Robert Bartley's 'The Seven Fat Years' - One of the Greatest Economics Books Ever Written
Ten years ago in the fall of 2003, I finally read Robert Bartley's The Seven Fat Years. An economic history of the booming ‘80s, along with the slow-growth ‘70s that preceded the alleged ‘Decade of Greed," Bartley's book was a masterpiece. Most already know this, but Bartley was the editorial page editor of the Wall Street Journal, and he sadly died ten years ago today.
I was never lucky enough to know Bartley, but he was always kind enough to return an occasional e-mail, including one about interest rates referenced in his book not long before he passed. Though The Seven Fat Years was published in 1992, it remains one of the most useful books an economically interested reader could ever buy. It explains very entertainingly how extraordinarily easy is economic growth, and to read it once again as I did for this belated review is to also see how very visionary was this revolutionary economic thinker.
What were the seven fat years? As Bartley writes early on, they took place from 1983-1990 when "the United States recovered its pre-1973 growth path." Why did it? That's pretty basic, though hard in practice thanks to the third rate thinkers who generally populate Congress and the White House, not to mention the deluded sorts who populate what is an increasingly fraudulent economics profession.
Bartley thankfully wasn't an economist, and possessing a mind not so polluted by charts, graphs and more than worthless measures of economic activity, he understood intimately that economic growth is as simple as keeping the price of work and investment light (taxes), trade among economic actors around the world free, regulation minimal, and the money used to measure real economic activity stable in value. The Seven Fat Years describes how we forgot basic economics in the malaise-ridden ‘70s, only for Bartley and others to revive Classical economics in the ‘80s; thus the 7-year boom.
The book begins with Bartley's observation that "In the years just before 1982, democratic capitalism was in retreat. Its economic order seemed unhinged, wracked by bewildering inflation, stagnant productivity, and finally a deep recession." He went on to note that "Economic confusions and a sense of futility sapped the morale of the Western people; leaders talked of "malaise" in America and "Europessimism" across the Atlantic."
What's so amazing about Bartley's words, or maybe not, is that they could have been written yesterday. History surely repeats itself, or rhymes, and just as Paul Krugman on the left and Tyler Cowen on the right talk at length about economic growth as something no longer attainable, the popular view among economists then was that "America had become a ‘debtor nation' and was declining as previous empires had." No, economic growth is once again as simple as getting the policy mix right. Bartley and a group of economic visionaries that included, but was not limited to Robert Mundell, Arthur Laffer, Charles Kadlec, Jude Wanniski, and Rep. Jack Kemp, authored a revolution that led to Ronald Reagan's election, and an eventual revival of economic growth thanks to a return to simple economic ideas that removed barriers to production.
These economic concepts were referred to then, and are now, as "supply-side" economics. Unfortunately a media that couldn't understand the concepts limited its flawed analysis of supply side to the Laffer (more on Laffer's brilliant contributions in a little bit) Curve, but it was really much more than that. Unlike demand-side thinkers who falsely presume growth is a function of stimulating consumption, Bartley and other Classical thinkers knew otherwise. They correctly understood that all demand is a function of supply, so in order to stimulate demand it was necessary for policymakers to stimulate the supply side of the economy; as in remove the tax, regulatory, trade and monetary barriers to production. It worked as the booming ‘80s revealed.
To read The Seven Fat Years is to know with certitude how very much Bartley would understand the problems of today. That is so because today's problems are in many ways a repeat of what happened in the 1970s. If there's disagreement with Bartley, and there's very little of that, it has to do with his assertion early on that "It seems that prosperity may bring discontents, real and imagined, that in turn consume the prosperity." My own view is that prosperity doesn't so much bring discontent as much as one of its negative tradeoffs is that it makes us flabby, and too often uncaring in terms of whom we vote into office.
