The Passing of Donald Regan
Jude Wanniski
June 11, 2003


Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: The passing of a supply-sider

When it was announced in late 1980 that President-elect Ronald Reagan had chosen Merrill Lynch president Don Regan as Treasury Secretary, supply-siders went into despair. He had not been on any of our wish lists for that critical post and we naturally assumed that he would be a drag on the plans to cut the income-tax rates from the top marginal rate of 70% across the board by roughly 30%. We were thankful that Reagan had chosen one of the supply-side gang as Budget Director, David Stockman. Amazingly, it did not take more than a few months to realize that Regan was a godsend and Stockman was a traitor to the cause. Regan, we learned, immediately asked for all the speeches the Gipper had made on matters of public finance and markets, and then sat down and read them all. He knew he would have to assemble a team that really believed in the Reagan agenda that got him elected, instead of imposing his own.

The men he brought in were part of the gang, true believers in the curative powers of lowering unnecessarily high tax rates on income and capital. On the other hand, Stockman fell into the clutches of the budget balancers, including Alan Greenspan, and decided to pursue his own agenda, cutting spending especially on "the social pork barrel." President Reagan found he had a true ally in Regan and eventually a problem with Stockman, who told William Greider of the Atlantic magazine in a series of interviews that the supply-side growth idea was only a "Trojan Horse," to starve the government of revenues by cutting tax rates wherever possible. That debate still haunts the GOP.

All this came to mind Tuesday when I learned that Don Regan had passed away, 84 years old, going straight to supply-side heaven. Amazingly, his intellectual vitality right up to the last inspired him to write an op-ed for the Wall Street Journal in support of President Bush's tax cuts. Here it is:

A Reaganomic 'GPS'
Bush's stealth tax cuts are worthy of the Gipper.


The recent debate over President Bush's tax proposal had so many echoes of the Reagan era that I could almost recite the parts of the various players from memory. Amid all the clamor, few have stepped back--as President Reagan did in 1981--and asked three basic questions: Where are we, where do we need to go, and how are we going to get there? Unfortunately, we have no GPS that could pinpoint where we are and how to navigate from here to there.

The 1981 tax debate occurred when the economy had serious ills. It was entangled in a strange phenomenon known as stagflation--a combination of slow growth and inflation that could not be accounted for by the dominant Keynesian economic theory of the time. Keynesian economists believed that slow growth--or no growth--was the cure for inflation, but somehow both were happening at the same time. Tax cuts, it was feared, would only create more deficits, stimulate more inflation and raise interest rates--already in the high teens--further into the stratosphere.

Ronald Reagan, however, was not troubled by this state of affairs. To answer the question of where we were, he recognized that growth was held back by high tax rates and excessive regulation. As for where we needed to go, his answer was that the first priority was economic growth; other problems would take care of themselves as long as the Federal Reserve maintained a steady and moderate rate of monetary expansion. And his policy for how we were going to get there was breathtakingly simple--the government was going to get off the back of the American people by taxing and regulating less.

The opponents of Mr. Reagan's program were saying many of the same things they said in response to the Bush tax cut proposal: We can't cut taxes, it will increase inflation and raise interest rates; deficits are already too high; tax cuts will only deprive the government of the revenues it requires to meet the many needs of the American people.

Thanks to President Reagan, we know a lot more today, although it seems that many in Congress didn't get the memo. We know that tax cuts spur economic growth by improving incentives to work and invest and by making more money available for new ventures and small business, where the real job growth occurs in our economy. There are many examples of this in recent history, from the Kennedy tax cuts of 1962, through the Reagan cuts of 1981 and 1986. We also know that deficits do not cause inflation or cause interest rates to rise. Although the deficits during the Reagan period were higher (as a percentage of gross domestic product) than the deficits projected today, interest rates declined after the Reagan tax plan was adopted.

As I interpret Mr. Bush's tax program, I think I see that he has tried to answer the same three questions that President Reagan always kept in mind--even though the economic problems he faces are different. We are not in a period of inflation. Quite the opposite; inflation and interest rates are at historic lows. We are, however, in the midst of a slow economic recovery, in which jobs are not coming back as quickly as we might have hoped. In fact, the whole economy is changing right before our eyes, and will continue to change. Unskilled or semiskilled jobs are going overseas, and jobs involving knowledge and skill--technology, specialized services, finance, health care, energy, entertainment and communications--are the growth areas here at home.

The Bush tax program is ideally suited to address this new economy. Whereas Mr. Reagan saw generalized economic growth as essential, the Bush plan has both a stimulative component to start the engine and a long-term component to advance the process of moving our economy into the new areas of future growth. That's what the dividend tax cut and the cut in the capital gains rate are all about. As companies increasingly pay out dividends, and pay less of a penalty for making profits, investors will have funds to invest in new ventures. Our economy, already the most dynamic in the world, will continue to change and grow in response to the growing skills of the American people, particularly in the service sector.

President Bush should also aim to extend his tax-relief vision beyond financial transactions such as dividends and capital gains. In a knowledge economy, education and learning are real factors of production. Americans who add to their knowledge and skills are, then, adding to the stock of the nation's productive assets. The president's next tax bill should recognize this with tax credits for individuals that match the investment tax credits that have been available to business. That's a program that assesses where we are, where we need to go, and how we are going to get there.

Mr. Regan, who died Monday, was President Reagan's Treasury secretary.
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