Tuesday, October 26, 2010

A Five Run Inning for the Supply Side?

Scott Grannis helpfully reminds us of the massive resurgence in the value of global equities. As I have said before, a good chunk of this increase in wealth has likely accrued to those who analyze the world through a supply-side lens (I lump Friedmanite monetarists in as "supply-siders" for simplicity). Viewing the world through a supply-side lens versus a Keynesian or neo-classical lens was the key differentiator in correctly analyzing the financial crisis and making the appropriate investment decisions. Indeed, it is not just in equity markets that supply-siders are raking it in, check out this runup in TIPS. Any supply-sider worth his salt could have seen inflation coming even while the conventional wisdom was fearing deflation. These developments represent important wins versus competing viewpoints on the idealogical scoreboard. But it doesn't stop there, traditional, demand-side theory on economic growth, aka Keynesianism, is currently taking a beating in the real world laboratory. The blow could eventually prove fatal. If the US's economic torpor persists despite unprecedented "stimulus" and if Europe decisively rescues itself by adhering to a doctrine of austerity, Keynesian theory will be forever hobbled, if not defeated. There's nothing like a decisive real world counter-factual to trash a good theory. While Milton Friedman and Edmund Phelps eventually won Nobel prizes for their work burying the long accepted Phillips Curve, it wasn't until the 1970s delivered stagflation that Phillips Curvers had a permanent, undeniable, debilitating flaw attached to their beloved theory. Here's hoping that the next few years bring further vindication to supply-side theories so that we will be less likely to have to live under the dreadful policies that emanate from the demand side such as $1 trillion stimuli, "quantitative easing" and all the rest.


Blogger Richard said...

Granted, Milton Friedman and Edmund Phelps won Nobel prizes. But so too did the execrable Paul Krugman. Keynesian theory is certainly "taking a beating", but its not the first such thrashing in my lifetime. Before Ronald Reagan's supply-side triumph are the echoes of Jimmy Carter's "malaise" and Richard Nixon's "We're all Keynesians now!"

Besides, to recognize once and for all the futility of Keynesian fiscal policy, one must first be willing to view economic reality beyond the ideological blinders. Freedom-hating leftist autocrats have no such clarity of vision.

4:49 PM  

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