We Are All Supply-Siders Now Jude Wanniski July 28, 1997

Memo To: Richard W. Stevenson, New York Times
From: Jude Wanniski
Re: ‘The Supply-Side’s Irrepressible Charm’

Nice headline, but your piece in Sunday’s “Week in Review” section on the status of the supply-siders did not seem to diverge much from the preconceived theme you had when you interviewed me: That supply-siders were wrong in “warning, in apocalyptic terms,” that the 1993 Clinton tax increases were about to “subject the nation to all manner of horrors.” I assume you did get the fax of my ‘93 client letter, published the day after the tax increase passed the Senate, in which I said the increase would not do much damage to the economy. And I do appreciate the mention you made that not all supply-side economists failed to appreciate the economy’s underlying strength. Here is the relevant part of my August 9, 1993 analysis

It really isn’t necessary to cast President Clinton or Senate Minority Leader Bob Dole in one role or the other. At the outset of this grand, historic debate that we have been privileged to witness up close, there were serious questions about the staying power of both sluggers. Both have proven themselves in ways we had not seen before, ways that we can admire: the President for his doggedness in pursuing his vision, maintaining a flexibility that enabled him to reach his goal, albeit by the narrowest of margins; Dole for his deftness in keeping the entire Republican Party unified, not through narrow partisanship, but by a principled approach to helping the President find his way to a budget that will in the long run do little damage to the economy.

1. While you never mention me and the 45 minutes you spent on the telephone with me, you did take a swipe at what I’d told you: “Its adherents are now offering the somewhat tortured argument that the economy would be even stronger if not for the 1993 tax increase.” My “somewhat tortured” argument was that if Fed Chairman Alan Greenspan had not accommodated the tax increase with more liquidity, the price of gold would not have climbed to $383 from $350, and interest rates would not have increased with this signal of new inflation expectations. The one thing the White House claims credit for in the decline of the budget deficit as a result of its ‘93 tax increase are the lower interest rates that are now supposedly the reason for the booming economy. Unhappily for this argument, interest rates are higher now than they were in 1993. Why has this happened? My reasoning, which I offered you, is that the tax increases caused a decline in demand for dollar liquidity, and by the time Greenspan decided the Fed had to raise interest rates to offset this inflationary effect of the tax increase, gold had gone up to $383 and the long bond’s yield had climbed from 5.87% to almost 7%. Now you don’t have to accept my reasoning, Dick, but you surely agree that interest rates are higher now than they were in 1993. If the decline in the deficit is responsible for the expansion of the economy because it lowered interest rates, you don’t have the lower interest rates. Republicans may be too dense to point this out, but the top guns for the financial press should be able to give us a rationale that hangs together, whether tortured or not. 

2. I’ve tried to impress upon you again and again that supply-side economics does not mean tax cuts. It means thinking about how all policy affects healthy economic growth in national production. The supplier of goods, the producer, is the central actor in this analysis, not the demander of goods, the  consumer. I know you are stuck with a stereotype, but by now you should be able to at least lean against the stereotype. You say in your piece: “What has undermined supply-siders’ credibility is the absolutist approach of the most strident among them, what Robert D. Reischauer of the Brookings Institution called “the one-answer response go every economic question.” I don’t know who you have in mind as “the most strident among them,” but I suppose you mean me, although you know that I am not a “one-answer,” i.e., “tax-cutting” fellow, but will discuss all policy instruments in a supply framework. If you would have asked why supply-siders often focus on tax cuts, I would point out that tax rates of all kinds, throughout the world, had become excessive because of the breakdown of the Bretton Woods monetary standard -- the dollar/gold link -- which produced the worst global inflation in the history of civilization. All over the world, tax rates were swollen by monetary inflation, and all over the world, there are economic and social ills that are the result. Because all economics taught in the U.S. since WWII has been in the demand model, there have been almost no trained economists around who knew what was happening. Reischauer certainly did not, nor does to this day.

3. You infer that Jack Kemp may be the most strident of supply-siders. You will say: “No I didn’t, Jude,” but in the paragraph immediately following the Reischauer quote you say: “In that formulation, tax cuts can solve almost any economic or social ill. In a speech in Zimbabwe last week, Jack Kemp, last year’s Republican Vice Presidential nominee and the person who comes closest to serving as leader of the supply-side movement, suggested that the solution of Africa’s poverty was to foster entrepreneurship and to reduce tax rates. Mr. Kemp may have a point when it comes to attracting foreign investment, but his idea ignored the question of how few of Africa’s poor -- or its wealthy, for that matter -- pay taxes at all.”

I’m sorry to say that it is not Kemp who ignores the question. It is Richard W. Stevenson, senior financial correspondent of The New York Times. Where is your evidence of having asked the question, of Jack, or of me? How can you have spent so many years in your incredibly important position without knowing how oppressive tax rates have always destroyed the ability of a people to create wealth? Is there someone at the NYTimes who threatens dismissal if a reporter begins to show signs of understanding the destructive power of oppressive tax rates? There must be something in the water, or in the last 20 years, out of the hundreds of new hires at the Times, surely one man or woman would have shown an interest in the subject.

What I mean to say, Richard, is how does one expect a nation to be able to create wealth when the top marginal income tax rate of 35% applies at $8,000, as it does in Ghana? It’s like building a three-foot ceiling in a house for three-foot kids. What happens when, on top of such ridiculous rates on personal and business income, the IMF recommends a VAT tax on top of the national sales tax? Would you guess that Botswana is doing better or worse than Ghana, if you knew that the top rate on income tax in Botswana was 25% at $22,000? Take a wild guess, Richard. If you ask the IMF/World Bank economists why Botswana is growing, they will tell you it is because there are lots of mineral resources in Botswana. What noodleheads. The entire continent is one giant mineral resource, undeveloped because the Western imperialists have held them down with financial aid, which they get only if they agree to raise taxes and devalue their currencies.

3. Your piece is accompanied by a photograph of President Reagan, seated at his desk in the Oval Office. It describes him as “the first supply-side President.” Now that is flat wrong. Every President in U.S. history was a “supply-side President,” although some, like Hoover, thought the economy would grow faster if tax rates were increased to balance the budget, as he did in 1932. Demand-side economics -- the management of aggregate demand -- did not show its face until Keynes wrote his General Theory in 1936. Eisenhower’s model was supply-side as a candidate, promising tax cuts, but he quickly broke his promise when elected, saying the budget would first have to be balanced. Democrats couldn’t beat him in ‘56 because they favored tax increases. John Kennedy was a genuine supply-side President in every sense of the term. The National Association of Manufacturers is now running TV commercials with quotes from JFK on how the quickest way to balance the budget is by cutting tax rates, which you should check out. Democratic liberals hate those old JFK quotes. Nixon and Ford were conservative Keynesians.

Nixon even said “We are all Keynesians now.” Jimmy Carter was a “neo-Keynesian,” who thought he could fix the economy with a weak dollar. Reagan was a supply-sider and so was Bush, but Bush, like Hoover, believed in raising taxes to balance the budget to lower interest rates. Clinton is a supply-sider in that mode, although he is tempted by tax-cutting ideas now and then, and has certainly embraced Greenspan’s arguments of keeping the dollar strong. What? Clinton is a supply-sider? You bet. All of his economic arguments are in a production framework. I disagree with a majority of his formulations, but can assure you he is far more supply-side than demand-side. You should also remember that I have been pointing out for 20 years that Adam Smith and Karl Marx were both supply-siders. Except for Bob Rubin, who says there is no evidence that tax cuts do anything for economic growth, which even the President could never say with a straight face, We are all supply-siders now.