Smoke and Mirrors at The New York Times
Jude Wanniski
January 4, 2000


Memo To: Howell Raines, NYT editpage editor
From: Jude Wanniski
Re: "That Elusive Surplus"

The essence of your January 2 editorial, "That Elusive Surplus," is that none of the $3 trillion in projected federal budget surpluses should be devoted to tax cuts. Instead, it should go to financing future Social Security needs and government spending which you think is needed. So far so good, but you then advise your readers: "One lesson from the Clinton years is that an expanding economy can do more than any social program or tax cut to improve the lives of Americans. An enduring lesson of the Reagan years, of course, is that it really does take smoke and mirrors to produce tax cuts, spending initiatives and a balanced budget at the same time."

An expanding economy, of course, can do more than any social program to improve the lives of Americans, but how do you get an economy that is in a tailspin -- as the U.S. economy was in the 1970's -- to expand? You do not present an argument or a hypothesis on how to achieve non-inflationary economic growth at a time when your economy is in inflationary decline. As one of the Reagan supply-side economic advisors in 1979-80, I recommended the policy mix that has been identified with Canadian economist Robert Mundell, the newest Nobel Laureate in economics.

There is nothing "voodoo" about the mix, as George Bush said in 1980, nor is "smoke and mirrors involved," as third-party candidate John Anderson suggested that same year. A government tax rate that is too high is like a protective tariff , so high it discourages trade and reduces or even eliminates the revenue available to the government from the tariff. Can you imagine where the economy would be now if the top income-tax rate was still where Reagan found it in 1980, at 70%? A lowering of the high rates was essential to economic growth. They had become swollen by the monetary inflation and bracket creep that logically followed President Nixon's attempts to expand the economy by cheapening the dollar. These policies were "smothering the economy," as Mundell put it in a 1974 Wall Street Journal interview which I did when I was still with the paper, "It's Time to Cut Taxes."

The task was simple, no magic involved. Lower the rates to levels that would permit economic expansion and stabilize the dollar/gold price to prevent further inflationary bracket creep. Mundell never argued that a lower rate would have to produce more revenues than a higher rate in the same calendar year. Revenues only had to increase faster than the interest payment of the bonds needed to finance the tax cuts. Over time, the inflation would end while continued expansion eventually overtook the red ink in the budget.

The same is true of government spending. If federal social programs do more good than harm, they essentially produce a positive return on government investment. If the same funds can make the economy grow even faster, the growth "can do more than any social program... to improve the lives of Americans." What we are enjoying today is the result of the Reagan policy mix of the 1980s and the bipartisan budget, including the tax cuts, of 1997. If you really believe President Clinton's policies expanded the economy by lowering interest rates through fiscal and monetary austerity, you must explain why interest rates are almost as high now as they were at the beginning of the Clinton years. Can you do that? Of course, the Times can say whatever it wishes, but I am usually more impressed when your arguments hold together with some logic and coherence -- rather than smoke and mirrors.