Traditional supply-side economic policies stimulated U.S. growth to such an extent that by 1906, U.S. workers became the richest workers in the world, a trend that continues to this day.
Recently, Treasury Secretary Janet Yellen proposed relabeling President Biden’s Build Back Better policies as “modern supply-side economics.”
“Modern supply side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage,” she said.
Yellen wrongly said Biden’s modern supply-side strategy is superior to traditional supply-side economics, which stresses limited government spending, cuts in regulatory burdens, and lower tax rates. Traditional supply-side policies have failed to produce their promised benefits, she said.
The Real History
The United States was founded on traditional supply-side policies designed to provide individuals with maximum freedom over their economic lives. These were the policies promoted by Adam Smith, the 18th-century classical economist and author of “The Wealth of Nations.” Smith said countries enjoy the greatest prosperity when they adopt low tax rates, limit government spending and regulations, allow markets to respond freely to supply and demand, provide a stable monetary policy, and follow the rule of law to protect people and their property from others, including the government.It was these policies that led to U.S. workers surpassing those in the UK in 1906 to become the richest in the world. In the 115 years from 1900 to 2015, average worker real take-home pay increased by 211 percent. Today, U.S. workers remain the most prosperous workers of any major country in the world. Countries with less economic freedom than the United States, such as Japan, China, and most of Europe, all have living standards well below those of the United States.
Countries with the least economic freedom produce abject poverty. Individuals will risk their lives in an effort to escape to U.S. freedom and prosperity.
Although the United States has a relatively high level of economic freedom, we’ve moved far from Adam Smith’s ideal of low tax rates and minimum government interference. The move away from free-market classical economic principles wasn’t a steady one.
My book, “Rich Nation, Poor Nation,” presents the history of U.S. economic policies from 1900 to 2015. Since 1900, there were only 50 years when economic policies clearly moved in the direction of traditional supply-side economics. By contrast, there were 52 years when policies were moving away from these free-market classical principles. The remaining years, 1940 to 1953, involve policy moves back and forth in response to wartime conditions. As a result, policies during this time weren’t consistent with a clear policy alternative.
Yellen said traditional supply-side policies failed to produce promised benefits. However, during the 50 years when U.S. policies clearly followed free market classical principles, our country enjoyed its greatest progress. Almost all of the 211 percent increase in average worker real take-home pay, 87 percent, occurred during these 50 years. The remainder occurred from 1940 to 1953, when there was no clear move in one policy direction or the other.
I chose to label moves away from traditional supply-side policies “progressive” economic policies. During these “progressive” policy years, there were rapid increases in federal spending and regulations, controls over markets, and increases in tax rates.
The first such period came from 1913 to 1920. President Woodrow Wilson, the father of progressive policies, promised to replace the free markets with active government action. His intent was to make the economy more productive and prosperous, as well as reduce inequality. Wilson’s policies involved sharp increases in the money supply, rapid increases in government spending and burdensome regulations, wage and price controls, and tax increases intended for businesses and the rich.
Instead of real take-home pay rising at its prior rate of close to 2 percent per year, Wilson’s “progressive” experiment ended with gains of a mere 0.07 percent per year, a half percentage point over seven years. The policies created such havoc that the public responded in 1920 by throwing those responsible out of office.
Newly elected leaders reinstated classical economic principles. From 1920 to 1929, there were major reductions in tax rates, federal spending, and regulations. Average real take-home pay increased by 1.7 percent per year. The period became known as the “Roaring Twenties.”
In what has been a pattern, the next shift to progressive policies began in 1929, under Republican President Herbert Hoover. Hoover was enamored with such “progressive” ideas as increasing government spending and using government intervention to control the economy. His moves to place high tariffs on international trade and increase federal spending and taxes created economic carnage.
In 1932, voters responded by putting the original “progressives” back in power. Their policies extended the depression to the end of the decade. Although real after-tax wages rose by 1.4 percent per year from 1929 to 1940 there was a major increase in poverty due to high unemployment during the period now known as the Great Depression.
The remaining periods of “progressive” policies were also very disappointing. These moves in 1965–1981, 1988–1995, and 2004–2015 all failed. The annual change in average workers’ real take-home pay was negative 0.7 percent, negative 0.5 percent, and 0.06 percent, respectively.
‘Progressive’ Policy Legacy
During the entire 52 years when “progressive” policies were clearly in effect, average worker take-home pay failed to increase. It was the only extended period in U.S. history when the greatest country in the world failed to provide its workers with any increase in living standards. As great as the U.S. economy is, when we adopted policies similar to those found in underdeveloped nations, it has behaved like the economy of an underdeveloped nation.Changing the label on failed policies doesn’t change those policies any more than putting lipstick on a pig makes it pretty. The historical record is clear. Whatever we choose to call them, whenever the United States has followed policies to increase federal spending, regulations, and tax rates, the result has been economic failure. So long as U.S. policies move in the direction of those favored by the Biden administration, the recent decline in real wages will continue, followed by economic stagnation and a recession.
In order to reignite U.S. potential, it will be necessary to return to free-market classical policies. Specifically, we must reduce the growth in government spending and regulatory burdens; eliminate government controls over energy, labor, and health markets; adopt a more stable monetary policy; and lower taxes to prevent built-in automatic increases.
The history of the past 100 years provides encouraging news. Today’s destructive economic policies are nothing new. We’ve endured their ill effects before. Each time we’ve recovered. We can do it again. Traditional supply-side policies have stood the test of time. Their proven effectiveness will end the current economic turmoil, raise living standards, and allow the United States to resume its unprecedented history of prosperity.
