The Supply-Side Revolution: An Insider’s Account of Policymaking in Washington
Presidential Economics: The Making of Economic Policy from Roosevelt to Reagan and Beyond
The Barbaric Counter-Revolution: Cause and Cure
Near the end of his second year in office, John Kennedy proposed a dramatic reduction in federal income-tax rates. The maximum rate, applied to income above $200,000, would fall from 91 percent to 70 percent, and down through the rest of the income distribution, rates would be cut by an average of 20 percent. Corporate taxes were to be cut, too. The reductions were enacted soon after Kennedy’s death, and their first stage took effect in 1964. Immediately afterward, America entered a period of unparalleled prosperity.
Nothing that any Democratic president has done in peacetime has commanded more Republican admiration than these reductions. In political discourse, the “Kennedy tax cut” has become one of those phrases, like “Munich” or “Bay of Pigs,” that is thought to prove an argument merely by being stated. Congressman Jack Kemp, in his tireless advocacy of reducing tax rates, has invoked the “Kennedy tax cut” hundreds of times. (The Republicans rarely call it what many economists do: the “Kennedy-Johnson tax cut.”)
Paul Craig Roberts, who with Kemp has been one of the most consistent proponents of “supply-side economics,” turns to the Kennedy tax cut several times in his new book. He says that when taxes went down, the incentive to save went up, as did the eagerness of America’s entrepreneurs to draw on those savings and make productive investments. Kennedy’s advisers, most of them Keynesians, may have thought that the tax cut would stimulate the economy by giving consumers more money to spend. But, according to Roberts, “what the policy-makers really got was a burst of saving and investment activity that spurred the economy…to faster growth of the ability to produce…. As Stanford economics professor Paul Evans has said, ‘the critics who assert that there is not a shred of evidence [for supply-side economics] just have not looked for it.”’
Herbert Stein, the chairman of the Council of Economic Advisers during the Nixon administration, also examines the Kennedy tax cut in his new book. But to him, the cause-and-effect relationship that seems so simple and obvious to Roberts looks a little more complicated.
It is conceivable, Stein says, that the tax cut had at least some of the effects that supply-siders such as Roberts say it did. But it is more likely that it did not. As the nation’s output increased, it did not display the trait the supply-siders would have predicted: faster growth in output per worker, resulting from modernized factories and equipment. Instead, Stein says, “all of the increase in the rate of growth of output after the 1964 tax cut went into effect resulted from the faster growth in the number of persons employed. Output per person employed actually grew more slowly after the tax cut than before, although one would have expected the reverse if the supply-side effects were dominant.” The expanded work force, in turn, reflected a higher level of aggregate demand. But did that demand arise from the tax cut, as the Keynesians believed, or from the expansion of the money supply that had been underway since 1961?
In short, Stein says, “many other things were going on besides the tax cut, and it is hard to disentangle the effects of the tax from the other effects. But still, the weight of the evidence is against the idea that the supply-side effects of the tax cut were dominant.”
These contrasting views of the Kennedy tax cut are important, because they suggest the gulf between the supply-siders and everyone else. The significant point in Stein’s analysis is not simply that he places less emphasis on supply-side effects. Rather, the crucial difference is that Stein can imagine more than one force at work in the world. Paul Craig Roberts’s book, precisely because it is so cogent an expression of the supply-side view, makes clear that what is most distinctive about the supply-siders is their desire to reduce the complexities of political choice and economic life to one simple idea.
In its way, The Supply Side Revolution is a delightful book because it is a pure reflection of a culture and a place. The place is Washington; the culture, that of political infighters. During the first year and a half of the Reagan administration, Roberts was the assistant secretary of the Treasury for economic policy, part of a team within the Treasury that unwaveringly defended the president’s tax-cut plan. For five years before that, as a congressional staff assistant and an editorial writer for the The Wall Street Journal, he had helped soften the ground for the supply-side policies of the Reagan years.
Roberts, who has spent most of his working life in Washington, continually professes to be scandalized by the city’s mores. The many sentences in his book that begin “In Washington…” all end with laments about the sins and wickedness of the capital (“principles are an imported product,” or “no one is ever chastised for being a chameleon, since the town itself operates that way”). “Washington is not a place where people expect to find a sincere person,” Roberts says, and there can be no doubt that he sees himself as just such a well-meaning crusader doomed to grapple with those less scrupulous than he.
