply side financiers”. In addition to the seven members of the Standing Committee of Mike I, they also include Buchanan, the founder of the supply school. In addition, there are dozens of believers on the Capitol Hill, who have gradually formed a small “tax cutting force”, led by Senator Kemp.

On March 15, the Kemp act has won 106 support in the Congress.


“Never recover”

On january20,1977, jamycarter became president of the White House.

However, in the years since President Carter took office, the US economy has been a disaster.

In 1978, the inflation rate was 8%, the unemployment rate was 6%, and the economic imbalance index was 14%; In 1979, the inflation rate rose to 11%, the unemployment rate was 6%, and the economic imbalance index rose to 17%; In 1980, the inflation rate rose to 14%, the unemployment rate rose to 7%, and the economic imbalance index reached 21%.

In 1977-1979, the budget deficit was between $40 billion and $60 billion, and in 1980 it was as high as $74billion.

According to what Roberts said at that time, as confirmed by the Ministry of finance, every 10 points of inflation rate can bring 16.5% increase in revenue to the government. However, such a high inflation rate cannot make up for the fiscal deficit, and the bond market is on the verge of collapse.

In February, 1980, Bailey’s editorial Edition: “the exposed wounds of bond dealers have turned Wall Street into a bloody river.” “Traders usually think that bond prices, which move very slowly, are in the process of ‘free fall’… This is the first time since the great depression.”

At that time, the most popular books were disaster books. For example, the best-selling Howard J. Ralph’s how to achieve prosperity in the coming disaster year (1979) and Douglas R. Casey’s crisis Investment: opportunities and profits in the coming great depression (1980) predicted that the great depression was “coming”.

In 1978, the national patience was polished by lingering inflation and inaction of the government. President Carter reluctantly signed a tax bill to support tax cuts, reducing the value-added tax rate.

At the same time, Robert E. Lucas, the leader of Chicago school, made a profound reflection on traditional economics in a famous speech: the task facing business scholars at present is to sort out the wreckage left by the economic disaster, and then judge which can be retained and used in the famous academic event of “Keynesian Revolution”, and which must be discarded.

On july15,1979, Carter delivered the famous speech “never recover”.

“Mr. President, we have a hard time. We just want to talk about blood, sweat and tears.”

Carter stated the public opinion in his speech.

“Our excessive dependence on (oil imports) has greatly damaged our country and people.”

“This is the reason why we are now facing rising inflation and unemployment. This excessive dependence on foreign oil threatens our economic independence and the country’s major security.”

Carter attributed inflation to the excessive consumption and excessive greed of the people, so that they were heavily dependent on oil and led by the Arabs. Throughout the 1970s, the US federal government warned people to reduce demand and control consumption.

Four days after the speech “never recover”, Carter asked all 13 members of the cabinet to resign, which was an unprecedented high-level “massacre” in the history of the US president.

After cleaning up the “disobedient” team members, Carter was eager to recruit. First of all, he found g. William Miller, chairman of the Federal Reserve, to serve as the Treasury secretary.

As a result, he also needs to find a candidate for chairman of the Federal Reserve immediately. Anthony Solomon, the Deputy Minister of finance, recommended Paul Volcker to the president. But the president’s answer was, “who is paulvolcker?”

Volcker, a big man with a height of 6 feet and 7 inches, was the chairman of the Federal Reserve Bank of New York at that time. He was an outstanding Wall Street financier; He once served as Deputy Minister of finance during the Nixon period, pushing President Nixon to announce the decoupling of the dollar from gold, leading to the disintegration of the Bretton Woods system.

On july24,1979, Volcker was invited to the White House to meet with President Carter. During the one hour meeting, Volcker was speaking most of the time. After leaving the White House, Volcker said to himself, “he will never give me this position.”. But the next day, Carter personally called Volcker to take the post.

Why Carter chose Volcker is still a mystery. Carter’s memoir “faithfulness to faith” did not even mention this “landmark measure”. Just from “never recover”, it can be seen that during his tenure, he has been longing for “the voice of the dollar” to be more extraordinary.

