The Magic Formula: The timeless secret to economic wealth and prosperity (Nathan Lewis)

A PROVOCATIVE ANALYSIS - As The Magic Formula has been out for several months, I was struck by the invitation on Amazon to “be the first to review this item.” Did this mean that no one else had read the book, others were hesitant to express their opinions on it, or reviews were being rigorously screened before posting? Whatever the explanation, here’s my take.

It seems a bit too much to expect that a magic formula for economic success could be distilled down to four words – low taxes, stable money. And sure enough, the text offers many qualifications, particularly for low taxes. There is no fixed standard of how low taxes need to be (although 10% of GDP is mentioned as commendable) – it apparently matters what the money is being spent for and how much citizens are accustomed to paying – some kinds of taxes do more damage than others.

Instead of advocating low taxes, would it make more sense to shoot for balanced budgets? Arguably yes, certainly plenty of books have been written to make that point – but Mr. Lewis suggests a solid argument for not trying to cover deficits by raising taxes, namely tax increases never deliver as much revenue as promised because they cut into economic growth and/or fuel tax avoidance.

Which is not to say spending cuts can’t contribute to the solution of budget problems, surely they can, but maybe the focus should be on spending cuts/tax cuts that will reliably pay off versus tax increases/lesser spending cuts that may not yield the desired results.

Stable money captures the oft-demonstrated point that money will lose its value if the supply grows too fast, and considerable evidence is presented for the point that linking currencies to gold (or in some periods gold and silver) has maintained monetary stability over long periods of time – typically breaking down in time of major wars and then being reinstituted afterwards - whereas other systems based on the judgment of politicians, central bankers, etc. have failed all too often.

Since 1971, when the US effectively devalued the dollar and the Bretton Woods agreement was abandoned, the central bankers have been muddling along – with mixed results. And the solution isn’t to reinstate Bretton Woods, which attempted to have things both ways by permitting countries to have “currencies whose values were linked to gold, and also attempt to manage [their domestic macroeconomies] using central bank currency and interest rate manipulation.” Nor should the goal be a global currency that would be managed by the central bankers of the world, effectively creating the potential for miscalculations that would affect everyone in the world.

Rather, the suggested solution is to either revert to a real gold standard or develop a new system that will reliably deliver the same results without a lot of human management of the numbers. This makes sense to me, but might be a tough pill for the central bankers to swallow.

This book offers a wealth of historical examples, backed up by what appears to be very thorough research. The discussion can be hard to follow at times, however, as it jumps between cultures and time periods. I didn’t get much out of the charts, as they didn’t display well on my Kindle reader.

In sum, a very interesting discussion of some important policy issues – well deserving of a “four star” rating.

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