Conversely, slow growth always and everywhere authored by government focuses the electorate. Reagan's election was the result of the failures of LBJ, Nixon, Ford, and Carter, and he revived economic growth through the implementation of the Bartley policy mix that President Clinton largely maintained such that the Reagan/Clinton era was marked by substantial growth. A booming economy essentially blinded voters to the importance of policy such that they elected second rate thinkers of the George W. Bush and Barack Obama variety. Both presidents revived the failed policy ideas of the 1970s; the unstable, cheap money that each sought the most consequential when it came to policy that's always inimical to economic growth.
Bartley would understand today precisely because he'd seen all of this before. Indeed, while it's popular to this day among the political and economic commentariat to blame OPEC for rising oil prices in the ‘70s, Bartley righted the false history about oil in correctly putting quotes around ‘oil shocks.' As he and the rest of the Michael 1 (the lower Manhattan restaurant where he, Laffer, Mundell and other leading Classical thinkers frequently talked policy) crowd knew well, oil wasn't suddenly expensive as much as the dollar in which it was priced was cheap.
Bartley wrote that "The real shock was that the dollar was depreciating against oil, against gold, against foreign currencies and against nearly everything else." About OPEC's non-role in an energy ‘crisis' created by U.S. monetary policy, Bartley observed that "In the confusion of the 1970s, no one noticed that OPEC told us plainly what was going to happen after the closing of the gold window." Put more simply, when the Nixon administration delinked the dollar from gold, the dollar's value plummeted on the way to the 1970s commodity boom.
Bartley would understand our present situation well simply because George W. Bush, like Nixon and Carter in the ‘70s, sought a weak dollar. The markets complied owing to the historical truth that presidential administrations always get the dollar they want. It staggers this writer to this day that so many otherwise smart people ascribe nominally expensive oil to OPEC and foreign demand much as smart people felt this way in the ‘70s. It's particularly unsettling that so many on the right who generally believe in free markets buy into this falsehood. Implicit there is that an oil market dating back to the 1860s still hasn't figured out how to match supply with demand. More to the point, when the right incorrectly tie expensive oil to scarcity they are explicitly suggesting ‘market failure' on the part of the energy industry. It would be funny if it weren't so sad.
The money illusion that gave us high oil prices in the ‘70s, and that has given us similarly nosebleed oil in the 2000s brings with it economy-sapping investment implications. Not only is oil everywhere such that it's prosaic, it's also easy to tax for it being of the earth, or stationary as it were.
Later in the book Bartley noted that in the ‘70s "Nearly everyone had bet on constantly rising oil prices." When money is cheap, investment flows into the commoditized wealth that already exists over the stock and bond income streams representing wealth that doesn't yet exist. When oil and commodities are booming, the real economy is struggling. Bartley went on to write that "when money turned tight, the oil price couldn't go up and the loans [made to oil companies] couldn't be repaid." When we return to quality money, and eventually we will given the desire of Americans for growth, oil and commodity based economies here (think North Dakota in particular) and around the world will face a rude awakening. History always repeats itself, and Bartley would not be fooled by today's energy ‘boom' in much the same way that he and the rest of the Michael 1 crew weren't fooled back in the ‘70s. As he put it, "At Michael 1 these events were not seen as an oil problem but a monetary problem."
Moving to the monetary policy that created the ‘70s crack-up that Bartley described, and that tells the story of the present too, the Michael 1 crowd very much decried Nixon's ill-conceived decision to rob the dollar of its gold definition. Better yet, they understood the change in investor preference from future concepts to the hard wealth of the present that similarly weighs on our economy today. Much as housing and commodities soared under Bush, in the ‘70s there was similarly according to Bartley a rush into "real assets such as gold or real estate."
In the ‘70s the prevailing economic view of a political class utterly confused by the slow growth that resulted from a weak dollar was that the economy needed more of the same. A weak dollar would boost exports despite devaluation always and everywhere existing as the economy-wrecking policy lever of the poorest countries. The Michael 1 attendees correctly understood that "Money is a veil, and will not change the relative value of a jug of wine and a loaf of bread." To Bartley et al, money's sole purpose was as a measure of value that would facilitate the exchange of bread and wine, thus the importance of stability.