Volcker is not bound by any theory. He does not belong to monetarism or supply school. He adheres to pragmatism and is known for his tough tactics. In his first month in office, within the Federal Reserve, Volcker’s plan to raise the interest rate was passed by 4:3. At the end of 1979, as inflation continued to be strong, the international community came to denounce the United States, and the members of the Federal Reserve unanimously agreed to “raise interest rates immediately”.

At that time, the U.S. inflation rate set a record and was still soaring fiercely. Volcker found that the market did not respond for the first time.

In november1979, just two weeks before the congressional election, the inflation “tiger” ran up at an alarming speed. In a desperate situation, Carter made a speech across the country on television, emphasizing that the “big inflation” should be dealt with through the control of industry prices and wages, while the tax cut can only be second.

In fact, Carter was busy regulating labor disputes this year, while Bailey criticized the stupidity of this policy and won the Pulitzer Prize.

In 1980, the desperate Volcker raised the federal benchmark interest rate to 12.5%.

Volcker once said in recalling this history: “if someone told me before 1979 that I would become chairman of the Federal Reserve and raise the interest rate to 20%, I would certainly dig a hole into it and cry.”


one thousand nine hundred and eighty

1980 was a crucial year.

At that time, the economic circles, Congress and the White House accepted the tax cut proposal, and the supply school had considerable influence and appeal. Laffer and Bailey had planned to support the members of the supply school to participate in this year’s presidential election in advance.

However, in December1978, Steiger’s death caused the supply school to be in a mess. In desperation, they could only push Kemp to the front stage and let him compete for the presidency with Kemp rose bill.

But soon Kemp gave up. Bush, Reagan, Connery and Anderson all tried to compete, but Kemp backed out.

In order to occupy a place in the top decision-making level of the White House, laver was determined to help Reagan take office and make Kemp vice president.

So laver set up a bureau, held a party at his home in Los Angeles, and invited Reagan, Kemp and some friends to dinner. After dinner, Laffer spread the crowd and let Kemp and Reagan alone in the small room.

“Sir, I appreciate you very much. My eyes are always following you. You are the influence in my mind, the example of my actions, and even my life like existence. Sir, I want to say that I will run for office. I will order all the members of Parliament won during this period to vote for you when the election day comes.”

“Jack (Kemp), you’ll have to say so,” laver told Kemp repeatedly in advance.

Reagan and Kemp stayed in the small room for less than half an hour before they came out.

“Jack, did you do what I said?”

“Oh, no, Arthur, I can’t say it. I just told him that I would never be bad for him. I would do everything to support him.”

“Jack, you won’t be the vice president. He won’t choose a coward to be his vice president… How can he work with a man without fighting spirit?” Laver was very upset and suppressed his anger.

Of course, laver will not give up Reagan. In fact, they have a deep relationship – laver predicted that Reagan would be elected governor of California when he was still a graduate student at Stanford University. Later, as laver expected. After Laffer’s efforts, Laffer became Reagan’s good friend.

Reagan would never give up the help of popularizing the supply side. John Sears, his campaign manager, has long found the voter appeal of the Kemp case.

In january1979, Kemp and rose submitted the amended Nunn amendment to the Congress and passed it by a majority of votes (Kemp rose act). After passing, Ross, like a happy father who came to the kindergarten, took out cigars and distributed them to all colleagues and employees. Kemp has considerable nominal support in the rust belt and the West.

Sears tried to put Reagan on the label of supply school, and took Kemp plan as the core of his campaign policy agenda. The first thing Reagan said in every campaign speech was to cut taxes. However, his rival George H. W. Bush satirized that Reagan was addicted to “witchcraft economics” (supply Economics). President Carter still refused to make tax cuts his first choice.

On november4,1980, Reagan defeated Carter and George H. W. Bush by an overwhelming majority of 10 popular votes and 440 votes from the electoral college, and was elected president successfully.

After winning the election, Reagan asked pendletonjames, the head hunter of Los Angeles, to help him recruit the team during the transition period.

