host: we're joined by bruce bartlett, whose new book, you call yourself many times throughout the book and elsewhere as a supply sider, a reformer supply sider. what is supply side economics? >> well, supply side economics is sort of a euphemism for an economic viewpoint that developed in the late 1970's

where we had a problem of stagflation, rising unemployment and rising inflation. the three riis were developed in the 1930's, and those policies presupposed a demration air situation. so when you use them in an inflationary situation, all they did was make inflation worse, and the inflation eventually made the unemployment worse. so the supply siders look around for a different way, and their philosophy was to tighten the money supply severely to reduce inflation, and at the same time, cut tax rates in order to increase the incentive to work, save, and invest, and almost all conventional economists of the times, thought this was insane, that it was like putting your foot on the brake and on the gas pedal at the same time.

but we thought it would work and it did, because ronald rage and an paul volcker implemented it, and by the middle of the 1980's, inflation was down very substantially and growth had been restored, and this was viewed as a success for the supply side model. host: as a former proponent of reagan economics, how difficult it was to write a book about its fame insure guest: well, the reason why it wasn't working in the 1970's is because it was misapplied in inappropriate circumstances. and i think the same thing happened with supply side economics in the 2000's. i think a lot of policies implemented by the george w. bush administration were said to be based on supply-side economics, but in fact, they were not. they were making ridiculous claims and implementing unwise policies. they said they were based on supply side economics, and they weren't.

i think some of the problems we had were developed from that misunderstanding. host: i want to follow occupy that point, because in your introduction you write about what remains when people think of supply siders is a caricature, that there is no problem that more and bigger tax cuts won't solve. talk radio and groups such as the club for growth and americans for tax reform ruth wasly enforce this view among republicans, even though it's obvious that the tax cuts of the george w. bush years not especially successful, that the economy's problems today are due primarily to lack of demand and not supply. why did the bush administration, in your view, get it wrong? reaganomics, that is, and supply side economics. guest: well, keep in mind, the president's father raised taxes in 1990, and for this he was very widely criticized, and it led to his defeat in 1992. and i think that his son was never going to make that same mistake, and i think he felt that as long as he just kept

cutting taxes and cutting taxes and cutting taxes that a large element of the republican coalition would be with him. and no matter what else he did. and i think that as a political calculation, that worked. the problem is it was irresponsible. as was much of the policies of administration. sh ]dj just for for example, i'm incredulous that so many republicans are complaining about the cost of the healthcare measure that's being considered, that at least is being paid for in one way or another, whereas they put forward a proposal to expand drug benefits for people on medicare and did not pay for it at all. it has a cost of like a trillion dollars over the next 10 years, the medicare drug benefit will, which is about the cost of a health benefit so. these people just have no credibility whatsoever when they complain about deficits. host: your book is about the failure of supply side economics, of reaganomics, as w

with a look back to and in chapter two, the triumph of keynesian economics. guest: well, i observed there was a real problem that the existing orthodoxy couldn't handle, the new philosophy, the supply side philosophy came into existence, was implemented, appeared to be successful, and then hence forth, it was applied in every circumstance, whether it was justified or not. so you had kind of a cycle of success and failure. and as i thought about it, i realized the keysnenian economics had gone through exactly the same cycle. it had been implemented in the 1930's, helped end the great depression, but then misapplied in the 1950's and 1960's and gave us inflation. so it seemed there was a

similar tree that was interesting, and i tried to ask, what's coming next? host: well, that's what i'm going ask. what comes next? have we come full circle to its time for a keysnenian approach to our economy? guest: it was quite clear to me that the economic conditions we were viewing were almost identical to the once that the keyns analyzed. so it was a useful exercise for me to have the background just as this happened. but i had to kind of short circuit my thoughts about what was coming next because i was overwhelmed by the economic crisis. host: and when folks say keysneian economics, they're talking about more government stimulus, stimulus spending to get the economy going, correct? guest: yeah. to me, the essential point -- you have to understand that what runs the macro economic is essentially federal reserve policy, monetary policy.

