The “policy mix” to escape economic crisis – the central idea of supply-side economics – is tight money in tandem with tax cuts. The geometry, and then mathematics, of the policy mix were what propelled Robert Mundell to his prolific career in international macroeconomics from 1961 on. One of Mundell’s early graphs demonstrating the validity of the policy mix as cure for stagnation in the context of loose money may be found on the first page of this site, econoclasts.net.

In a Wall Street Journal article of two days ago that set off shock waves among traders and forecasters, Fed governor Kevin Warsh announced that the Fed is going to have to start thinking about tightening money. The piece had some great lines, especially the following: “It is no time to declare victory and scarcely the moment to hand out medals. I cannot help but think of the strong but weary athlete who, after a morning swim, embarks upon a grueling cycling contest to a rising din of cheers and a smattering of boos—only to be reminded that he is participating in a triathlon, and that he has a long run still before him.”

The long run still before the Fed involves screwing up the courage to tighten money. And yet this task is really not so harrowing, if it is accompanied by tax cuts. As Mundell’s economics has unmistakably shown for fifty-five years, “there are no economic costs” (his words) to tax cuts in the context of tight money. For tight money ensures the value of the means of exchange, and tax cuts ensure that people have this valuable means of exchange. Hence robust exchange – that is to say, growth – will immediately ensue, and for the long term.

The historical record is clear in verifying Mundell’s theory in every case. Tight money in combination with tax cuts occurred in the context of crisis in 1921, 1947, 1962, and 1982, and in each instance resulted in long multi--year booms at growth rates far above the norm.

Larry Kudlow cheered governor Warsh’s piece, and said it was time for him to call for tax cuts. If there was one disconcerting part of Warsh’s piece, it was this: “For those of us at the Federal Reserve, the task ahead involves longer days, but, in all likelihood, fewer weekends.” The idea that monetary policy takes the enormous exertions of immensely smart and credentialed people is mistaken. Good monetary policy by definition takes virtually no exertions by anybody. John Taylor’s monetary policy rule is 7th-grade algebra. The gold standard that supervised the second industrial revolution, 1871-1914, the greatest period in the economic history of the world, was “so simple a monkey could run it,” as Mundell said of it in his Nobel Prize address in 1999.

Warsh’s piece in the WSJ is here:

http://online.wsj.com/article/SB10001424052970204488304574433041058334138.html?mod=WSJ_hps_sections_opinion#articleTabs%3Darticle

And Kudlow’s at NRO is here:

http://article.nationalreview.com/?q=MTI5NWViYTAzYmMwN2UzODY0ODNjZTAzMDJmMTNkMjU=