Instead, and pouring gasoline on the fire, the Nixon and Carter years were defined by regular devaluation of the unit of account (the dollar) such that investment dried up, and chaos reigned. Bartley described this era of floating money as a time when "price signals in the real economy would be subject to repeated disturbances that would detract from efficiency and growth." Yes, floating money that was in freefall gave us the growth-deficient ‘70s, but with the resumption of largely stable money in the ‘80s and ‘90s, the economy took off. Since 2000 we've re-entered an era of limp growth; the latter made predictable by a dollar that was both weak and unstable.
Notable about the ‘70s is that just like today, a sagging economy brought out of the woodwork a great deal of monetary mysticism. Milton Friedman's monetarism was rising in popularity then, and while its modern adherents of the Scott Sumner variety in no way measure up to Friedman (about the Nobel Laureate, Bartley wrote that "On most issues - Say's Law, price controls, energy, efficient markets, deficits, Keynes or whatever - he would be entirely at home at Michael 1), it's sad and happy at the same time that economic distress elevates incorrect thinking (Monetarism) as much as it does Classical thinking of the kind that Bartley was so instrumental in reviving.
It's on the subject of Monetarism in The Seven Fat Years that readers will be reminded of Arthur Laffer's certain genius. Monetarism then and now naively presumes that nirvana can be achieved if allegedly ‘wise men' control "the money supply." But as Bartley so helpfully wrote about Laffer's discredit of this failed idea, "Laffer would draw a tiny black box in the corner of a sheet of paper; ‘this is M-1,' currency and checking deposits. Still bigger boxes included money-market funds, then various credit lines. Finally, the whole page was filled with a box called ‘unutilized trade credit' - that is, whatever you can charge on the credit cards in your pocket. Do you really think, he asked, this little black box controls all the others." The Michael 1 crowd understood well that it didn't, but Friedman and other Monetarist thinkers believed it then, much as Sumner and others promote his monetary form of Keynesian mysticism today.
Laffer et al once again didn't bite. As Bartley further explained Laffer's explanation of the quantity theory of money, "The money supply, he insisted, was ‘demand determined.' What the big boxes demanded the little one supplied." Monetarists at present decry the Fed paying interest on reserves (IOR), and while the Fed should not be paying for bank reserves it needlessly created with the imposition of its adolescent QE policies, it does precisely because demand for money is so low. More comically for a truly dangerous theory is the more that money is corrupted by the creation of it clamored for by Monetarists, the lower is the demand for it. Money's sole purpose is as a stable measure of value, but so deluded are Monetarist thinkers by monetary aggregates that they can't see how very much their own policies work against the rising monetary aggregates they desire.
Stable money in terms of value is heavily demanded, and as a result soars in terms of supply, but all of this confuses the Monetarist School. Then as now, monetarists got inflation backwards. Bartley noted that "With big inflation [meaning devaluation - always], for example, consumers would not want to hold currency. They would shift to high-interest deposits not counted in narrow aggregates, or to real assets like real estate or gold, not counted at all. This would mean that demand for money would fall, pull down the statistical aggregate. When the aggregate fell, the Fed would inject more bank reserves, fueling the inflation. Yet if the real economy swung into boom, say because taxes were cut, the demand for money would grow, pushing up the aggregates. Watching the aggregates grow because of higher money demand, the Fed would worry about inflation, choke off bank reserves, curtail the availability of credit, push up interest rates and stop the recovery."
The Reagan policy mix truly took hold in 1983; '83 when the Reagan tax cuts were finally fully implemented, and the economy soared. With a rising economy money demand naturally soared given the tautology that producers are demanding money when they offer up goods and services for sale. As the economy took off Friedman, wedded to a monetary theory that is rooted in confusion about inflation, made the rounds of Wall Street to argue that the recovery was inflationary even though the value of the dollar was on the way up. Rest assured that if and when the U.S. economy emerges from the Bush/Obama disaster, money demand and the aggregates that always confuse Monetarists will soar again. Modern believers in that which doesn't work like Sumner will first claim that they predicted the boom based on rising aggregates, then they'll claim an inflation problem despite a stronger dollar. Lost on the Monetarist crowd is the simple truth that the stable money values they dismiss are the only path to the rising money in circulation that they're asking for.