but there are times when fed policy is impotent, when it can't do anything, economists say it's pushing on industry string. and these conditions come about when you have very, very low interest rates, as we have right now, and economists call this liquidity trap. and when you have that situation, the fed is unable by itself to stimulate the economy. host: so keeping rates real low doesn't do it, as low as they are now, just not going to stimulate the economy? guest: no, it doesn't. you have to have some engine pull the economy along, and that engine that be fiscal policy, that is, government spending. and a lot of people think that, well, if you're going to do something on fiscal policy, we should just cut taxes. but the problem is that tax cuts i don't think are going to have any impact under the particular circumstances we have right now. and i think it's a mistake to have a one-size-fits-all policy that worked under completely different circumstances and to

say, well, let's just do it again under completely different circumstances. it seems to me that the keysneian model fits current economic circumstances better than any other one that we know of. host: so some fiscal stimulus was necessary in passing -- in congress passing it earlier this year? >> yeah, i did support the idea of fiscal stimulus, but i warned at the time that it was being gross willing oversold, which it clearly was. unemployment is vastly higher than the administration had predicted, and i also think that people don't understand the time tags involved. it was clear to me that it was going to take much, much longer than the administration thought before the spending actually impacted on the economy. and i think that's one reason why the unemployment rate has not fallen -- or why it's risen and not responded. host: we do have callers waiting for you. 202-737-0002 for democrats.

202-737-0001 for republicans. i understand fents and others, to 2-628-0205. first up is buffalo. good morning on our republican line. caller: how you doing? mr. bartlett, i'm going try to get ahold of the book and read it. i want to get more insight on your opinions. but basically, what i wanted to address was, if we're dealing with a fiat currency, how can you stop inflation? what can do we do to stop inflation? that's what happens when your money is not backed by gold or tooken off the gold standard like the house joint resolution. host: thanks. we'll get a response. guest: well, it's clearly the responsibility of the federal reserve to maintain a stable price level, and although they have increased the money supply a great deal in response to the

current economic crisis, the fed perfectly well understands that it has to reverse that policy or else we are going to be back into a 1970's hyper inflation situation, and they've already talked a lot about how to do this and when to do this, but they have not yet decided to actually begin tightening, and my fear is that they will wait too long, and so i think a certain amount of inflation is almost inevitable, but hopefully the fed will not allow it to go too far. host: next, pennsylvania. greg, good morning, a democratic caller. erie, go ahead. playerstown, new jersey, mark on our independents line, go ahead. caller: hi. how are you doing? host: fine, thanks. caller: i think all these people got it wrong. they tried to push the democratic plan and the republican plan. the really plan that needs to happen here is they play the games with the fed and all the

rest of it. they got to start placing value in america again. i mean, you sit down and look at, from illegal immigration devaluing our construc n@dá

and i think you kind of lose your perspective and start focusing on individual trees and miss the forest, which is really what we have to be thinking about. host: you write about some fiscal stimulus during the reagan administration. you write -- host: is there any evidence that this sort of experience may happen with the stimulus

bill? guest: well, it clearly did. clearly a great deal of the money that was in the february stimulus package was just pork barrel stuff and things that members of congress have been wanting to get past and just needed some excuse, some must-pass legislation to get enacted. but one of the things that i talk about a lot in the book is something i mentioned earlier, which is the implementation lag. i think that there was this somewhat romantic notion that there were just tons and tons of public works projects that really needed to be done, roads to build and bridges to build and things like that, and the plans were just sitting there, and everybody was just ready to go, and all they needed was a check from the federal government, and the next day, you know, workers would be out digging and building, and that wasn't true. it takes a long time to get these projects going, and as of this last time i checked the data, in august, only $16

billion out of all of the almost $800 billion in the stimulus package actually had gone to public works projects that had been -- there were already, you know, working. that's a very trivial amount of money, and a lot of rest of the money was just wasted. host: but by the same together known your book, you're critical of the tax rebate that happened very end of the george w. bush administration, not very effective? guest: no, not effective at all. there's a lot of history on this. we tried a tax rebate in 1974, and all the studies afterwards showed that people didn't spend it, but they just saved it, which may sound like, well, saving is good, too, but the deficit increased in order to pay out the deficit -- or the rebate. so the higher deficit simply offset dollar for dollar the rebate, and nothing real was accomplished in terms of stimulating growth. and then we did another rebate in 2001, and all the studies after that shows exactly the same thing, everybody saved the money. and then despite all these

