The Way The World Works: How Economies Fail-and Succeed
Wanniski, Jude
BOOK REVIEW The Way The World Works: How Economies Fail-and Succeed Jude Wanniski / Basic Books I $12.95 George H. Nash The first thing one notices about this book is its title. Although it may...
...Keynesianism, for example, attempts to stimulate economic growth via income redistribution...
...According to Wanniski, religion is essentially a means by which the masses, historically, have communicated with, and "humanized," their leaders...
...And this, Wanniski contends, is what happened in 1929...
...Thus we are told that Warren Harding was elected president by a landslide in 1920 because he promised a "return to normalcy" on tax rates...
...The "plain fact," he concludes, is that "the modern monetarist model has even less to recommend it than does the Keynesian...
...Similarly, the postwar economic "miracles" of West Germany and Japan are attributed, not to the Marshall Plan or some other cause, but to their systematic reduction of their respective tax wedges...
...The key, therefore, to the success and failure of economies (and civilizations) lies in the tax rate or "wedge" (which includes both monetary and non-monetary governmental exactions on economic activity...
...It knows its best interests and invariably selects, from available alternatives, the leader most closely attuned to its wisdom and its wishes...
...But clearly in Wanniski's mind it aspires to be much more: nothing less than a "general theory" of economic behavior and economic history...
...As Congress debated a massive tariff revision which would savagely encumber international trade, the stock market ebbed and flowed-in precise daily correlation with shifting prospects for tariff increases...
...From the perspective of Wanniski's "model," politics is essentially a "mechanism" employed by the "global electorate" for augmenting its savings or capital...
...And there is always and everywhere only one such reason: to enhance the worker's well-being (as he himself defines it...
...Let the Democrats be the party of income redistribution, Wanniski counsels...
...Another Wanniski hero is John F. Kennedy, whose tax-cut proposal, finally enacted in 1964, is seen as another demonstration of the validity of the Laffer Curve...
...Fortunately, this process of critical evaluation is underway...
...Few readers will be convinced by his apotheosis of the all-wise electorate, which supposedly selects the best available leader at every election...
...Wanniski, Laffer, Kemp, and the "supply-side fiscalists" have shifted attention away from the hackneyed Keynesian emphasis on stimulating aggregate demand via endless deficit spending-as if somehow a demand for goods will automatically yield an adequate supply of goods...
...The idea that government can foster prosperity by manipulating the money supply, he says forcefully, is based on illusion-"the notion that people will work for 'money,' as a form of wealth, whether or not there is anything that money can buy...
...And the Republican Party has declined since 1930 because it has not understood the Laffer Curve...
...His publisher, not unreasonably, has labeled this book the "manifesto of the tax revolt...
...If the "wedge" is too burdensome, incentive and productivity will diminish and contraction will ensue...
...In fact, tax policy was not the sole, or even the primary, issue discussed in that campaign...
...By severing the attenuated gold standard in place since the Bretton Woods conference of 1944, and by instituting floating exchange rates, the Nixonians bear prime responsibility for unleashing the worldwide inflation of the 1970s...
...Nor will many conservatives, at least, be impressed by the assertion that the news media "exert only a trivial influence on the electorate...
...If the tax rate is zero, the state will of course receive nothing...
...Toward the end of his book, in.fact, Wanniski asserts that the most important work on political economy published in the eighteenth century was The Wealth of Nations-, in the nineteenth, it was Marx's Capital', and in the twentieth, Keynes' General Theory of Employment, Interest, and Money...
...From the dawn of civilization," he declares, "the tension in any political economic unit and in the global economy as a whole lies between income growth and income distribution...
...The banking crisis of 1933, we learn, occurred because Hoover's tax increase of 1932 forced a run on the banks as the taxes fell due...
...Wanniski's choice of the term "general theory" is, I think, deliberate, for it immediately calls to mind (and implicitly invites comparison with) the George H. Nash, author o/The Conservative Intellectual Movement in America Since 1945, is writing a biography of Herbert Hoover...
...on the contrary, he increased them...
...Some may, perhaps, regard these lessons as merely common sense...
...With particular trenchancy and some illuminating statistical data, Wanniski applies his model to the current maladies of the Third World...
...Eventually reality catches up with the magicians...
...If in political terms this "global electorate" is creeping logically toward a single world government supremely responsive to the "global consensus," in economic terms it is constantly "striving toward an ideal system of political economics that can maximize welfare" for every human being...
...Yet if Mellon's reduction of the ' 'wedge'' was so successful, why the stock market crash of 1929 and the Great Depression...
