Leading figures in supply-side economics are heading into the 2012 election sharply divided over the future direction and emphasis of the movement, with one faction pushing for Reagan-style tax rate cuts while another faction advises a focus on a sound dollar, including a return to a gold standard.
That was the news out of a conference in New York on Tuesday that was part of the celebration of the 100th anniversary of Ronald Reagan's birth. Convened by the Manhattan Institute for Policy Research, the Ronald Reagan Presidential Foundation, and the Wall Street Journal, the event featured remarks by Reagan aides and advisers including Lawrence Lindsey, Lewis Lehrman, Arthur Laffer, and Lawrence Kudlow as well as comments by a Nobel laureate economist, Robert Mundell.
A trustee of the Reagan Foundation, the publishing executive and former presidential candidate Steve Forbes, pointed out in his opening remarks that the debate within the supply-side camp between gold-standard advocates and those who felt the monetary supply could be managed was "never really resolved."
Jeffrey Bell, who produced and co-wrote TV commercials for Reagan in the 1980 primaries and was a Reagan delegate from New Jersey in 1980, said the monetary policy issues — "zero interest rates prolonged well into the third year" after a downturn — had been "underaddressed" by Republicans. He faulted Rep. Paul Ryan, the Republican chairman of the House Budget Committee, for, at a recent hearing, asking Fed Chairman Ben Bernanke "for approval" of spending cuts. Mr. Bell said that indicated Mr. Ryan felt "insecure."
Mr. Lehrman, appointed by Reagan to the Presidential Gold Commission, lamented: "We never got control of the Federal Reserve's absolute discretion to create money." He said that is the key to restraining federal spending, warning that otherwise, the government will act like anyone else "who has unlimited credit facilities at zero interest rates."
Mr. Kudlow, who served in Reagan's Office of Management and Budget, said, "lower marginal tax rates will not work unless we have stable money."
Even Mr. Lindsey, who was a staff economist on the Council of Economic Advisers in the Reagan administration and later served on the Federal Reserve Board of Governors, predicted, "We will end the decade with something other than fiat money....They are going to be right. We are going to switch."
The dissenter from those emphasizing monetary policy was Professor Mundell, whose heavyweight status was recognized by the fact that he spoke in the prime lunchtime position, in a conversation with the editorial page editor of the Wall Street Journal, Paul Gigot. Professor Mundell focused on tax cuts rather than the Fed. He advised making the Bush tax cuts permanent to remove the "sword of Damocles hanging over" when they are scheduled to expire in 2012. He also said the corporate tax rate should be cut to 15% or 20%. "That is the secret to getting the U.S. economy going again," he said, referring to both tax cuts.
Mr. Mundell didn't dismiss the importance of monetary policy — he said the Fed should watch gold and foreign currency exchange rates relative to the dollar as symptoms and early warnings of inflation — but he wasn't as alarmed as some of the other speakers were about oil or gold prices at current levels signaling inflation. "The risk of cutting off the recovery now is greater than the risk of inflation," Mr. Mundell said. "It would be disastrous to have a policy of tight money now....If I were on the Fed I would not be voting for tightening at this time."
It's possible, of course, to be for both sound money and tax cuts, as were both President Kennedy and President Reagan. The two aren't mutually exclusive; in fact, they can be self-reinforcing.
And anyone troubled by division among Republicans today on the Federal Reserve or the gold standard can recall that even in Reagan's day Republicans weren't exactly unanimous about tax cuts, either, with both George H.W. Bush and Robert Dole deriding "voodoo economics." Still, if Republicans in 2012 or 2016 hope to achieve the kind of structural reform of monetary policy that ultimately eluded even Reagan, they'll probably need either a politician who is both as principled as Reagan and as great a communicator — or inflation that is as bad or worse than what preceded Reagan.
If no Reagan seems on the horizon for the Republicans, Arthur Laffer suggested that such figures are made, not born. "It took Carter to create Reagan....You can't imagine the great president that is going to follow Barack Obama....This is just a rocket ship ready to launch."