It is reasonable to say that by virtue of Laffer’s personal relationship with Reagan and the Kemp Roth act, the members of Reagan’s core team should also have the supply school.

However, vanniski did a stupid thing that almost destroyed all the efforts of the supply school.

In april1980, when the presidential election was intense and tense, wanniski was framed by the voice of the country and made inappropriate remarks, which almost made Reagan lose trust in the whole supply school.

In this interview, vannisky said that Reagan had to rely on Kemp to dare to run for office. The reporter asked, “are you an extremist?” His answer was “we are all.” He even said that he was responsible for the idea of the Kemp rose bill.

Laffer, Roberts, and the Reagan team were furious. After the Village Voice incident, the supply school gradually alienated vannisky until his death in 2005. He was also disqualified from joining the Reagan team.

At the most critical moment of the battle, the senior general was seriously injured, which made everyone upset

“It’s too bad. Waniski once made such a great contribution to the economic aspect of the knowledge revolution that it began to expand to the United States and even other countries and regions around the world.” Anderson, a core member of the Reagan team, said with great regret.

Roberts once warned vanniski that his actions might threaten the supply side’s actions in Congress. “All your ideas are full of romantic feelings in the 19th century.” Vanniski’s countered: “we will sacrifice you to the revolutionary cause.”

This is waniski’s paranoia and fanaticism as a revolutionary.

However, vanniski obviously won’t give up. In order to maintain his influence, he organized and established a “shadow cabinet committee”, whose main goal is to support Lehmann as finance minister.


Reagan plan

James drew up an investigation list, in which Lehmann, a popular figure of the supply school, was a candidate for an important position in the Ministry of finance.

In order to seize the opportunity, Lehmann immediately wrote a letter to Kemp and Kemp’s most trusted ally in the house of Representatives stockman (the supply school). In his letter, Lehmann directly pointed out that when everyone’s eyes are on tax cuts, the worst place in the United States is the financial market – the stock, debt and credit markets are in a state of imminent collapse. It is suggested that the new president must take all actions as soon as possible to avoid the country falling into a financial disaster.

The letter inspired stockman. Soon after, Reagan’s economic advisory team held its first meeting in Los Angeles. Stockman immediately wrote an article and asked Kemp to copy several copies and distribute them to every member at the meeting. The title of this article touches people’s hearts – avoiding the Dunkirk economy. The article points out that if we do not retreat as the British did in those days and let inflation disappear as soon as possible, otherwise the financial market is in danger of collapse.

At this time, it was less than ten weeks before President Reagan took office. “President Reagan will face the completely disordered credit and capital markets. Not only will the interest rate be frighteningly high, but he is ready to react strongly to the signals of economic policy,” stockman said

At the end of the article, it is also proposed that the government should immediately and comprehensively open up the regulatory policy, “immediately terminate all these, including the 1981 passenger vehicle exhaust emission standard… The unconfirmed 5mph bumper standard… The diesel particle standard… The vehicle noise standard… Permanently terminate.”

Stockman also said the government would cut spending by $50billion in 1981.

The economic advisers present agreed that stockman and Kemp were not alarmist. In fact, inflation has been out of control and the financial crisis is heavy. The article stockman distributed by Kemp, to a large extent, won the opportunity for the supply school to enter the Reagan team. On Thanksgiving Day, 11 days after the meeting, Reagan invited stockman to the Budget Office of the Treasury Department.

Stockman immediately set up an economic forecasting team. Among them, the supply school members appointed by the Ministry of Finance include Toury, Roberts, stephenentin, etc., who are also informal advisers to the forecasting team. In order to strengthen the team, stockman recruited a new person, johnratrich, who was only 32 years old.

Latridge, who is talented and good at econometric models, was deeply influenced by Mundell and gradually became a supporter of the supply school.

Soon latridge constructed the “supply school thermodynamics” model based on Mundell Fleming Model. In this model, latridge predicts that tightening monetary and tax reduction policies will promote new capital to enter the market, “about trillions of dollars of assets will be transferred to the bond, securities and stock markets”. In this way, inflation will disappear, the tightening problem will be solved, and the real money demand will expand again, which will also save the capital market, and may even usher in a bull market.

