"America Is Borrowing Trouble" Jude Wanniski April 17, 2001

Memo To: New York Times letters editor
From: Jude Wanniski
Re: The Trade Deficit

Following is a letter to the editor of the NYTimes I sent on April 10, which the editors chose not to publish. I’d written it in response to an op-ed which appeared in the Times the previous day by two prominent economists who had spent their teaching careers at the Massachusetts Institute of Technology, Robert Solow and Franco Modigliani. I’ve never thought much of their work, although they both got Nobel Prizes in Economics. When I wrote the Mundell-Laffer Hypothesis for the Public Interest quarterly in the Spring of 1975, a 10,000-word essay that helped launch supply-side economics, Solow was actually on the board of the publication, which had been founded by Irving Kristol. Solow was so outraged by the ideas in the essay that he threatened to resign if Kristol published it, which at least is what Irving told me. In 1980, when Ronald Reagan based his campaign for the White House on the ideas in that essay, Solow said the tax-cutting idea was “snake oil.” Jack Kemp, who had turned the GOP into a tax-cutting party, Solow called a “snake-oil salesman.”

Solow, now 76, was given the 1987 Nobel Prize in economics “for his important contributions to the theory of economic growth.” As the Brittanica tells us, “Contrary to traditional economic thinking, he showed that the rate of technological progress is actually more important than capital accumulation and increases in labor in achieving such growth.” I personally think this is baloney, but Solow’s idea is one reason why there is so much poverty in the world even though technological progress has advanced by leaps and bounds. It also helps explain why he hates supply-siders, who argue that tax rates must be kept low and money sound in order to promote capital accumulation that can help undervalued labor increase in value. If Solow is right, we should keep taxes high and give government subsidies to MIT to think up new gadgets, which we will distribute at deep discounts to the poor.

Modigliani, 83, did some pioneering work in finance. He showed that the market value of a company’s stock depended primarily on investors’ expectations of what that company would earn in the future. I’d thought that idea had been around since Adam, but maybe Modigliani did think it up. The Nobel, though, went to him because he showed that people worked like hell to save up as much as they could to spend in their old age, not to leave anything to their kids. The Swedish Academy and the NYTimes liked the idea because it justifies a confiscatory death tax. Anyway, here is the letter I wrote to the Times which they decided not to publish:

Dear Letters Editor:

Two Nobel economists at MIT, Franco Modigliani and Robert Solow, warn against tax cuts in "America Is Borrowing Trouble," (April 9, op-ed), saying the cuts will increase "the large and growing deficit in our international trade balance." They are right, but for the reason the cuts will make the U.S. economy an even more attractive place to invest than it is now, which means capital will flow here from the rest of the world. Foreigners must sell us more than they buy from us in order to use the difference to buy U.S. dollar assets.

The answer, though, is to make the rest of the world more hospitable to capital formation, so the world expands simultaneously. An MIT graduate, Robert Mundell, who won the Nobel Prize in economics in 1999, 26 years ago told me that in the extreme, if the United States is the only country in the world with sound supply-side economic policies, eventually everyone in the world will move to the United States. They will bring the paper assets we gave them in exchange for their goods and our international trade deficit will dissolve in the process.

This is why supply-siders have been so insistent over the years in arguing for a gold dollar, which helps the whole world by providing a monetary anchor to all currencies, plus simpler, flatter tax systems everywhere. The IMF professors could help by getting the International Monetary Fund to adopt those principles instead of encouraging weak currencies and high tax rates.

Jude Wanniski
Morristown, N.J.