failures, we had another rebate in 2008 that the same thing happened. and i argued at the time, i wrote a piece in the "new york times" saying this money is going to be wasted, we should take that you will money and tuesday to stabilize the housing market. maybe a little bit of money upfront could have forestalled a collapse that cost a great deal nor take care of later on. host: you mean money to homeowners and such? >> i was not sure exactly what the right way to use the money -- my thought was give it to fannie mae and freddie mac and get them to start buying up some of this bad paper. i don't know. but the point, is it's an option that was never considered, so we'll never know whether things could have been done differently. but the within thing we do know is that the rebate didn't work at all. host: we next go to e ri e. greg, missed you earlier. caller: thanks. mr. bartlett, you just mentioned the bad paper. it really strikes me as sort of

disingenuous of the right and the conservatives to complain about our deficit and the problems that the government's going through right now with financing all of these things, when you compare the deficit that the federal government has with the obligations that business has due to all of that bad paper, all the debt that they created, the trillions of dollars. i mean, credit default swaups are like $43 trillion. i mean, it's unbelievable the insurance that the business took out on itself against its bad decisions. and now all of that's coming due. but when you compare -- could you compare the federal deficit versus the deficit of the big mistakes that everybody made or the illegalities that people snade and i'll take my answers off the tv. thank you for having my question. host: thank you. guest: well, i was a little unclear as to what the caller was asking, but i would

certainly agree with one thing he mentioned at the beginning, which is that i think the republicans have -- are really off on the wrong track by trying to blame every single thing that's going on with obama. i mean, to listen to these guys, you'd think the budget would be balanced if we simple elected john mccane. but i think it's important to remember that the c.b.o.'s deficit estimate for fiscal year 2009 that was made in january 2009 before obama even took office was $1.2 trillion for fiscal year 2009, and when it ended, it was $ 1.4 trillion, and of the $200 billion increase, $1 hundred billion of that was due to slower economic growth than the c.b.o. had anticipated, leading to lower revenues. so there was exactly $1 hundred billion of additional spending that was not projected in january, and i think it's worth keeping that in mind, because it shows, really, that the

administration has done very, very little in terms of stimulus for the economy. which a big deal of the problem republicans complain about is because of their policies, which obama inherited. host: here's san francisco. good morning, susan, democratic caller. caller: yeah, i have sort of a specific question that i can't figure out when i try to think about where the mortgages, what money to who, and that is on the one hand, i've heard people say that one of the -- one of the things that pushed people to make all these loans is that there was such a market for asset-based investment. so these mortgages were turned around and then people bought them as investments, i guess presumably balls they pay interest back and they'd make a profit, and that wall street,

you know, was just turning these over so fast that people were looking to make more and more mortgage loans. on the other hand, when the banks had problems, one of the things they said is they're broke because all these foreclosed homes and the decreasing, you know, are prices that homes cost, which are i guess the tax is assets that are on their books, you know, they have all these losses, and it seems to contradict. they seem to contradict each other. it would seem that they had already turned these mortgages around and been paid for by the investors, and i just -- it's seems to contradict itself. host: thank you, susan. guest: well, historically banks would make a loan to a homeowner to buy a house. they would give them the mortgage, and the bank would hold the mortgage until it was

paid off. but over the years, people concluded that you could take these mortgages that were sitting in these various banks and bundle them together and have a new type of investment vehicle that people were willing to buy because you can get a higher interest rate on mortgages that you can on many other kinds of investments, and in theory, these were all backed by real estate, and so therefore, you had, at least in theory, very low risk. and so, for a long time, it was a good deal because the banks in the past, when they'd make a mortgage, they might not have any more money available to make additional mortgages, but now they can sell the mortgage and get money back, that they can then republican lend to someone else so. for a long time, it was really a good deesm the problem was that the people -- the real problem was the people whose job it was, places like moody's