Ratrich summed it up as a “beautiful scene”.

In fact, the latridge model is the most detailed academic demonstration of Mundell and the supply school theory. Later history proved that the 32 year old star did predict the magnificent bull market in the 1980s and 1990s.

However, at that time, that is, in January and February 1981, things did not develop towards latridge’s “beautiful scene”. On the contrary, the poor unemployment rate, the financial market, especially the rapidly expanding fiscal deficit, caused participants to waver in the supply side model.

“At that decisive dinner meeting,” the participants had all kinds of data in their hands, one of which was the “terrible deficit”. As an official of the Ministry of finance, stockman and others may accept the high unemployment rate, but they cannot accept such a huge fiscal deficit. Latridge only built models, unable to predict, let alone guarantee whether the government finance will collapse.

The buttocks determine the immaturity of the brain and theoretical system. The supply school began to split when it came to the door of power and policy. Even someone inside began to taunt ratledge, “where does this model come from?” “It comes from here,” said one of the members (wittenbaum) with great disdain, clapping his hands on his own. Soon after, latridge left the Treasury and returned to California.

“It was the last supper,” Bailey recalled.

This means that the pure theory of the supply school is constantly discounted in the face of policy reality and power choices.

In march1981, stockman wittenbaum forecast replaced the latridge model and became the core of Reagan’s tax cuts.

The economic recovery and taxation act, which covers 10-10-10 marginal income tax cuts, free depreciation, regulatory restrictions, budget restrictions and tightening monetary policy, has gradually surfaced. It is predicted that in 1986, the implementation of the tax reduction policy will result in a decrease of $162billion in revenue. This gap is filled by spending cuts, economic growth, increased savings and capital repatriation.

Washington media called it a “beautiful scene”. However, Roberts is not optimistic about this scenario and believes that “this exaggerated policy is an irresponsible performance.” Roberts also knows that this is the result of many interest games and entanglements.

In his memoir political victory, stockman has some implications:

“The basic framework was basically built by a small group of theorists. Roberts, Toury and entin were responsible for every aspect of the work. Wanniski, Laffer, Kemp and leierman all participated in it… At that time, everyone was revolutionaries, including myself. They predicted according to the revolution initiated by the supply school. It can’t be blamed on anyone.”

In fact, the role of the supply side in the Reagan plan was not as great as expected. The Reagan tax cut bill was far from the Kemp rose bill. Greenspan and other members of the economic standing committee played an important role in the Reagan plan. This old school forecaster does not believe that inflation will disappear immediately and has limited tolerance for fiscal deficits.

According to the memorandum of the Ministry of Finance: “the basic scenario assumption was prepared by alangreenspan to seek external support; the goal is to obtain consistent support figures for OMB, the Ministry of finance, Greenspan and wittenbaum.” The last sentence of the memorandum reads: “both the staff of the Ministry of Finance and the minister Reagan expressed their approval for the signing of this scene.”

For the supply school, Reagan was the only option, but for Reagan, the supply school was only an option.

After Reagan’s successful election campaign, more than 70 major economic advisers worked for him, including the “Eight leading figures”, namely Friedman, Simon, Greenspan, paulmccracken, Arthur burns, George Schultz, Caspar Weinberg and Murray wittenbaum. They are both traditional economists who are responsible for chairing task forces and dealing with major economic problems every day.

Carter’s campaign strategy focused on attacking the Kemp tax cut plan in Reagan’s plan. He accused the tax cut of causing inflation and called it “Kemp rose inflation”. Later, these leaders believed more in Carter’s judgment than the supply side.

Later, as Laffer expected, “former actors and stars don’t like former football players”. Reagan appointed Bush Sr. as vice president and gave up Kemp. Reagan soon appointed Reagan, who had been the CEO of Merrill Lynch for more than ten years and an experienced financier on Wall Street, as secretary of the Treasury instead of Lehmann.

In fact, the supply school did not really enter the top decision-making level of Reagan’s team.