The charming aspect of his approach is that Roberts comes across as the perfect reflection of the environment that so dismays him. His is a chronicle in which tides turn on Evans and Novak columns and invitations to White House dinner parties. No extra-Washington happening of any sort makes its way into the narrativeâ€”not the formation of a business or the taking of a risk, or any of the other wealth-generating activities that Roberts says are his constant concern. Nothing in the book indicates that Roberts has ever lived in, visited, or inquired about any other place. He writes with wounded resentment about those Washingtonians who stooped to the detestable tactic of making “ad hominem” comments about him. Meanwhile, he is putting the shiv into everyone in sight. His targets include Arthur Laffer, Jude Wanniski, James Baker, Richard Darman, David Gergen, Lawrence Kudlow, and most unspeakably craven and Washingtonian of all, David Stockman. Each of these, of course, is a member of Roberts’s own party, and most have been part of the Reagan administration. The bitterness of the in-house feuding is another sign of the Washington-ness of Roberts’s tale.
Taken at face value, most of Roberts’s complaints revolve around the themes of ambition and treachery. He says that the others proved loyal only to their careers or to the conventional wisdom, rather than to the supply-side cause, which only he and the president adequately defended. “It was clear that a person could get nowhere within the Reagan administration by supporting the President’s program,” Roberts says in both sorrow and anger, contrasting his exclusion from White House meetings with Stockman’s all-powerful role. “It may be that the most dangerous position in Washington is that of loyal aide to the President.” Roberts kept a pipeline open to the editorial pages of The Wall Street Journal, and he sent out articles designed to expose backsliders who masqueraded as the president’s friends. “It was clear that I had far more allies outside the administration than within, so my decision to protect the independence of my pen was sound. I estimated that I could help to keep the President out of the establishment’s cage for a year.”
Yet there is more to such sniping than the intrasquad rivalry that every administration has known. What Roberts objects to in the others, especially Stockman, is that they cared about matters that the supply-side reasoning had defined out of the political equation. Two great acts of exclusion and oversimplification undergird the supply-side faith. One concerns the nature of federal budgeting; the other, the sources of economic growth.
Let us start with the supply-side theory, as Roberts would wish to see it defined. Economic activity, he tells us, depends on incentives. People must expect some return for the effort they put into manual or professional labor, for the risks they take in starting an enterprise, for the satisfactions they defer when money is saved rather than spent. Taxes reduce the value of that return, and therefore they can affect the decisions people make. Other things being equal, then, “lower tax rates mean better incentives to work, to save, to take risks, and to invest. As people respond to the higher after-tax rewards, or greater profitability, incomes rise and the tax base grows.” Lower taxes, and the consequently greater incentives, increase the supply of goods available to society, whence the term “supply-side economics.”
So far, so good. But if the argument, as stated, seems logically valid, it also seems of limited importance. True, this line of reasoning has already changed public policy in one way that is likely to endure. During those periods when the government desires to stimulate economic activityâ€”and when, unlike the present, it is willing to increase its deficits in order to do soâ€”the supply-side argument means that it is more sensible to reduce taxes than to increase federal spending. The Keynesians, Roberts says, naturally preferred larger spending programs, since they believed that increased consumer demand was the exclusive engine of recovery, and knew that some of the money returned by tax cuts would be saved, not spent. By arguing that savings and investment, not simply consumer demand, are the real sources of long-term growth, the supply-siders have since the late 1970s convinced both Democrats and Republicans to justify their economic proposals according to savings rates and incentives for enterprise.
As Roberts points out, the high-water mark for this kind of supply-side thinking may have come in 1979, when the congressional Joint Economic Committee, which embraced figures ranging from the liberal senators George McGovern and Edward Kennedy to such conservatives as Senator Lloyd Bentsen and Congressman Clarence “Bud” Brown, released a unanimous report recommending more emphasis on tax incentives and other measures to stimulate investment.
But this accomplishment, substantial as it may have been, hardly encompasses what “supply-side economics” has come to mean. For the last four years, despite Roberts’s attempts to limit its definition, the phrase has implied an overall approach to federal finance. Unfortunately, in the leap from limited congressional recommendations to the full-scale budget proposals issued by the Reagan administration, the supply-side philosophy itself did not expand. Having originally concentrated on the government’s role as taxing agent, it barely acknowledged that the government spent money as well as collected it, and that the balance between the inward and outward flows could affect the nation’s economic health.
Roberts takes a hard line in claiming that serious supply-side economists, including himself, never contended that the Kemp-Roth tax cuts would pay for themselves by stimulating so much entrepreneurial activity that they would return extra revenue to the Treasury. Roberts is angry at Arthur Laffer and Jude Wanniski because they raised the bogus hope that the tax cuts would amount to a free lunch. The evidence for their proposition was Laffer’s famous “curve,” which purported to demonstrate that certain levels of taxation might be so onerous that, by reducing taxes, the government might actually collect more tax revenues. What was always missing from Laffer’s argument was any evidence that American rates had reached that onerous point. (As W. W. Rostow points out, “the proportion of GNP (and taxes) flowing to government was higher in Switzerland and Germany, where private sectors flourished, than in the United States.”)