Not so the Michael 1 thinkers. Well aware that an economy is a collection of billions of individuals making infinite decisions every millisecond, they weren't so arrogant as to presume to know how many dollars an economy would need. Their solution was a return to quality money defined by gold. As Bartley wrote, the monetary "system needs an ‘anchor,' some method of judging how much money the world needs. If all nations use their monetary policy to fix the currency of nation n, the nth nation can use its monetary policy to anchor the whole system, to gold or some other indicator." Bartley knew well of gold's historical stability, so he called for monetary policy that would stabilize the price of the dollar by virtue of adjusting supply to meet demand; the gold price serving as the market signal that would tell the monetary authority whether there were too many or too few dollars in the system.
The above description brings up another minor disagreement with the author of this most essential of books. Paul Volcker gets a mostly free pass in an economic memoir which refers to him as a ‘saint.' In truth, and Bartley obviously knew this welll, Volcker not only regularly leaked against the Reagan tax cuts, but he also foisted Friedman's monetary policies on the economy in such a way that the Reagan Revolution almost never was. Administrations once again get the dollar they want, and as Reagan was for a strong dollar in the way that Nixon and Carter were not, the markets were going to correct the dollar upward no matter the ‘tight money' policies rooted in quantity theory imposed by Volcker. More to the point, stable money in terms of value has little to do with ‘tight money' as Bartley suggested in the book. More realistically, stable money is heavily demanded as the unit used in trade and investment, so if stable money is the goal, the supply of the credible currency will naturally rise.
Volcker ultimately abandoned Friedman's Monetarism in late '82 such that the Reagan boom would soon begin, but in waiting until then he nearly made Reagan a one-term president. Notably, when he shed Friedman's failed policies that are perhaps unsurprisingly being revived today, Laffer and Kadlec concluded that he was following some sort of dollar price rule; a stable dollar always necessary for economic growth. Volcker surely looms large in any discussion of the ‘80s economic renaissance, but the story should be more about how he almost suffocated it as opposed to being a major factor in the seven fat years that Bartley chronicled.
It's also sadly true that while a dollar price rule loomed large in the recovery, Reagan and the Michael 1 crowd never achieved their goal of returning the dollar to a gold standard. We have the 2000s to thank for this not having happened, and as Bartley noted, resolving monetary policy in a way that rids the economy of unstable money was "the one big unfinished task of the Seven Fat Years." So true, but Rome wasn't built in a day.
About trade and the mythical ‘trade deficits' that still captivate those in the ever fraudulent economics profession, Bartley noted that "In all the pantheon of economic statistics, there is none so meaningless and misleading." He went on to write that we somehow "have trouble remembering that commerce takes place between consenting adults, that the bargain makes both sides richer in one way or the other. Instead, we tend to view trade as some kind of nationalistic competition." This misunderstanding which presumes that trade is war such that one side weakens the other is the driver of all manner of policy stupidity.
But as Bartley so expertly pointed out (thank goodness once again that he wasn't an economist), "In fact, international transactions are always in balance, by definition." Of course they are. We can only trade insofar as we produce something to trade with. We trade products for products, and our ability to demand that which we don't have is a function of our supplying what we do; that or borrowing from the production of others. All trade once again balances.
Back to trade ‘deficits,' Bartley revealed the absurdity of the calculation. As he wrote, "The export of an airliner is called trade. The export of a share of stock is called foreign investment." Why this is important has to do with his later point that "a rapidly growing economy will demand more of the world's supply of real resources and run a trade deficit." We are able to import a great deal in the U.S. precisely because we're able to export not just goods and services, but shares in our leading companies. With the exception of the Great Depression and other periods where bad policy has repelled foreign capital, we've always run a trade ‘deficit' precisely because the U.S. has been correctly seen by investors as the best locale in which to commit capital.
