John Kasich, Presidential Timber Jude Wanniski January 7, 1998

Memo To: Rep. John Kasich, Chairman, House Budget Committee
From: Jude Wanniski
Re: "Meet the Press" 

Your Sunday appearance on NBC's "Meet the Press" was as good as I've ever seen you. Tim Russert threw a lot of good, tough questions at you and so did David Broder of the Washington Post and I must say you were almost, shall I say, presidential in handling them. I thought you were at your best in dismissing the demands of the Beltway's cultural conservatives that the Republican National Committee not support any GOP candidate who supports partial-birth abortions. Because you are pro-life and generally popular among cultural conservatives, it was good that you addressed the subject on a political principle: If the Republican Party can draw such lines on the abortion issue, it can draw lines against other issues which you support. This was Ronald Reagan's great strength, in that he conveyed to the American people that he stood for principles that could not be shaken, even though there would be policies and practices that he had to accommodate in order to govern. The people appreciated the fact that he had an ideal to which he wished to move the national family, but that he would show understanding for the frailties of those who could not move as fast as others. If you have the time, you should read the new biography of Reagan by Dinesh D'Souza, who captures the spirit of Reagan's leadership.

As always, there were several minor points you expressed that I would take issue with. The only one really worth mentioning is your pledge to not borrow money in order to cut tax rates. This is the kind of thinking that a national electorate will always reject in a presidential candidate, if they have a choice. If Reagan had made such a pledge in 1980, he would never have been elected. Reagan y understood the essential supply-side principle that if a tax rate is so high that it is discouraging healthy economic growth, a reduction in that tax rate would be economically and financially sound as long as the revenues that would flow from the economic growth would cover the interest on the bonds needed to finance the cuts. Granted, this is easier to do when you come into the Oval Office when the top income-tax rates are 70%, as they were in 1980, or 90%, when John Kennedy was elected in 1960, or 74% when Harding was elected in 1920. But at 38% now, the federal rate is counterproductive, and should be reduced even if the government must go to the bond market to finance the early revenue loss that might appear. The capital gains tax, at 20%, could be eliminated entirely, and the economic growth generated would be so powerful that the bonds needed for early offsetting revenue losses on the capital gains account would be very small, producing enormous future revenues.

The Clinton administration now takes credit for the approaching zero deficit, but this is because nobody has explained the dynamics of public finance to him. The reason the Reagan tax cuts were followed by big early deficits meant little to the economy and financial markets, because the return on investment was properly seen as enormous by the financial markets. This is why the opponents of the tax cuts in both the Democratic and Republican party were dumbfounded when the high deficits were accompanied by falling interest rates on government bonds. In other words, the financial markets saw beyond the start-up costs of the tax cuts. It was the seeds Reagan planted back then that are now producing the fruit that Bill Clinton is harvesting. Please take note that Clinton's tax increase of 1993, which got not one Republican vote, was accompanied by an increase in interest rates on government bonds. The 30-year bond was at 5.78% in September of 1993, as the tax increase was first felt. It climbed to well above 7% as its negative effects were being felt, and is now testing new lows at 5.75%, following the cut in the capital gains tax last year. There are Republicans who opposed the budget deal in 1997, including presidential hopefuls, on the grounds that it did not cut tax rates enough and increased spending too much. These views may be sound at some parochial level. They are unsound at the national level, where the President must consider the return to any possible investment in tax cuts or spending. To forego the use of bond finance as a matter of principle is cause enough to eliminate a candidate for the presidency. See what I mean? If you think about it for awhile, I think you would be able to adjust your position, as I would late to have you cut yourself down as presidential timber that still has room to grow.