Memo To: Stanford Erickson, Farm Journal editor & publisher
From: Jude Wanniski
Re: Your Generous Praise
The editorial and commentary you ran on your website over the weekend, about me and Supply Side University, was about the most flattering and generous I've ever had. My Mom is proud of me! What really made me feel good, though, was your remembering me telling you two years ago, really the last time we had contact, that farm prices would follow the price of gold -- straight down -- unless Fed Chairman Alan Greenspan changed the policy of the Federal Reserve. You know, Stan, I was shouting this message from the rooftops, badgering Greenspan himself, begging my old friends at The Wall Street Journal to listen, pleading with my old political allies to get into the act and sound the alarms. They hate now to admit I was right and for the most part maintain a discrete silence. But here you are, editor and publisher of the most prestigious farm periodical in the nation, confessing to your beleaguered constituents that you wish now that you had paid attention then. It takes an awfully big man to do that, Stan. At least you came right out as soon as it dawned on you that with gold down 33% in 33 months, and corn down 33% in 33 months, there may be the connection I saw when we last spoke in early 1997. Only by throwing a high beam on this connection can your readers in the agricultural community realize they have trained their frustration on the wrong target, themselves. Greenspan should not be allowed to run around saying farm prices are low because there are too many farmers, too much corn, too much wheat, too many soybeans, too much food!
Does the world have to go on a diet, for goodness sakes? Now that you have the bit in your teeth, Stan, run with it. President Clinton and Alan Greenspan have to feel the heat in order for there to be a policy change. When the Fed starves the system of liquidity being demanded, the price of gold will fall and drag all other commodity prices down with it. Gold has to climb back above $300 for expectations to change in farm inventories. Even in the face of drought, the force of darkness that has taken hold of Greenspan will keep prices down. Prayer won't help in this realm. The only way to counter it is in the political realm, with support for the three men who are with us in this fight: Jack Kemp, Dan Quayle and Steve Forbes.
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A Lesson in Supply Side Economics
by Stanford Erickson, CEO
Editor's Note: Jude Wanniski is an interesting guy with an interesting past. I want you to get to know more about him, and to know more about a free educational web site he has to help dispense a solid understanding of the economic powers at play in national policy. I got to know him a dozen years ago when he took an interest in the writings of The Journal of Commerce, which I edited and published back then.
His predictions have been successful enough that after 21 years in business, he has 150 clients, including, he says, many of the biggest asset managers in the country. In my recent editorial describing the cause of the current plight of the ag community, where I blamed the collapse of prices on the Federal Reserve for starving the world economy of dollar liquidity, I mentioned my regret that Wanniski two years ago had warned me that farm prices would follow the price of gold.
Remember the term "supply-side economics?" Those of you who do probably connect it with Ronald Reagan and his tax cuts. Actually, it was a phrase first coined by Jude Wanniski in 1975, when he was an editor for The Wall Street Journal trying to figure out why the great inflation of that era had occurred.
Not having studied economics, Wanniski searched for economists who had correctly predicted the dramatic increase in the price of commodities in the early seventies. He wanted to know why they made their predictions and why almost all economists failed to see what was coming.
During his search, he was surprised to find only two in the entire world -- a Canadian named Robert Mundell and Mundell's his protégé, a young economist from Ohio named Art Laffer.
(Remember Laffer? It was the "Laffer Curve" initially written on a napkin over cocktails which showed how a tax cut can produce more revenue. This became the intellectual basis for the Reagan tax cuts in the U.S. and for Maggie Thatcher's tax-cutting policies in England.)
Why were their predictions so accurate? Wanniski learned Mundell and Laffer had revived the system of economic thought that we know as "classical economics," -- a system that died out after it could not explain the stock market crash of 1929 and the Great Depression. So, Wanniski called it "supply-side economics" because it began with the assumption that the central actor in the economy is the producer of goods -- the "supplier," not the consumer of goods, the "demander."
In 1978, Wanniski founded Polyconomics, Inc., in Morristown, N.J., to advise the industrial and financial community on the impact political decisions would have on the financial markets and on the real economy.
Wanniski became an unpaid, outside advisor to Reagan in 1979 and found, to his delight, that Reagan understood all the basic principles of classical theory. The Gipper had gotten his college degree in economics at Eureka College, Ill., in 1932, when classical theory was still the backbone of the curriculum.
Reagan went on to win two presidential terms with his popular ideas, and as Wanniski predicted, tax revenues soared, and the inflation ended.
The budget deficits that followed, Wanniski explained at the time, were necessary to adjust to the effects of the monetary inflation, which saw the price of gold going from $35 per ounce to $350. The national debt had to go up tenfold in nominal terms until the adjustment was complete.
In 1981, Wanniski wrote a letter to the Washington Post predicting that there would eventually be huge budget surpluses, leading to fights between the two parties on whether the national debt should be paid down or a national health insurance system enacted. 1981!
Gold, Wanniski contends, remains the best pure signal of incipient dollar inflation or deflation. Wanniski warned his clients in early 1997 that deflation was inevitable unless the Fed reversed course. In May of 1997, he asked to meet with the President to express his fears, but was directed instead to the deputy Treasury Secretary, Larry Summers, who is now Treasury Secretary.
According to Wanniski, Summers pooh-poohed his warnings, even after Thailand led the collapse of commodity prices when it was forced to devalue its currency against the super-strong dollar. The Fed, Wanniski wrote at the time, caused the Asian Crisis, with the help of the International Monetary Fund.
Why don't all economists subscribe to this? Because, according to Wanniski, there is no place in the nation where the old-fashioned classical economics that Ronald Reagan learned is now taught. If you want a Ph.D. in economics, says Wanniski, you have to become an expert in demand-side theory, either monetarism or Keynesianism -- neither of which pay any attention to the importance of the gold signal.
Getting an education on the web at SSU.
Three years ago, a young man e-mailed Wanniski at Polyconomics and asked him if he would teach him supply-side economics on the Internet. Jude decided it would be a good thing to do, and founded Supply Side University (SSU) at his website: www.polyconomics.com.
He charges no fees and accepts everyone who registers as a student. With only Internet word-of-mouth, SSU's student body has climbed from 35 in the first year to almost 1300 today. It is now in summer session, which last week featured a lesson on the economic causes of the Vietnam war.
There are no examinations and no degrees, but Wanniski believes he is keeping the classical ideas sufficiently alive for the day when academic economists come to admit to themselves that demand-side theory is at best insufficient when explaining the world, and that supply-side theory has far better predictive powers.
The website itself is an interesting place, with daily commentaries from Jude on what's going on in the world, also free of charge. "It is my form of philanthropy," he tells me.