At noon on march30,1981, a gangster named John hink aimed a revolver at Reagan outside the Hilton Hotel in Washington. Reagan was shot in the lung. Fortunately, he was treated in time and recovered quickly.

The failed assassination brought Reagan enormous public sympathy and political capital.

On July 27, Reagan made a speech on television to build momentum for the tax cut plan. In his speech, there was a large chart behind him, telling citizens intuitively what benefits you will get after the implementation of the new tax law. The producer of this chart, entin, was very excited when he saw Reagan’s speech in front of the television.

On August 4, the Senate and the house of Representatives passed the economic recovery and tax bill. On the 13th, Reagan signed the bill with satisfaction on his farm in California.

However, within a year after the economic recovery and Tax Act came into force, the US economy experienced the worst period since the great depression. The worst news is that the damned Phillips curve has reappeared in the Jianghu. It has reduced inflation by 14 points and replaced unemployment by 3 points. The unemployment rate has soared to 9.7%, the economic imbalance index has reached 21, and the federal interest rate has reached 21%.

In this year, the number of unemployed domestic workers reached 11million, of which the iron and steel workers in the rust belt suffered the most serious unemployment. In fact, since then, the Northeast Asia Great Lakes industrial zone has been doomed to be a tragedy. The lush grass in the rust belt and the drunken money on Wall Street have become the most obvious rift in American society in the past 30 years.

But what really shocked the Reagan team was the staggering government deficit. In september1981, the government’s fiscal deficit was as high as $79billion, exceeding the worst deficit situation in the cartoon era. The government was severely criticized by the outside world.

The Reagan administration launched the September offensive. This action surprised the supply side, and the Reagan administration changed its attitude of cutting back during the election campaign. “We all know that if the government no longer borrows heavily to cover the deficit, the interest rate will only show a downward trend and continue to decline,” he said in a televised speech

Reagan was very cunning. He excluded defense spending from the previous Reagan budget cuts. This time, he asked for an increase in taxes on the grounds that the Ministry of defense needed $13billion (to plan for Star Wars). “I will soon urge Congress to pass a new bill to eliminate the abuse of tax laws and outdated incentives,” he said publicly

This means that before the tax cuts were actually implemented, Reagan had already started his second plan. This may have been unexpected for Reagan himself or part of politics.

Greenspan, burns and Walker in Reagan’s team all supported increasing or decreasing taxes to reduce the deficit, rather than monetizing the huge deficit.

The year 1982 can be called “the year of quack medicine”. Some members of the supply side have lost confidence. Robert resigned as assistant secretary of the Treasury.

In his farewell speech, “the recession began in the second half of 1981… Because the experiment of the economic theory called Reagan’s economic policy finally failed, and may evolve into an important historical time. This is a kind of five poisons to absurd situations.”

In September, the tax fairness and fiscal responsibility act was passed, creating the largest tax increase in American history. This bill humiliated Toury and he resigned as Deputy Minister of finance. Since then, the only pure supply school figure identified in the Ministry of finance, liberal entin, and Deputy Assistant Secretary manueljohnson.

When Reagan first entered the White House, he invited a group of economists to give lectures. The first one was Laffer. When Laffer said that “when the tax rate is higher than a certain value, people are not willing to work”, Reagan stood up excitedly and said: “yes, that’s it. During the Second World War, I was working as a film actor in the big money company… After making four films, we stopped working and went abroad for tourism.”

After the “September action”, Laffer always doubted whether Reagan wanted to cut taxes completely or just for the rich. Laffer also complained to Reagan about this and was scolded by the latter.


“The problem now is money”

On August 4, 1981, the day the house and Senate passed the economic recovery and tax bill, wanniski hurried to the White House and handed a five page document to Anderson, a core member of the Reagan team. A note was written in this document: “I wish you great success in tax law.”

After the “voice of the country” incident, wanniski, who was unwilling to fail, still maintained the keen sense he had developed on Wall Street. Vanniski was deeply impressed by Mundell’s true story. He knew very well what the government should do next.

