Arthur Laffer is in today’s Wall Street Journal:
Today’s corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.
Alan Reynolds has a really good post on National Review’s website today. If you are a conservative or a Republican you probably read National Review often and you are likely to have read, and enjoyed Kevin Williamson. Kevin is a great writer and a big thinker. He recently stepped into the lion’s den with a piece called “Goodbye Supply Side” and Alan Reynolds has properly stepped in to administer justice and set the record straight.
Williamson says “tax cuts aren’t really the problem” — but the real problem is the threat of European-style tax increases. If we accepted his advice to ignore all the evidence behind supply-side tax reforms, we would be left with no credible defense against Obama’s plans to pile surtaxes on top of surtaxes for investors and high-income families, or against a VAT. If lower tax rates in the 1980s were useless, then higher tax rates in the next year or two must likewise be harmless.
Williamson claims the “proper perspective” looks only at federal spending, treating spending and taxing as synonymous, regardless of tax rates or even tax revenues. This leads him to define money-losing “tax cuts” as a “poorly applied supply-side analysis.” On the contrary, George W. Bush’s advocacy of tax credits and rebates to “put money in peoples’ pockets” was demand-side, Keynesian analysis.
Supply-side economics in 1971–87 was largely about a policy mix to end stagflation: Using monetary policy to reduce the growth of nominal GDP while using tax incentives and deregulation to raise the growth of real GDP. The tax side was always focused on microeconomics — the incentive effects of marginal tax rates.
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Federal spending is indeed approaching crisis proportions, but Williamson may not entirely right that “nobody wants to touch it.” Wisconsin congressman Paul Ryan, a favorite supply-side ally of our good friend Jack Kemp, is not shy about proposing large and specific federal spending cuts. Neither is Indiana governor Mitch Daniels, who once recruited me to the Hudson Institute.
If cutting top tax rates from 70 percent to 28 percent under President Reagan did not constitute a tax cut because defense spending went up for a few years, then raising top tax rates under President Obama would be equally irrelevant if spending were unchanged. The only “real” tax cut, in this view, was the post-Soviet peace dividend under Bill Clinton. If that is “the stuff that a broad-based political movement is going to put at the center of its campaigns,” it doesn’t sound too promising.
Read the entire column here.
Brian Domitrovic speaks at Baylor University in Waco, Texas about Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity.
By Brian Domitrovic
January 26, 2010
Should a book on the financial crisis by David A. Stockman be welcome? Word is he is preparing one. In a sense, the answer must be yes, given that there can be no question that Stockman has a meticulous and active intelligence and that he’s had a front-row seat in policy and the economy since his days in Congress in the 1970s – as OMB director in the 1980s, in a high Wall Street position after that, and then in business. Surely he has something to say about our crisis that we should hear.
But will he tell us what he has to say? The major examples of Stockman’s expressing his views for public consumption suggest that he will not. Robert Novak said that Stockman was the most informative source he ever had. Mind you, the greatest shoe-leather man in the history of Washington journalism said this. Novak even confided, in his memoir, that in the early Reagan years, he got too close to Stockman, meaning that Novak’s own columns were not as critical and accurate as they should have been. The question arises: do Novak’s columns from the period correctly portray what was going on the Reagan White House, much less what Stockman indeed believed about the issues of the day – or were the columns fronts for some ideological message that Novak and Stockman were striving to get across so as to influence events? This is not an idle question, in that Novak himself raised it, after the passage of decades.
Then there’s William Greider. This Washington Post reporter hung with Stockman throughout 1981 and wrote up the experience in his “Education of David Stockman” article in the December Atlantic. The article is famous for its quotation of Stockman calling the Reagan tax cut (ERTA) which had just passed a “Trojan horse” to bring down the top rate of the income tax. The idea was that ERTA’s reducing of all rates – even those on the little guy – was a populist ruse to ensure that the rich got theirs.
There can’t be any mistake that Greider felt he hit the jackpot in getting the line. He spent the next several years trading on it, publishing the article as a book and generally advertizing himself as the pressman who got Stockman to say “Trojan horse.” Surely this came into play as Greider arranged for his pay package for his book Secrets of the Temple.
