Reviewed by Barry L. Anderson University of Delaware
In the preface to A Guide to Supply-Side Economics, Hailstones reveals that he has tried to write a short book for any layman seeking instruction in:
. . . the classical roots of supply-side economics, the reason for the Keynesian Revolution, the modern setting for supply-side economics, its propositions, its differences and similarities vis-a-vis Keynesian or demand-side management, some models for supply-side economics, its current status and its probable policy applications in the 1980s, (p. v)
The order in which topics are presented is approximately that in the quotation above. Hailstones begins by defining supply-side economics as the general belief that a nation can best promote non-inflationary economic growth by stimulating the supply of goods and services rather than the demand for them. (p. 3) Supply-side policies include most prominently lowering marginal tax rates, but can extend to almost any measure that strengthens private incen-tives to work, save, and invest. If the right micro incentives are in place, the theory goes, the macro economy will be self-sustaining. Thus broadly conceived, supply-side economic theory is as old as the economics profession itself. Hailstones underscores this point by tracing the roots of supply-side thinking to the classical economists of the late 18th and early 19th centuries. The contributions of Smith, Ricardo, and Mill are all discussed together with those of Jean Baptise Say, the patron saint of the supply-side.
Appropriately, much of the discussion centers on Say’s Law of Markets which, in paraphrase, states that production generates income which in turn generates demand for the goods produced. If this is true, successful efforts to stimulate supply will not require additional efforts to stimulate demand. As supply expands demand will grow of its own accord preventing inventory accumulation and the threat of unemployment that accompanies it.1 I say, “If this is true,” because Say’s Law has provoked a great debate in economics about the conditions necessary for it to hold. Keynes and the demand-siders who march under his banner have pointed to circumstances under which increased supply will not automatically lead to increased sales. These include the existence of “price rigidities” in either the capital or labor market and/or the existence of a liquidity trap in the money market.2 Hailstones mentions these criticisms in Chapter 3 and then devotes Chapters 4 and 5 to demand-side theory and the history of its adoption in the U.S. The income-expenditure model, on which demand-side economics rests, is developed in much the same manner that it would be in a standard introductory text. The notion that aggregate demand depends upon expenditure decisions of consumers, investors, and the government and that it can be deficient unless somehow “managed” is accurately presented as the keystone of the demand-side point of view.
While the demand-side story is in jarring conflict with the classical arguments previously presented, Hailstones makes no effort to reconcile the two or to choose between them; nor does he indicate the basis on which a reconciliation or choice might be made. This omission is by design and is made to avoid appearing either strongly supportive or strongly critical of supply-side propositions. The result is that the reader is confronted with two opposing but equally plausible sets of arguments. Although scholars will no doubt applaud this objectivity, the layman may wish that his guide provided a bit more guidance. Some data and perhaps a little statistical analysis would have fit the bill nicely here, had it been included. Regrettably, it was not.
The final third of the book develops supply-side economics in its most recent incarnation. Since this is the most timely part of the book, it is fortunate that it is also its strongest portion. In the con-cluding chapters, Hailstones introduces virtually all of the currently prominent supply-siders, from politicians like Roth and Kemp to academic scribblers like Mundell, Feldstein and Laffer. While the contributions of these and many other individuals are only briefly described, this section is extensively footnoted and followed by an excellent bibliography. The bibliography alone is worth the price of the book, but the last chapters contain much more. Chapter 9, for instance, covers the Laffer curve and the capital and labor wedge models. One simply cannot understand modern supply-side thinking without an adequate understanding of each of these.
Also in-cluded is a discussion of the Capital Cost Recovery Act or 10-5-3 plan for accelerated depreciation. Hailstones correctly points out that such a measure is necessary to prevent the underdepreciation of assets that occurs when historical cost accounting methods are applied during inflation. This inflation induced distortion is one of the major problems to face the accounting profession in recent times and it is comforting to see legislators and popular authors finally cognizant of its dangers. The book concludes with a discussion of the current policy status of supply-side ideas and several appendices showing how they have been incorporated in the Reagan Administration’s economic program. The appendices are quite thorough and cover everything from specific tax and expenditure cuts to reform of the E.P.A.
In summary, Hailstones has attempted to cover the entire waterfront of supply-side economics for those with an interest but little background. Explaining so much to the uninitiated is a formidable task even when length is not a consideration. If one limits oneself to 175 pages of large print, as Hailstones has, the task is more difficult still. The problem is that 175 pages does not provide enough room to include very much detail. Hailstones realizes as much and obviously cuts everywhere he feels that he safely can. Statistical data, for instance, is generally omitted as is the kind of rigorous critical analysis generaly found in the professional literature. Instead of analysis or detailed exposition, the reader receives the gist of the supply-side story in a readable almost outline format. In short, if one is seeking an introductory or conversational knowledge of supply-side economics, this book provides it. If one is seeking a deeper understanding, further reading is necessary but the book provides a good start.
FOOTNOTES
1Keynes, pp. 78-79. 2Say, p. 172.
BIBLIOGRAPHY
Keynes, John M. The General Theory of Employment, Interest and Money. New
York: Harcourt, Brace and Co., 1935. Say, Jean Baptise. A Treatise on Political Economy. Philadelphia: John Griggs, 4th
ed., 1830.
