Former US Senator and Treasury Secretary Lloyd Bentsen has passed away. Bentsen was a Texas Democrat and was President Clinton’s first Treasury Secretary. As Chairman of the Joint Economic Committee of Congress, Bentsen played a key role in the replacement of Keynesian demand management with supply-side economic policy. The 1979 JEC Annual Report stated that stagflation, the major problem of that time, was the result of policies that stimulated demand while retarding supply. In the chairman’s introduction Bentsen recognized “an emerging consensus in the committee and in the country . . . that the major challenges . . . are on the supply side of the economy.”
The report concluded that supply-side incentives had “been badly neglected as a way of fighting inflation.” Keynesian demand management had proved to be impotent, because “even if demand is high, capital spending and the supply of output in general may be low if the after-tax real rate of return is inadequate.”
Under Bentsen’s leadership, the 1980 Annual Report, “Plugging in the Supply Side,” disavowed the practice of fighting unemployment with inflation and inflation with unemployment. The report acknowledged that policymakers had made mistakes by viewing tax cuts “solely as countercyclical devices designed to shore up the demand side of the economy.”
The proprietors of the econometric models that policymakers used to formulate US economic policy got the message that the days of demand management had passed. At a Joint Economic Committee hearing on May 21, 1980, the forecasters were asked if they had plugged in the supply-side. Alice Rivlin, director of the Congressional Budget Office, testified that the models were beginning to incorporate the direct effects of fiscal policy on supply, thus moving away from the focus on the short-run effects on demand. Otto Eckstein testified that “the mistake we have made over the last 20 years is that we have always looked at the short-run demand effects, and have thereby ignored what we are doing to the long-run growth potential of the economy.” He admitted that it had been costly to ignore the effects of fiscal policy on the supply side of the economy.
Prior to President Reagan’s election, congressional Democrats had started the Supply-Side Revolution. The original instigator was Republican Jack Kemp. Kemp was addressing a real problem, not just playing politics. Democrats, who controlled Congress, saw the point and took the lead in implementing the new policy.
It is part of leftwing mythology that Ronald Reagan deceived the country and implemented “trickle-down economics” in order to enrich the already rich. But as the Democrats realized, stagflation was destroying their constituents, not the rich. Supply-side economics broke the back of stagflation. We have not seen it since.
A quarter century ago Congress still had members who were accustomed to lead. They could think for themselves and did not rely on the executive branch or on lobbyists to tell them what to do. Lloyd Bentsen was one of those leaders.
Paul Roberts was Assistant Secretary of the Treasury for Economic Policy in President Reagan’s first term. He was staff associate, Joint Economic Committee, for Senator Orrin Hatch. He is the author of The Supply-Side Revolution (Harvard University Press, 1984)