But Greider must have also known that Stockman had not been involved in the preparation of ERTA. Today, the archival record makes plain that Stockman devoted all of his attention in spring and summer 1981 (ERTA became law in August) to the spending bills going through Congress. He was the OMB director after all. Stockman had next to nothing to do with the preparation of the tax bill. Surely Post insider Greider knew that Stockman was a poor source on the tax bill – that he wasn’t even a real witness to it. But Greider asked Stockman about it anyway, got a great line, and then trumpeted and traded on the line. If Greider ever is visited by the confessional mood that got Novak near the end of his life, we may yet hear about all this.
As for The Triumph of Politics, Stockman’s memoir of his Reagan years that came out in early 1986 (only five months after he departed OMB), its bona fides as a source stink. It botched the history of the formulation of the Reagan economic plan (which Econoclasts readers know so well) — no mention of John Rutledge! And it is anchored by the Atlantic nonsense. Of course it is – by that point, given the huge reception of the Atlantic article of five years before, this was Stockman’s brand. What if Stockman had told his publisher Harper & Row, “Look I’m really not going to go with that Trojan horse stuff. I knew next to nothing about the tax bill. Let me make the book all about the fight over pork.” They would have said – as they may indeed have said – “Sonny, when you have a brand, you trade on it.”
Then there’s the question of authorship. Stockman was a workaholic, but the 400-page book came out in five months? There’s no convention against ghostwriting for trade books, and Stockman says in the preface that much of his manuscript met a “deserved demise on the cutting-room floor,” as Econoclasts readers recall. There’s a nagging rumor that Christopher Buckley wrote the book. The rumor is consonant with the tone of the book. It has literary panache, and so does Buckley. “Thank you for trashing,” as I always say to my little babies when they strew things across the floor.
The NYT piece from a few days ago? It has the hallmarks of over-editing. The “supply-side catechism” phrase in the opening line is the giveaway. A warhorse in the cheap criticism of supply-side economics is that its proponents treated it as “theology.” Catechisms, after all, are explanations of unerring, unchanging divine science. If something has a catechism, it is theological.
The NYT has long played ball with the cheap criticism of supply-side economics, so I’m ready to say that the Gray Lady imposed that line on Stockman. Battle-axes usually get what they want from their men. But Stockman in fact knew Norman Ture, Jude Wanniski, et al. Ture must be in heaven right now laughing parts of his glorified body off on being the first accountant in history confused for a theologian. The Wanniski-Stockman correspondence is thick at the Hoover Institution, and it’s hard to walk away from it saying Wanniski was not an empiricist. And it is not clear that Robert Mundell is deeply concerned about the affairs of the here and now?
So the record is highly suggestive that Stockman gets manipulated and used by his editors and publishers (not to say interviewers). That’s why I’m worried about this forthcoming book. Don’t tell me that some lowlife critic of supply-side economics is going to put out a book on the crisis and slap Stockman’s name on the cover. That’s why I’m suggesting Stockman drop it and play to his strengths. These strengths only include making money hand over fist, humiliating federal prosecutors, and dominating New York philanthropy. And boy did he get the girl. Robert Mosbacher/Michael Huffington wish they could have married so right. As lives that “hang patchy and scrappy” go, his is better than anything Browning had in mind – where unusual boy and neat girl certainly do not tie the knot. Stockman married better than F. Scott Fitzgerald did, that’s for sure.
I go into all this because professional historians have shown themselves complicit. Princeton lion Sean Wilentz gave “The Education of David Stockman” and The Triumph of Politics primacy of place as he wrote up The Age of Reagan. That’s simply not what historiography needed at this late date. Where I went to graduate school, full professors got hot at colleagues – with their fancy titles, prestige, and dollars – who were fine with putting their name on superficial research. Use your titles, prestige, and dollars to do the hard labor of getting the right sources. That’s why you’re paid the big bucks.
Kevin Hassett has written that supply-siders must take care not to silence apostates like Bruce Bartlett, and he’s right. Bartlett gives every impression that he says what he believes, and that what’s said with his name on the cover is indeed what he said. Sing from the mountains. We need good information. For Stockman’s new book to qualify as good information, a precedent has to be broken.
JFK Defied Samuelson, Setting Off Boom
By Brian Domitrovic
Investor’s Business Daily
December 16, 2009
Paul Samuelson, the dean of American economists, died last Sunday at 94. An MIT professor and Nobel Prize winner, Samuelson made one major venture into public policy. This was when he advised the John F. Kennedy campaign and economic transition team in 1960 and 1961 and thereafter consulted with the new president’s Council of Economic Advisers.
