How Fast Can We Grow?
Jude Wanniski
August 23, 1996


Memo To: Richard Stevenson, NYTimes
From: Jude Wanniski
Re: How Fast Can We Grow?

Your piece today on "Dole's Plan for Economy Could Be Hard to Fulfill" has at its core the question of how fast can the economy grow without inflation. The reason I would give you a low mark, not more than a C-, if I were grading you in J-School, is that you mix apples and oranges for the readers, and never sort them out. There is no question that an economy can grow faster than 3% or 4% for some period of years. None. Your own newspaper reports that China has been growing at a 9% or 10% annual rate for the last 10 years. Yet you quote Lyle Gramley, a former Fed governor, as saying: "Certainly a claim that we can increase the growth rate to 3.5% is not at all likely to come true in my lifetime, almost no matter what." You don't make it clear, Dick, that China's growth rate can remain at 9% a year until it fully utilizes its human potential, when labor and capital are at a peak of efficiency. Only then will it be able to grow only at the level Gramley seems to be talking about, the 2 1/2% which has been the observed rate over centuries. The same is true for any country that has fallen below its potential growth rate for a period of time. Supply-siders do not believe the economy can grow at a rate faster than 2 1/2% over the long run, but we can grow at twice that rate until we get capital and labor back to a peak of efficiency. For the last 30 years, we have been steadily eroding the efficiency of capital, which is why wage rates gave been in decline. We have had the worst inflation in our history, because of the decision to leave gold and go to greenbacks in 1971, and while we have protected labor income from inflation and cut its marginal tax rate, we have not protected capital gains from the impact of this horrendous inflation.

We can grow at 4% or 5% for several years without inflation, or for 3 1/2% a year for a decade or two without inflation. Don't take my word for it. Ask Alan Greenspan and he will tell you how to do it!! But let's not have a national debate on economic growth in the Times over apples and oranges, or permit it to dissolve into the administration's ad hominem arguments.

After all, you do quote Labor Secretary Reich, who after saying "it is certainly fair to have a debate about growth," dismisses the idea of faster growth with an ad hominem sneer: "We tried supply-side economics in the 1980's. It's been subjected to real live national experimentation, and it utterly failed." Does Reich get the last word?

Please turn to the editorial page today and you will find a column on "The Return of Voodoo Politics," written by your colleague Steven Weisman. In it you will find an accurate description of how supply-side economics was tried in the 1980's. He writes glowingly of Richard Darman's new book, as if this is the authority on the experiment, when he did everything he could in those years to undermine the supply-side tax cuts of 1981. He and David Stockman could not entirely block the tax cut that Reagan promised the American people in 1980, so he schemed to take it back later. Your colleague at the NYT, Mr. Weisman, reminds us: "The fixes came in part when Mr. Reagan won approval of tax increases in 1982, 1983, 1984, 1986 and 1987." Please Dick, let that statement sink in, and then read Weisman blithely dismissing the supply-side "chimerical" fantasy that "revenues would magically appear to close the Federal deficits." By any accounting used in the 1980s, the 1981 tax cuts were dwarfed by the tax increases of the following years, not to mention the Bush tax increase of 1990 and the Clinton hike of 1993. How can you let Reich get away with arguing the supply-side experiment failed, when all we got out of those years were the lower marginal rates?

The reason I take such pains this morning to write this to you is that the greatest newspaper in the world, the most powerful and influential has assigned you to cover the debate over economic growth that is at the center of discussion on the planet. The fate of six billion people are hanging on this debate.