and standard & poor's, to go through these packages of mortgages and try to figure out what is the risk in these mortgages, what is the likelihood that some percentage of them are going to go bad, and they did a very, very poor job of making that -- making those estimates, and we also had some just, you know, unexpected events that that just -- it was a good idea, but it just didn't work. i don't know what else to say. host: you raise a red warning flag your book about a second fiscal crisis. you write when the second fiscal crisis hits, sometime in the next few years, it is inevitable that higher revenues will be needed to plug much that have fiscal hole. unfortunately, both parties are in denial about this. republicans still delude themselves that tax cuts starve the beast and tax increases feed it, while democrats are so afraid of being seen as tax increasers that they -- so afraid that they simply refuse

to acknowledge reality. what is this second fiscal crisis you're talking about? guest: well, i started writing this book long before the current fiscal sexrice before the massive deficit that is we've seen, and i was just looking at the projections from last year and earlier made by the congressional budget office and the social security trustees and the government accounting office and places like that of the long-term fiscal trends, and in particular, what's going happen to programs like social security and medicare and medicaid when the jeent baby boom generation begins to republican tire, and the youngest one has already turned 62 and qualifies for early retirement, and over the next three years, more and more of any generation are going to be drawing social security and medicare. and when that happens, the spending for those programs is going to explode. and we've done nothing, absolutely nothing reform them in such a way as to make them

sustainable. and i'm afraid that as time goes by, the deficits were look agent now that we think are one-time-only events are liable to become regular events that we have year after year after year that are inevitably going to have a very negative consequence for interest rates and inflation, and at some point, we're going to have to do something about it, but i think doing something sooner is going to be a lot less painful than waiting until the last possible moment. host: one of your solutions is a value-added tax. how would that work? guest: well, my observation of the analysis of the situation is that it's simply impossible, certain unlikely in the extreme that we could cut enough spending out of these entitlement programs to avoid the necessity of a very large tax increase r. and so the question becomes how will those taxes be raised? if we try to get more revenue out of our current income tax

system, which is essentially dysfunctional, and we can barely get money out of that now. i think it will just collapse of its own weight, and therefore, we have to look at a new revenue source, and this value-added tax is one that every other major country has used to finance its entitlement programs and it's a kind of sales tax, but instead of being collected all at checkout, it's collected a little bit at a time in the whole production distribution stream. and it's proven in other countries to be a very, very effective tax, raise as lot of revenue at very little economic decision portion, and i think we're going to have to do it whether we like it or not. host: any supporters of that on capitol hill? guest: none, none. at least none publicly. i periodically meet with members of congress who say, i'm absolutely right, but but if you go around and say that i agreed with you, i'll call you a liar to your face. so there's a deep, deep fear

about saying anything about these things that i think is very, very harmful because we need to at least have open debate and not have certain subjects that were -- that we're not allowed to discuss because it upsets somebody or another. i think the policy community in this city has really fallen down on the job by pandering to crackpot ideas like, you know, all tax cuts raise revenue and silly things like that or that tax cuts will starve the beast and automatically bring about -- host: what does that term mean, starve the beast? guest: well, the idea was that if if you tried to cut spending by itself, you were never going to get anywhere because the people who like spending will be too powerful. so the trick was, well, let's just cut spending and not worry about spending, and when the revenues are reduced and the deficit is increased, then all

the people who worry about deficits will have no choice except to put their efforts into cutting spending. and that was a theory that made a sense amount of sense in the 1970's, but clearly makes no sense whatsoever today. there's simple knoll evidence that that theory works, and yet a lot of people on the republican side are just absolutely convinced that this is the key to, you know, financial, you know, bliss or whatever. it's just stupid, really. host: robert is next. rockville, maryland, good morning, go ahead. caller:@@@@@ @ ,

guest: well, i don't think any of those proposals will work, because i think the basic problem we have in our economy today isn't that costs are rising, but rather, that there's no demand. a great many companies are losing money. tax cuts are not going to do them any good. what they really need is an increase in people buying their products, and i don't see how tax cuts on business are going to do any good. i don't see how any tax cuts are going to do any good under current economic circumstances.