Of course to the economic and political commentariat, the eagerness of global investors to place their money in the U.S. is seen as a negative. Indeed, so debased is economic commentary today (just as it was then) that the investment inflows are decried as a negative signal for making us a ‘debtor nation.' Horrors! All that investment somehow weakens us. What's more horrific is that economics is generally a highly paid profession.
All of which brings us to worries about the budget deficit that reigned supreme then, and that still captivates far too many thinkers today. Bartley wrote that the "deficit is not a meaningless figure, only a grossly overrated one." Unfortunately, it being overrated means that this "great national myth" impacted policy then, just as it does today.
Rising deficits forced a giveback of some of Reagan's tax cuts, and then in modern times any tax cut is viewed in Washington through the prism of its impact on the deficit. Such an accounting abstraction did not cloud the minds of the grand thinkers at Michael 1. Internationalists all who understood per Mundell that "the only closed economy is the global economy," it was apparent to them that "it's not government borrowing that crowds out the private sector, but government spending."
Remember, a dollar is a dollar, and dollar credit is dollar credit. Dollar credit is everywhere (note this, Monetarists) in the world. Whether a government that tautologically lacks resources borrows the money it spends is economically of little consequence. Either way, limited capital is extracted from the more productive private sector and the investment driving the latter in favor of often wasteful government consumption. In that case, the only statistic that matters is how much government spends on an annual basis because the number is a clear signal of what the private sector is losing. Deficits are just finance, they're a waste of time, and any sentient being should understand that we'd be much better off economically if we had annual deficits of $500 billion per year out of $600 billion in annual spending, over balanced budgets of $3.5 trillion.
The above is important when we consider that much as it does today, Keynesian thinking dominated economic discussion in the ‘70s when Bartley et al led an intellectual revolt. To Keynesians there's no distinction between government and private sector investment. Ever worshipful of demand, they just want the money spent; hence their support of large government budgets.
Bartley obviously saw all of this in a different light. How the money is spent is crucial, and in response to the industrial policy types who felt then and do now that government should direct investment, Bartley wrote "Rank in order the most likely recipient of capital from an industrial planning bureaucracy:
(A) Steve Jobs's garage.
(C) A company in the district of the most powerful congressman."
Hopefully readers get the point. Government, whether overseen by Republicans or Democrats, is by nature ‘conservative' in the non-ideological sense such that it very much resides in the ‘seen.' If government employees had a clue about what the future of commerce might be they certainly wouldn't be allocating capital from Washington. Instead, they would be making real money investing in the private sector. Government allocation of capital, though said to be stimulative, is logically the opposite. Government spending and investment means that the connected get credit over revolutionary thinkers like Jobs who got started in garages. With the above passage Bartley cleverly exploded the lie that is Keynesian government ‘stimulus.'
About the taxes that governments collect with an eye on redistributing the inflow, Bartley helpfully made plain throughout The Seven Fat Years that high rates of taxation make productive work more expensive. Taxes are a price, or better yet a penalty placed on productive work. To get more work, lower the price. It's that simple.
Looked at in terms of investment, he logically noted that the prospect of a capital gain "is the big jackpot that attracts entrepreneurial vigor." Along those lines he pointed out that "there were no high-tech startup companies founded in 1976, while more than 300 had been founded in 1968." No surprise there. Capital gains taxes were increased in the ‘70s until being reduced in 1978, and then as investors are buying future dollar income streams when they provide capital to entrepreneurs, high taxes on investment combined with dollar devaluation dried up investment altogether.
The economics profession almost to a man and woman elevates consumption above everything else, but there again the non-economist in Bartley revealed the absurdity of the thinking that informs this most worthless of professions. As he put it so well, "If you scraped up $100,000 and used it to buy a Rolls-Royce, you don't get taxed per luxury-driving mile. But if you use it to buy stock, providing the company with investment funds, and then you want to sell it to buy another stock, you only have paper to show for your $100,000, yet you still have to pay a tax." The capital gains tax is anti-company formation, and worse for a political class that worships at the altar of job creation, it's anti-job creation. To put it very simply, there are no companies and no jobs without investment first. We should abolish the capital gains tax.
