Senate Democrats complained to me that they were willing to cooperate with Reagan on the tax bill, but were being cut out. Sam Nunn, who had got “Reaganomics” passed in the Senate before Reagan was elected, only to have it nixed by President Carter, told me that no one in the Reagan administration had ever spoken to him or sought his support.
The White House chief of staff, James Baker, wanted a Republican “victory,” and proceeded to pick a fight with the Democrats who were willing to support President Reagan’s policy. I told Jim Baker that he was making a strategic mistake. By cutting out the Democrats, he was setting the policy up for criticism that would create the perception of failure. I told him that Stockman had hidden the deficit by over-estimating inflation, a ploy that contradicted the logic of our policy. If our policy was correct, inflation would be less than Stockman’s forecast. The tax revenues would not materialize, and the Democrats, cut out of the action, would seize on the deficits and pay the White House back for cutting them out of any credit for the new policy. (My prediction came true. Democrats, inured to deficits by decades of Keynesian demand management, suddenly became as rabid about budget deficits as Republicans.)
If I had known then just how corrupt politics was, I would have thought twice before warning Baker that the hidden deficits would be used to discredit the policy even if the policy cured stagflation. Baker was allied with George Herbert Walker Bush, Reagan’s VP, and the fight was on from day one for the succession to Reagan. Kemp was in the forefront, because he was identified with Reagan’s economic policy, and Bush had called it “voodoo economics.” If Baker could make Reagan’s policy appear to be successful only because Bush had moderated it, all the better for VP Bush’s claim to the succession.
Tip O’Neill, the Democratic Speaker of the House, offered an alternative supply-side tax rate reduction to the administration’s bill. Speaker O’Neill’s bill had a smaller reduction in marginal tax rates on personal income, but had a superior pro-growth tax reduction on the business side. The House Democrats’ bill offered expensing of business investment.
The Reagan administration was too fearful to propose expensing (immediate write-offs) of business investment, and here was the leading Democrat in the nation offering it to them. I told Jim Baker to jump on it, to work out a compromise with O’Neill on the size of the personal tax rate reductions and to give the Democrats equal credit for the policy.
That, I told Baker, would ensure the policy’s acceptance and success.
For political reasons, Baker was more committed to giving Reagan a “victory” over Democrats than he was to the success of the policy. Baker wanted a headline. I wanted a policy. From Baker’s standpoint, if Democrats for political reasons turned against the policy, they would help to create welcome roadblocks to Jack Kemp’s challenge to George H.W. Bush for the succession.
Reagan’s version of supply-side economics carried the day over Tip O’Neill’s version. Deputy Assistant Treasury Secretary Steve Entin prepared a graph comparing the Reagan and O’Neill tax rate reductions. The Democrats’ tax cut was initially larger, but Reagan’s was better over time. That let Reagan go on national TV, point to the graph and say, “the Democrats have the best bill—if you only expect to live one more year.”
The history and explanation of supply-side economics are in my book, The Supply-Side Revolution (Harvard University Press, 1984). Books published by Harvard are peer-reviewed, which means that publication depends on a go-ahead from outside experts. A book that was “voodoo economics” or simply said that “tax cuts pay for themselves” or that “trickle-down economics works by giving the rich money to spend and some of it will trickle-down to help the poor” will not clear peer review.
Thirty-five to forty years after supply-side economics made its appearance in policy debates, the vast majority of Americans, including apparently some economists and public intellectuals, have no idea what it is. For example, on February 1, 2014, Information Clearing House posted Bill Moyers interview of David Simon, “America as a Horror Show.” This important interview gets fouled in its opening lines when Simon declares: “Supply-side economics has been shown to be bankrupt as an intellectual concept. Not only untrue, but the opposite has occurred.”
Supply-side economics was not relevant to the interview. Yet off the bat Simon destroys the credibility of his interview. Supply-side economics cured stagflation exactly as supply-side economists said it would do. That was its only claim. I know. As Assistant Secretary of the Treasury for Economic Policy, I was in charge.
In 2013, The Supply-Side Revolution, which Harvard has kept in print for three decades, was published in China in the Chinese language. Why would a leading Chinese publisher translate and publish a 30 year old book about a subject that “has been shown to be bankrupt as an intellectual concept?” Why would Chinese economists request a publisher to translate and publish a book about a discredited and useless subject?
Why does Simon, a reporter who was on the Baltimore Sun’s city desk covering crime during the Reagan administration, think that he knows anything about supply-side economics?
How can America save itself when its public intellectuals have no idea what they are talking about?
As I am associated with supply-side economics and the Reagan administration, the coterie of Reagan haters will write in to the many sites that post my column with sarcastic comments denouncing me for “again defending Reagan.” I am not defending anyone. I am merely stating the facts. Anyone can find the facts. All they have to do is to look. But many had rather shoot off their mouths and demonstrate their ignorance. They can’t stand the thought of having one less reason for hating Reagan.
As I am an interested party, let’s turn to a non-interested one, Paul A. Samuelson, “the father of modern economics.” Samuelson was the doyen of Keynesian economics, America’s greatest 20th century economist, and the first American economist to win the Nobel Prize. If anyone was harmed by supply-side economics, it was Keynesian economists’ human capital. Yet in the 12th edition of his famous textbook published in 1985, Samuelson shows how supply-side policy can cause aggregate supply to increase or decrease, a first for economics textbooks. Samuelson validates supply-side economics in principle and says that its policy impact varies from “modest” to “substantial,” depending on circumstances. He also says that in Britain, “the supply side policies appear to have had an unexpectedly large impact, improving both inflation and productivity more than many observers expected.”
Is the “foremost academic economist of the 20th century” (New York Times) another trickle-down, voodoo kook like me and Ronald Reagan?
I met Samuelson in his MIT office when I gave the annual State of the Economy address to the combined economic faculties and graduate students of Harvard and MIT sometime in the 1980s. Samuelson had an open mind and could absorb new thinking. At the conclusion of my address, I received a standing ovation. No one in the large liberal audience of professors and graduate students said I was a voodoo economist or an agent for the rich. I have debated in public forums Keynesian economists who are Nobel Prize winners, such as James Tobin and Larry Klein. They were always respectful. At a meeting of the Eastern Economics Association, Tobin acknowledged that I was correct.
Supply-side economics dealt with the problem of its time—stagflation. Supply-side economics has no cure for an economy decimated by jobs offshoring and financial deregulation. The problems of today are different. I have made this clear in my book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West.
The George W. Bush tax cuts have nothing to do with supply-side economics. The Bush tax cuts were nothing but a greedy grab, but they are not a significant cause of today’s inequality. The main causes of the unacceptable inequality of income and wealth in the US today are financial deregulation and the dismantling of the ladders of upward mobility by the offshoring of manufacturing and tradable professional service jobs. The wages and salaries denied to Americans are transformed into corporate profits, mega-million dollar executive bonuses, and capital gains for shareholders. Financial deregulation unleashed massive debt leverage of bank depositors’ accounts, backed up with Federal Reserve bailouts of the banksters’ uncovered gambling bets. Neither tax increases nor reductions can compensate for these extraordinary mistakes.
Intelligent people over the centuries have stressed that failure to understand the past endangers the present and the future. Across the American political spectrum policymakers, economists, media, commentators, and the public are ignorant of the past and in denial about the present. Those trying to inform are few and far between, and they are constantly under attack from the very people they are endeavoring to inform. What is the point of the effort to inform? Is it merely “sound and fury, signifying nothing”?
This article was originally published at PaulCraigRoberts.org and has been used here with permission.