Bruce Bartlett's conservative economic bona fides are apparent in his resume: he started as a member of Ron Paul and Jack Kemp's Congressional staff, then became Executive Director of the Joint Economic Committee during the Reagan administration and later served as Deputy Assistant Secretary of Economic Policy at the Treasury Department under H. W. Bush.  He also literally wrote the book on supply-side economics, with Reaganomics: Supply-Side Economics in Action in 1981.  With such unimpeachable conservative economic credentials, Bartlett feels free to slaughter some of the right's sacred cows in his recent book, The New American Economy: The Failure of Reaganomics and the New Way Forward.  In it, he rehabilitates John Maynard Keynes as a misunderstood conservative, calls for the victory celebration and subsequent retirement of supply-side economics and defends President Obama's stimulus plan as the only thing to do.

Bartlett starts with an explanation of Keynes and the Great Depression.  Without rehashing our recent inflation/deflation debate, Bartlett basically believes our troubles in both economic times of crisis stem from deflation.  Deflation caused banks to hoard money reducing the velocity (the ratio of currency to GDP) of capital in the economy which caused GDP to crater.  Mr. Bartlett advocates for Keynes's solution in a deflationary recession: monetary expansion through the central bank and public fiscal stimulus to make up for lost private demand.  That course was charted by President Obama and Ben Bernanke last year, with the stimulus plan and a $1.2 trillion monetary expansion from the Fed.

That part is pretty conventional, but Bartlett's analysis of the New Deal turns the popular conception on its ear.  Conservatives, nominally anti-Keynesians, often debate the efficacy of the New Deal to denounce new government spending.  The line goes: it was the War, not the New Deal that got us out of the Depression.  Fair enough, because it was the war, not the New Deal that vindicated Keynes.  Keynes struggled to convince Roosevelt that he should run the massive deficits necessary to expand the money supply, because at the time deficits were considered immoral - more on that later.  Keynesian economics doesn't care how the government spends the money - though obviously building useful infrastructure is its own reward - because the deficit itself will plug the hole in output from the demand side.  So from his perspective, building the Tennessee Valley Authority or invading Europe are essentially indistinguishable from the economy's standpoint.  The difference was, now and then, that conservatives have no issue with massive deficits spent on defense, but raise a hue and cry about money spent on anything else.  The result has been six decades of Keynesian fiscal policy, shepherded through Republican and Democratic administrations, under the guise of strong national defense.  We have built our economy on F-22's and aircraft carriers, because high speed rail just seems too socialist.

Keynesian economics were ascendant for three decades after the Great Depresssion ended, hoowever, the gritty specifics of his economics faded before a simplified version that became a caricature of his nuanced opinions.   Every recesssion was met with fresh fiscal expansion, whether or not deflationary conditions existed and usually too late to be counter-cyclical.  A Keynesian, William Phillips, developed a chart showing that the historical relationship between inflation and unemployment was strongly inversely proportional.  Thus, inflation could be ignored, as it led to fuller employment, and monetary policy was esteemed to be of trivial importance since it could only be a secondary factor to unemployment in reducing inflation.  The low growth, high unemployment and double digit inflation of the 1970's, dubbed "stagflation," discredited this line of thought entirely and took Keynesian economics with it.  

However, Keynes himself obviously did not shortchange monetary policy - since he thought changes in the money supply was sufficient to prevent a recession.  He just had a ready made solution to inflation in the same theory: if deficits prevented deflation, government surpluses would reduce the money supply and stem inflation.  The problem isn't that Keynes didn't have a solution for inflation, but rather than politicians were perpetually unable to acheive budget surpluses.  The one exception was Bill Clinton, whose surpluses definitely did not have a Keynesian justification, but the robust growth and low unemployment without substantial inflation during the 1990's was no doubt facilitated by the reduction of the money supply through government surpluses. 

Keynes, through his association with FDR and government expansion, became the target of defamation from the right.  The caricature of Keynesian economics as Socialism-lite or "Crypto Communism" misses that Keynes was a virulent anti-Communist and his mission was fundamentally conservative and pro-free market capitalism.  Keynes hoped that by judiciously intervening when markets failed capitalism could be saved from Marxist revolution.  Far from a leftist, Keynes went as far as to criticize the British Labour Party as "an immensely destructive force" that responded to "anti-communist rubbish with anti-capitalist rubbish."  To Keynes, the daily transactions of the economy were sacrosanct and to be protected at any cost.  Tinkering with the macro-economy would prevent interfering with the more important micro-economy.  Price fixing and rationing - the most direct way of combating inflation- were especially abhorrent to Keynes, since they impose undesirable outcomes on consumers and when the prices are released pent up inflationary pressure explodes.  In the end, whatever his true beliefs Keynes was so fully embraced by the left that conservatives needed a new philosophical strategy to counter it and they found it in supply-side economics.