Obituaries have been quick to credit Samuelson’s advice to JFK for launching the great 1960s expansion. The Boston Globe quoted Samuelson’s recommendation to JFK in 1961 — “a temporary reduction in tax rates on individual incomes can be a powerful weapon against recession” — and then made this observation: “The cut was widely credited with helping foster the 1960s economic boom.”
To be sure, the advice of Samuelson, and of his economics confreres in JFK’s “Camelot,” has been cited far and wide as the cause of the incredible run of growth in the American economy from 1961 to 1968, when GDP increased by 5.1% per year, real federal revenues went up by more than a third, unemployment fell to 4%, and the Dow Jones industrial average hit 1000 for the first time.
But the connection is unwarranted. JFK listened to Samuelson, but aside from enacting popular business tax credits, he did not take his advice. Indeed, JFK did precisely the opposite of what Samuelson had counseled in the transition, and this decision is what sparked the boom.
The paramount matter facing JFK after he won the election of 1960 was, as his own campaign slogan had it, to “get this country moving again.” There had been four recessions in the previous dozen years, and departing President Eisenhower had supervised a yearly growth rate of 2.4% — the worst of any president in the latter half of the century. JFK wanted to eclipse that mark in a big way. He put together a dream team of economic advisers to tell him how, and he chose Samuelson to anchor it.
Samuelson said the government should raise taxes and loosen money. The idea was that Federal Reserve easing would make businesses invest and employ workers, and tax hikes would siphon off any inflationary pressures caused by the loose money. Samuelson called his policy mix the “neo-classical synthesis.”
JFK was puzzled by the advice. After all, the marginal rate of the income tax, at the astronomical level of 91%, had clearly been at the root of the Eisenhower sluggishness. Moreover, foreign investors scared off by that tax rate had been abandoning the dollar, a problem looser money could only exacerbate.
The U.S. already had the neo-classical synthesis, and it wasn’t working. Samuelson told JFK that as a second option he would support a tax cut of 4% “with the clear indication that the reduction will definitely expire” within two years.
The economy continued to teeter in 1961 and early 1962 as JFK considered this advice but enacted no policy. The economy sensed the president’s lack of surety. The Dow lost 28% in a six-month span, and forecasts came out that the Kennedy years were likely to be worse than Eisenhower’s.
JFK ordered his advisers to start taking suggestions from the business community, and a bombshell came from the Chamber of Commerce: a permanent 26% reduction in the marginal rate. Kennedy promptly indicated that this should become law, and it essentially did in the Revenue Act of 1964, which took the top rate down to 70% for good. The Fed, for its part, reacted negatively and tripled the federal funds rate.
The boom started just as JFK indicated that he was dumping the neo-classical synthesis for its opposite. Indeed, one of Samuelson’s former MIT students, Robert Mundell, was at the time a young staffer at the International Monetary Fund and urging just that.
As Mundell wrote years later, in the wake of his own Nobel Prize, “at first (my advice) wasn’t popular. This was because it recommended a complete reversal of the … neo-classical synthesis. . .. Fortunately for the United States (and me), President Kennedy reversed the policy mix to that of tax cuts to spur growth in combination with tight money to protect (the dollar). The result was the longest expansion ever … unmatched until the Reagan expansion of the 1980s.”
Mundell would reiterate his ideas in the 1970s, under the name “supply-side economics,” and see them implemented again the following decade.
The world lost its greatest Keynesian in Paul Samuelson last Sunday. But the historic runs of growth that the United States posted during his career did not derive from his economics.
• Domitrovic teaches at Sam Houston State University in Huntsville, Texas. He is the author of “Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity” (ISI Books, 2009).
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Ralph Benko for the San Francisco Examiner:
If (!) the economy grows so will tax receipts. Somewhat. But adding in entitlements, the interest on the debt binge will inevitably crowd out all other federal spending.
Bye bye, Health and Human Services! Farewell, Department of Education. Au revoir, Veterans Affairs. So long Housing and Urban Development, State Department, Department of Homeland Security, Energy, Agriculture, Justice, NASA and Treasury. (Wait! We can’t lose Treasury! They collect the taxes and borrow the money! Oh wait. So long Treasury!) And all the rest of the federal government, adieu!
There are limited options, mostly unthinkable.
Raise taxes. It’s politically and economically impossible to raise taxes, certainly not nearly as high as Progressives yearn to do.