It was said early on that The Seven Fat Years was quite the book in a visionary sense, and this should be stressed. Bartley wrote it in the early ‘90s when the economy was weak, but throughout had a very optimistic tone about the future. He wrote that "By 1990, a whole subculture was hooking itself together every night, posting messages, information, secrets and insults on tiny bulletin boards of silicon." I was in college at the time, but this in no way described my experience; the point being that a major informer of Bartley's optimism was an Internet future that most then didn't regard, and certainly didn't understand.
About banking, he spent a lot of time on the S&L debacle. He understood that the industry was regulated out of existence through caps on interest rates that could be offered, and then when near extinction, was allowed to swing for the fences; all while overseen by regulators totally and logically unequal to regulating that which they couldn't possibly understand. Bank regulators are the people who couldn't get jobs at banks. Naturally politicians played a role here too (remember the Keating Five?) in protecting errant S&Ls from regulators who were once again unequal to that which they were asked to do.
Where his visionary nature came into play with banking was in his assertion that "the essence of financial safety is diversification. And a financial system that outlaws diversification - breaking finance into a succession of narrow splinters - is a series of disasters waiting to happen." Bartley in a strong sense could see that the regulation of banks was their inevitable undoing; the latter taking place more recently. Bartley would have understood the problems within banks in 2008 very well for having seen what government was doing to them back in the ‘90s.
And to show how history always repeats itself, the response to the S&L crack-up was a great deal more regulation in the form of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) that economist Lawrence White referred to as "an Act of anger." FIRREA was the Dodd-Frank of its day that in Bartley's words "set out to ‘solve' the crisis of unprofitable thrifts by shrinking thrift profits, through higher insurance premiums, more indirect taxes, higher capital requirements, other increased regulation and a reduction in diversification authority."
Bartley seemed to sense that when we shackle any business with rules we reduce its profits, and with reduced profits, drive away the very talent that makes businesses more financially sound to begin with. Bartley correctly understood that the reforms of the early ‘90s were setting the stage for something much worse down the line, and he was proven very correct.
About the ratings agencies that were wrongly fingered for a financial ‘crisis' that was wholly a creation of government error, Bartley understood what too many did not in 2008. So many were quite eager to blame the drones toiling in agency cubicles for their flawed analysis of bonds that ‘tricked' the best investors in the world. What a laugh. As Bartley put it so well, "No one at Michael 1 would believe an individual bond rater could outguess the collective decisions of the market; if he could, he'd be rich and not have to work in such a stodgy place." So true, and his analysis is a reminder that we truly lost a great thinker when Bartley passed in 2003.
As a keen follower of the dollar, Bartley's brilliant book suggests that he would have foreseen our present economic problems early on. He would have known that spiking oil prices were a function of a cheap dollar that was going to author an economy-sapping rush into hard assets like housing least vulnerable to the devaluation. As a keen follower of finance, he would have known that the dollar's descent foretold major problems in a banking sector that was going to and did chase the money illusion into all manner of finance related to housing. And then having witnessed the wrongheaded re-regulation of the banks in the ‘90s, he likely would have written very presciently about how this was all going to work out.
Writing about the ‘70s toward the end of his book, Bartley observed that in that failed decade "the United States led the world to the brink of economic crisis without ever knowing it. It simply didn't understand what it was doing." Other than his tax cuts, President Bush in many ways mimicked the devaluationist, high spending, heavy regulating policies of Nixon and Carter, and a president who surely didn't know what he was doing similarly led the world into crisis once the results of his policies came to fruition.
It says here that Robert Bartley wrote one of the best economic books of all time in 1992. For readers who want to understand why the ‘70s and ‘80s were so different economically, including the seven fat years from 1983-1990, they should read his book. Even better, for those who want to understand what happened in the 2000s on the way to an inevitable crack-up, they should also read Bartley's book. History rhymes, and Bartley told the story of the 2000s in 1992.