keep in mind that in the fiscal year that just ended, fiscal year 2009, federal revenues were 14.9% of g.d.p. that he wants the lowest level since 1950 that the historical post-war level of taxes is 18% of g.d.p. so we've already had a three percentage point cut in taxes assist a share of g.d.p. that has clearly not done any good to revive the economy. and just throwing more tax cuts out there that have -- we have no reason whatsoever to think we'll have any impact, is just dogma. it doesn't have any relationship to reality, in my 15 more minutes with bruce bartlett. next up is detroit. this is john on our republican line. good morning. caller: hi, good morning, mr. bartlett. infrastructure is something that i can't quite understand, i can't wrap my mind around why

people seem to oppose or think that it's going to go poorly. i'm in scrurks a civil engineer, and we've been talking about the deficiencies in the f.a.a. and the tracking of aircraft flights in this country. we've been talking about bridges. near detroit, we just found out recently that m-dot found out there's a over the water bridges that have not been looked at as they were supposed 2006, 2007, and 2008, and all the bridge that goes over to winds sore, maybe you bheard that, i don't know, but it's in some questionable state. i looked at the number of bridges in this country, and i believe it's over 500,000, and you would think that if we only were to look at those bridges and investigate as to what state they're in, except for

the one who are receiving routine maintenance, just the bridges alone, if you were to initiate engineering contracts to have them investigated, looked at, you know, that's going to -- it would have to spread out into heavy equipment and other contracts, which would lead to, you know, suppliers. you know, it may be simplistic, but it seems to me that would be the case. and also separating sewer systems, improving waste treatment and water treatment plants and all the things here in this country, if we can put that much money into iraq that we've done that we've lost -- and we don't know, exxon mobil got something out ofdd to his comment, this tweet from shawn, our economic future lies not in the real estate market, tpwhut decentralizing energy systems creating an explosion in employment. calling for government spending in this infrastructure area and the energy area. but in the end, you get back to your problem of the mounting debt that the country has.

guest: well, yeah. you have to -- it's kind of a short run, long run problem. right at the moment, our problem is we have to stimulate growth and increase jobs. and i think the caller was exactly right that there's a great deal with the could have been done in terms of public works spending. there's clearly a great need about fixing up the bridges and roads and things like that. my only point i was making is people underestimate the time laggeds, the time that it takes to let contracts and higher -- have plans drawn up and things of this sort before a meaningful amount of work is being done by the people in the construction industry, and that is being done. it's just being done much more slowly than people thought was necessary. i think they just had this notion, like i said earlier, that all you needed was to have a check and the next day people would be out, you know, with pick axes and things, and it

just doesn't work like. that it's a very long, drawn-out process. but i think that going forward, i'm optimistic economically, because i think a lot of that money that was appropriated back in february will still be coming online this year and will add some stimulate to growth. host: why did the fiscal stimulus work during the f.d.r. years and is slow to work now? guest: well, it really didn't work at all during the f.d.r. years. that's the problem. all the right-wingers were complaining about how big his deficits were, but the problem is they weren't nearly big enough. and then just at the points the deficits were starting to have a good economic, roosevelt got talked into balancing the budget. and the federal budget went from a deficit of 5.5% of g.d.p. in 1936 to a complete balanced budget in fiscal year 1938.

so he took 5.5% of g.d.p. out of the economy that would have otherwise been stimulative, and really, as a result that really wasn't until world war ii that the depression really ended. host: to mesa, indiana. good morning to andy on our democrats line. caller: good morning. i'm looking at the kind of economist that the republicans in washington and groups like the united states chamber of commerce are trotting out and supporting their laissez faire tax cuts and trying to say that tax cuts create jobs, and i've never seen any evidence of that in my lifetime. i'm also wondering what you think about increasing stimulus and actually going out and spending more money to try to create somee guest: well, at this point, i think it would probably be not a good idea to have a second stimulus package for this reason. if you look at the economy,

there's an awful lot of evidence that we've really turned the corner, that we're past the bottom, and that, at least in terms of g.d.p., things are turning upwards and the stock market's rise is evidence of that, because it tends to rise in advance of changes in the real economy. and you've got a growing numbers of economists who are predicting what's called a v-shaped recovery, which would quite a rapid increase, and any number of economists are predicting 4% growth next year and things of that sort. the problem, is the real problem is that there's a disconnect between g.d.p. and jobs. we used to know that if g.d.p. went up x percent, then you'd get some other percentage increase in the number of jobs. they tended to be -- to move together. now it appears that they're not. instead, what businesses are doing is investing heavily in