The title of this article is “the problem now is money”. He repeatedly said to Anderson, “the problem now is money.” Before leaving, vanniski told Anderson that “please find time to read this article. It is very important to understand the supply school’s discussion on money.”

Wanniski claimed that the goal of the supply school was no less than the Reagan Administration (and the Federal Reserve) promised to embark on a path to dollar convertibility.

At this time, it was a critical moment to fight against inflation. Volcker worked hard to increase the interest rate to a staggering 22%. The inflation rate fled in a hurry, and the CPI fell by 10 percentage points. In the first quarter of 1982, the annual price growth rate was only 2.1% and 6.2% for the whole year, ending the double-digit inflation for three consecutive years, which was also the first landmark achievement of the Reagan plan.

“The owners of real estate companies came to visit me every day,” Walker recalled. “They kept asking when it would be over.” Another group whose interests have been damaged is American agriculture. Farmers who can’t afford to pay back their loans drive trucks into Washington and block the door of the Federal Reserve headquarters, cursing Volcker’s letters.

Volcker, with the courage and means of “being the enemy of the world”, suppressed the inflation that has plagued the United States for ten years. He is worthy of being a hero of the United States and is praised as “the greatest chairman of the Federal Reserve”. Greenspan praised him as “the father of American economic vitality in the past two decades”.

But should Volcker’s success be attributed to Mundell’s supply school or Friedman’s monetarism?

In 1973, Allan Melzer, a monetarist authority, established the shadow Open Market Committee. This group, composed of 12 monetarist authorities, discusses the current economic trends of the Federal Reserve and the white house twice a year.

In 1978, Congress passed the Humphrey Hawkins act, which requires the Federal Reserve to take care of the employment rate target.

At this time, the Mike No. 1 gathering has been transferred to the Lehmann Institute, and the research theme has changed from tax reduction to monetary policy.

Mundell believes that the Federal Reserve has always had the wrong idea that it should intervene in the economy in addition to stabilizing prices. Mundell hopes that the Federal Reserve will become simple, just maintain price stability (the rule of thumb), and do not need to take care of the employment rate target. Otherwise, it will cause great trouble.

Mundell criticized that the biggest problem of monetarism was that it lost control over prices and instead pointed to the total amount of money.

In fact, as early as the University of Chicago, Mundell and Friedman had countless debates on this issue. Friedman appreciated Mundell’s creativity but did not agree with his ideas, while Mundell regarded Friedman as an idol but insisted on his own views.

The core of the debate is whether the goal of monetary policy is monetary aggregate or price stability?

Friedman pushed the Federal Reserve to shift from the interest rate target to the quantitative target, trying to stabilize prices by controlling the amount of money. However, according to the “thumb principle”, Mundell proposed that the Federal Reserve is only responsible for maintaining price stability. However, this goal cannot be achieved by monetary policy alone. It requires the cooperation of CAIPA. CAIPA’s tax cuts can stimulate economic growth and make up for the losses caused by monetary tightening.

“The growth of economic entities stimulated by tax cuts will generate sufficient demand for loans and realize real monetary expansion at higher interest rates.”

Vanniski wrote to Volcker that fall: “you almost did it.” “You should begin to seriously consider revising your position on fiscal policy, and begin to prepare Miller to devise efficient and orderly tax cuts.”

Volcker’s answer is that he is taking time out of the weekend to read the book “the road to world development” (wanniski’s works).

Bailey expressed support for Volcker’s approach. He published an editorial saying: “the inflation policy implemented by the Federal Reserve in the new deal is the most promising economic policy development in more than a decade, clearly showing its determination to curb inflation.”

In fact, as for monetary policy, the supply school also split at this time. Wanniski, Mundell and Lehmann insisted on restoring the gold standard. Supply side officials of the Treasury believe that it would be better for the Federal Reserve to pursue Friedman’s monetarist policy. Laffer supported Walker’s ideas and work at the Federal Reserve.

In 1983, the inflation rate dropped to 3.2%, then around 4% in the next two years, and dropped to 1.9% in 1986.

The degree and speed of the decline in the inflation rate far exceeded the predictions of the government, the public and the staff.