The seminal policy move for supply-side economics came from an unlikely source: John Kennedy.  The Kennedy tax cut, passed post-humously in 1964, cut marginal income tax rates by 8% of the federal budget rolling back the World War II tax rates.  Conservative economists believed that this tax cut paid for itself by stimulating growth that increased revenues in the long run.  This line of thought led to support for a new tax cut along these lines from Jack Kemp's office.  The Kemp-Roth tax cut, which would have further reduced income tax rates by a similar amount, did not have a snowball's chance in hell with Jimmy Carter in office, but Governor Ronald Reagan included it in his platform.  During the Republican primaries, his claim that he would cut taxes to raise revenue was described by George H.W. Bush as "voodoo economics."  Reagan, however, was undeterred by Bush or Carter, and the Reagan-Kemp-Roth tax cut was enacted upon his election.  In fact, this tax cut did not pay for itself.  Lawrence Lindsey estimates that about one third of the revenues lost were replaced by increased demand and stimulated growth and Reagan ran large deficits throughout his two terms.  

As an architect of the supply-side economics behind that tax cut, Bartlett naturally believes it does not deserve the blame for Reagan's deficits.  Instead, he surmises that the true culprit - besides increased spending on defense - was Reagan's stunning success at reducing inflation.  Inflation, when combined with progressive tax rates, increase real governement revenue through "bracket creep" as taxpayers are bumped into higher tax brackets without making more real income.  Reagan and Paul Volcker's success at breaking inflation, a hugely positive development, had the side effect of greatly reducing government revenues.  For many conservatives, this was precisely the point: lowering government revenue was the only way to reduce the size of government.

The Republicans had been the party of fiscal moderation for most of the Twentieth Century, often advocating tax increases in order to balance the budget.  A sneaking suspicion developed on the right that they were playing a losing game; every time the Republicans raised taxes to balance the budget, the Democrats would increase public services creating fresh deficits that necessitated new taxes.  By breaking this cycle and insisting on lower taxes, even if it meant increasing the deficit, Republicans could "starve the beast" to reduce the growth of government.  Bartlett points out that in fact, the exact opposite happened: even with lower taxes, government increased in size.  In fact, some economists surmise that lower taxes actually stimulate increased government spending since politicians no longer feel constrained by the pain of increasing taxes.  Republicans, now unconcerned with deficits, could out Santa Claus the Democrats with the potent combination of lower taxes and increased services.

Bartlett damns George Bush as a man who fundamentally misunderstands supply-side economics.  "He [Bush] frequently asserted that all tax cuts raise revenue, something the original supply-siders never believed."  Bush gave out several rebates, which necessarily are demand side tax cuts and have no supply side benefits.  He passed a massive, unfunded entitlement in the Medicare expansion and fought two wars all without increasing revenue.  The Sarah Palin wing of the Republican party stinks of unseriousness when they trump tax cuts as the be all and end all of supply side economics.  Certain tax cuts, like Kennedy reducing the top marginal rate from 91% to 70% or a capital gains reduction, have revenue generating properties, but other simply cost revenue without stimulating anything.  Bartlett bemoans that the immorality of stealing the wealth of future generations through deficits has been replaced with a nihilistic "deficits don't matter" from what was once the "daddy party."  That Republicans have allowed Democrats to seize the moral high ground on deficits should be a source of shame to Conservatives.  So much so, that Bartlett feels compelled to call for the retirement of the economic movement he was on the ground floor of; declare victory - and after all the top marginal tax rate was 70% in 1980 versus 35% today - and go home.

Bartlett concludes by looking forward.  Now that deflation has receded and growth has returned he advocates cutting the deficit to keep inflation at bay.  However, he frankly acknowledges the canard of cutting discretionary domestic spending as a means of closing the deficit; eliminating every dollar of discretionary domestic spending would not have closed the deficit in 2008.  Thus it is imperative to raise revenues especially when faced with the promises the government has made to our senior citizens finally coming due as the Baby Boomers begin to retire.  Bartlett sees a favorite policy of the Inductive, the value added tax, as the solution.  Obama has dangled the bait of a spending freeze in front of conservatives, but clearly taxes will have to be raised too if he is serious about balancing the budget.  Bartlett's advocacy of new taxes from a conservative is nothing compared to this bombshell (hat tip to Matt Ygelias, because its the perfect quote to pull):

In America, people tend to think of their federal taxes as money down a rat hole and react accordingly. But in Europe, the people are more apt to feel they are simply paying for services with their taxes that Americans have to pay out of pocket.

This fact is best illustrated by health care. Most Americans get health insurance through their employers. The cost reduced their cash wages by 7.9 percent on average in 2008 according to the Bureau of Labor Statistics. If we had national health insurance and insurers were entirely relieved of this expense, they could afford to pay their workers 7.9 percent more and be no worse off. If the payroll tax went up by 7.9 percent to pay for health insurance, it would all be a wash, but both taxes and government spending would be higher. 

That's from the guy who wrote a book, in 2008, about how Democrats were historically racist - a factual if obviously biased subject of analysis.  Yet, his analysis of increased taxation and health care are about as fair-mindedly as anyone could expect.  It's that kind of book.  The New American Economy is a breath of fresh air in the discussion of political economics.  By examining issues situationally, critically and dispassionately he invites the reader to set aside preconceived notions in search for a non-partisan solution.  He praises some Democrats and condemns some Republicans, even though he uses "conservative" as a badge of honor.  If being a conservative means common sense, humility, and an embrace of nuanced, situation specific solutions then I would too.