FORBES

Last week, Howard Gold of MarketWatch wrote a widely read column called "It's Time to Bury Supply-Side Economics." Here's how the argument went, Gold's words:

"Supply-side economics held that reducing marginal tax rates would spur economic growth, create jobs and even generate tax revenue for the government....But [its advocates] rarely mention the 1990s or the 2000s. Maybe that's because those two decades were almost a perfect controlled experiment that shattered their pet theories: President Bill Clinton raised marginal tax rates and the economy boomed and jobs were plentiful. President George W. Bush cut them and we got only modest job growth."

Gold went on to cite the numbers on job growth, 20 million new ones under the Clinton tax increase and 8 million under the W. tax cut. Gold also said some things about tax cuts and increases having no effects on the 1920s and 1930s, and that the rich didn't "work more" in the 1980s as supply-side economics said they should have.

Let's fact-check, in particular the definition. What's supply-side economics again?

There is a canonical statement. It was made by the founder of supply-side economics, the future economics Nobelist Robert A. Mundell, in 1971. Here it is, and you bet the italics are original: "The correct policy mix is based on fiscal ease to get more production out of the economy, in combination with monetary restraint....The increased momentum of the economy provided by...a tax cut will cause a sufficient demand for credit to permit real monetary expansion at higher interest rates." By the way, the fiscal ease of which Mundell spoke referred to marginal tax cuts.

All advocates of supply-side economics over the years, whether Mundell, the historic Congressman Jack Kemp, the influential Wall Street Journal editor Robert L. Bartley, Arthur Laffer, Alan Reynolds, Jude Wanniski, Larry Kudlow, whoever, tightly followed Mundell's lead from 1971.

The main thing being that there is a policy mix. This is two things, not one, by definition. There has got to be tax reduction in combination with strong currency policy. Maybe we should put it in reverse so people get the picture: there has to be strong currency policy in combination with tax cuts. How about italics: there has to be strong currency policy in combination with tax cuts.

No "policy mix," no supply-side economics—OK? In the Reagan years, there were tax cuts, real nice ones, on the income tax, down at the top from 70% to 28%, in the context of strong-dollar policy and a low, stable gold price. Not perfect monetary policy, to be sure, in that Paul Volcker's Fed, in 1981-82, did not heed the last portion of Mundell's definition for "real monetary expansion at higher interest rates" in the wake of a money-demand inducing tax cut, and hence a recession, but pretty close all the same after 1982.

The Clinton years? You had strong dollar policy, some of the most heroic of the entire fiat-currency era. And guess who talks about this all the time—Larry Kudlow, whom Gold inexplicably called out in his piece for being silent on the Clinton boom and the Bush mediocrity. Clearly Gold does not listen to Kudlow's essential Saturday morning radio show, where this stuff is a refrain. You've never heard Kudlow go on about "King Dollar?"

Moreover, there was a serious tax cut in 1997, when the capital gains rate went down by eight points. And there was a major spending reduction in the wake of the income-tax increase Clinton is famous for, with the budgetary surplus implying future tax cuts. Of course the stock market went up, and all consistent with supply-side economics. Supply-siders don't talk about this? Alan Reynolds and Arthur Laffer sure do.

When the Bush years came, the Wall Street Journal editorial page, and particularly its über-supply-side leader Bartley, until his death in 2003, was exasperated over both Bush tax and currency policy. And however much supply-siders approved of the 2003 Bush tax cuts, they have always identified the notorious weak dollar policy of these years as the specific reason these tax cuts were only able to produce 3% in economic growth at their peak, as opposed to more than double that in the Reagan years. Again, in the supply-side precincts, Larry Kudlow and all the rest, this stuff has been standard.

Gold said in the 1990s-2000s we had a "perfect controlled experiment" to see if supply-side economics works. Well, that's not so. To have a perfect controlled experiment, you would need a comprehensive reversal of both sides of the policy mix at once. You would have to have high taxes and loose money. It turns out we are going to get this should the incumbent stay on as president in 2013, given the proclivities of this Federal Reserve. Anyone looking forward to that economy?

The point Gold could have made is that long experience has now shown that perhaps both aspects of the policy mix are not equally weighted. The evidence now in seems to be in that monetary solidity is probably more important than low and simple taxes. Lew Lehrman—another stalwart of the supply-side golden age—makes this point often. The benefits from tax cuts, and from deregulation and free trade, can get washed away by monetary policy that fights aligning the money supply with real money demand, fixed exchange rates, and the gold standard.

From Day 1 back in the 1970s, and continuously throughout the Reagan, Clinton, and W. years, supply-siders have identified their solution as one of a policy mix. If you've come to bury supply-side economics—and the evidence is clear that there is no reason to—you've got to face up to that fact.