At this time, latridge’s “beautiful scene” began to appear: a large amount of investment turned from high inflation commodity investment to low inflation financial assets such as stocks, bonds and monetary funds, and an unprecedented bull market was beginning.

In October of 1982, the Dow Jones index rose from 770 in August to 1000. This is a fabulous story. Inflation also began to decline, and international capital began to enter the US market in large quantities. Does this signal the end of the long and painful era of stagflation?

In the winter of 1982, the US economy and even the world economy entered a historic turning point. In the 25 years after 1982, the annual growth rate reached 3.3%, which is equivalent to the growth level in the 25 years after World War II. In 1983, the GDP growth rate was 4.5%, which was as high as 7.2% in 1984. Statisticians shouted that the economy was overheating and called on the Federal Reserve to regulate it. In 1985, it was 4.1%.

Santer’s New York Book Review praised: “Reagan’s election as president means that the air is once again filled with musk like profits.”


End in vain

The miraculous recovery of the US economy has well explained the phrase “darkness before dawn”. The super bull market in the United States started at the most painful time, which greatly exceeded economists’ expectations.

How did stagflation disappear? Why is the economy recovering?

Bailey wrote a book called seven big fat years. “From 1983 to 1989, there were” seven fat years “, and the economic imbalance index dropped below 10,” he said

In his book, Bailey emphasizes the three heroes who led the US economy to recovery in the 1980s: college dropouts (Bill Gates), engineers who started a new business (Technology Entrepreneurship) and illegal immigrants (population).

In fact, the supply revolution initiated by the supply school in the White House and the monetary revolution initiated by Volcker in the Federal Reserve jointly resolved the ten-year-old stagflation crisis.

In december1999, at the Nobel Prize Presentation Ceremony in Stockholm, Mundell became the protagonist of the evening. As a rule, he should deliver an “important” speech.

“I want to change not only the life of economics, but also the life of history!”

This remark surprised the public, but the following economists are very clear that it is “very Mundell”. He gave his speech a very modest title – “reexamination of the 20th century”.

“Most of the political events of this century originated from the little-known chaos of the international monetary system, which in turn was the product of the rise of the United States and the mistakes made by financial institutions and the Federal Reserve.”

“If the large central banks adhere to the price stability policy instead of the gold standard, there will be no great depression, no Nazi revolution, and no World War II.”


Mundell’s “conceited” speech, with criticism and emotion, seems to be venting his dissatisfaction and complaints for half a life.

Among the old acquaintances who attended the ceremony that night, besides Bailey, who are the 70’s gourmets of Mike 1 left? Where is Mike 1 restaurant today? Who remembers vanniski?

In this award banquet of the highest honor in economics, Mundell, as the protagonist, is so lonely in all sorts of ways. Why not play freely and sing a song?

Let’s sing my way by Paul Anka, a local lyricist from Ontario, Canada, his hometown, to sing a song for his academic career and complain about the grievances of the gourmets in those years.

Mundell’s play is undoubtedly the highest praise of supply economics.

All the glory, grievance, struggle and emotion are in it

Bailey once proudly said: “since 1974, this great country has exerted its self healing ability.”

Since Kaifu in North America, this group of Puritans have begun to narrate the same story inherited from the Mayflower in a “Jefferson style” way. Everyone can participate, whether you are a hippie, “Golden Lion King”, a drunkard or a “local snake”.

They are like self-organization. They come together spontaneously because of the difficulties of the country or common beliefs, and set off a fanatical revolution.

At the end of the song, they will be scattered.


On the Easter day of April 4, 2021, robertmondale died at his Italian home at the age of 88. A year later, the United States once again broke out in big inflation!


?1? Supply side revolution, written by briandomitrovic, translated by zhuguandong and liweijiao, Xinhua Publishing House;

?2? European and American economists on the supply side, Friedman et al., translated by wuliangkun, Shanghai University of Finance and economics press;

?3? American history, written by Alan Brinkley, translated by chenzhijie, Peking University Press;

?4? Stagflation Economics (audio course), written by Qinghe, Zhiben society.

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