labor-saving equipment. they're doing whatever they can to get by with their existing labor force and avoid at all costs hiring new workers, and that's more of what economists call a microeconomic problem that i think we have to come up with creative solutions for dealing with, because that's a problem that's going to be there even when we reached the point where g.d.p. growth is at the point where we all agree the recession's over with. host: how would you advise president obama on the unemployment problem? guest: boy, that's a very tough nut to crack. there's a lot of talk these days about some sort of tax credit for newly hired workers. host: that would go to businesses? guest: yeah. but the problem seths very hard to tell who's a new worker. and so you have a tendency to give rewards to businesses that just happened to be expanding for whatever reason, and you

get people gaming the system. you lay off some guy one day, and then up hire the same guy back the next day. you get a tax credit, and these kinds of things have made it very hard. we tried this sort of thing in the past and at the present didn't work very well. i think we'll probably going to have to come up with a package of things. i think it was a very beside idea to raise the minimum wage in july. it's quite clear that you had an almost instantaneous increase in the number of teenagers that were unemployed. we have to be more creative, and i haven't really murder any really ideas in that area. host: lansing, michigan, is with us. this is keith, good morning, i understand pen line. caller: i'd like to say john maynard cane discredited himself because he he endorsed the economic policy -- guest: that's not true. that's just not true. caller: listen to what i'm telling you. while he was trying to figure out the problems with

unemployment, adolf hitler had solved had. so basically, we all know how the nazis policy ended, but our economy is so central islesed. our economy is centralized in the politicians have made it to where we're going to have a service economy instead of an industrial economy. you can see that our tax code is set up to penalize industry so. what they want us to do is fix the problems in china and other countries make, while we are just not making anything. if we don't have an industrialized society and get all these environmentalists out of the way, we're going to really be hurt in this country host: i'll get a response from mr. bartlett. guest: well, i think it was clear that a lot of countries in the 1930's were experimenting with what we came to call keynsian ideas, government spending, public works, and things of that sort, and certainly the germans were

among them. the swedes were doing a lot of this stuff as well. and i just think it's irresponsible to make it seem like keyns was some sort of nazi because some other countries implemented some of his policies. as far as china is concerned, the real problem there has nothing to do with taxes t. has everything to do with the exchange rate. they simply refuse to allow their currency to rise, which gives them a competitive advantage that makes it cheaper for to us buy goods from them than to produce them ourselves. but nevertheless, the u.s. is still the largest manufacturing country in the world and the largest exporter, and i think sometimes we forget that. and we run ourselves down, when actually we're still in pretty good shape. host: there's a story in the "philadelphia inquirer" about china pledging more aid to african nations after a conference this weekend. what are the challenges of a country like china going into places like africa where the u.s. is already, but china becomes a competitor as a

developer, a developing nation in this n those countries? guest: well, i think it's basically in everybody's interest certainly to see africa become more developed, and i think the chinese view africa as an untapped resource for raw materials that they need to fuel their manufacturing sector, and so i think it's a challenge, but i don't think it's a problem. i think it really makes a lot of sense for everybody. host: kirby, good morning. georgia on our republican line, welcome. caller: hi. i wrned if our guest has ever read basic economics by either thomas or walter williams. as far as i'm concerned, the federal reserve is keynsian, and also the thing that he criticized about the drug deal, that's keynsian. and are i would like to ask a question. does he think economics is an art or a science? i think it's a science.

the same way the corps of engineers can determine how water will flow when they determine where to put a dam, human nature is the absolute that can be used to determine what economics is. host: in your all years in economics, have you figured out whether economics is an art or science? guest: it's clearly more of an art than a science. i think it's not really very scientific at all, except in its superstructure. you've got a lot of mathematics that looks very scientific. but when you peel away all the layers like on an onion and get down to the middle, lot of it is just pure judgment calls, people make their theories fit whatever they believe for whatever philosophical reasons, neble big government, small government, they're libertarians, socialists, whatever, and they cook up theories that support where they're already coming from. but i c