...Formerly an editorial writer for the Wall Street Journal, Wanniski has been a vigorous publicist for the Kemp/ Roth tax-reduction bill and the economic theories of his close friend, Arthur Laffer...
...Nationalism, one of the dominant phenomena of our century, is casually dismissed as "not a natural instinct of the electorate...
...One hopes that empirically-minded economists, econometricians, and economic historians will now soberly test the claims of the Laffer/Wanniski hypothesis...
...If less government intrusion is forecast, stock prices will soar...
...When Franklin Roosevelt entered the White House he failed to curb these onerous tax rates...
...This it does by taxing transactions among individuals operating in this visible realm...
...It rests on the fallacious premise that workers can be deceived indefinitely into producing goods in exchange for government bonds issued to cover federal deficits...
...The history of mankind is the story of the search by this "electorate" for political systems which will produce leaders capable of correctly interpreting its desires and maximizing its welfare...
...To the contrary, Wanniski teaches, supply will not increase unless there first exist incentive and reward for productivity...
...To Wanniski the stock market in 1929 was not overpriced...
...And in a stinging chapter, he lambastes President Nixon and his monetarist advisers for destroying (with Keynesian support) the international monetary structure in 1971...
...This intervention, this barrier between individual effort and individual reward, Wanniski (following Laffer) dubs the "wedge...
...Preeminent among these statesmen was Andrew Mellon, Secretary of the Treasury in the 1920s...
...The ferment he has catalyzed will undoubtedly continue...
...Not surprisingly, his heroes are politicians who have lowered taxes, shrunk the "wedge," and nudged their economies out of the "prohibitive" range of the Laffer Curve...
...As he perceives the kaleidoscopic flow of human history, one recurrent theme seems paramount...
...Both, he says, are sapped by perniciously progressive marginal tax rates and a bulging "wedge...
...Wanniski devotes several pages to documenting this correlation...
...At the very least he has raised some pertinent questions...
...To Wanniski the entire world is a closed political economy, and all of us are members of the "global electorate," which is wiser than any of its component parts...
...The remainder of Wanniski's book consists of a sweeping and exuberant application of his model to Western history...
...Republicans must be the political instrument for effecting income growth-the economic imperative of our time...
...For the stock market is "the most accurately programmed computer on the planet, the closest expression of the mind of the electorate itself...
...In order to create capital, however, people must work...
...government therefore intervenes in individual transactions and takes its cut...
...The early chapters of Wanniski's work are devoted to the construction of a "model" of political and economic action...
...This peril is intensified by his penchant for explaining complex historical events in terms of a universal, all-purpose, single cause...
...Why, after all, does the world work...
...But if the tax rate is 100 percent, exactly the same result will occur...
...Now whatever the validity of these and other debatable dicta, the danger is that they will instead evoke a soaring skepticism which will extend to Wanniski's more fundamental arguments...
...When, late in 1929, passage of Smoot-Hawley became a certainty, the stock market finally crashed and the Great Depression began...
...For the visible, monetary economy will collapse: No one will work if everything he earns is to be confiscated by the state...
...At times, however, in his zeal to construct a "general theory" of economic behavior, Wanniski offers opinions that seem both dubious and distracting...
...Such grandly simplified interpretations may or may not contain grains of truth...
...The various competing political systems of today represent its continuing "experimentation'' toward that end...
...Wanniski is, if anything, even more scornful of monetarism, espoused by such economists as Milton Friedman and Herbert Stein...
...Countries with low marginal tax rates have prospered...
...But common sense seems not to be so common in the seats of power these days...
...Only the "wedge" model and the Laffer Curve can...
...classic opus published by John Maynard Keynes in 1936...
...In various ways (direct taxes, tariffs, regulations, etc...
...According to Wanniski, the masses actually possess an "exquisite understanding of economics," whose crucial concepts every individual learns in childhood as part of the process of growing up...
...The Keynesian model, unable to generate growth, leads instead to stagnation and contraction-and the rising allure of collectivist egalitarianism...
...It is a measure of Wanniski's audacity that his is probably the first book in half a century to offer an intellectually serious defense of Andrew Mellon...
...Enter now the famous Laffer Curve, the major analytical tool of this book...
...Wanniski, in fact, defines work as "the process of forming capital, i.e., goods and services for future consumption...
...Already the Kemp/Roth bill has pumped vigor and initiative into the Republican Party...
...In a daring act of revisionism, Wanniski claims that the debacle of 1929 occurred because of a staggering political calamity: the Smoot-Hawley Tariff Act of 1930...
...Nevertheless, Jude Wanniski has written a significant, incisive book whose influence seems likely to increase...
...Prosperity and increased governmental tax receipts followed this lowering of tax rates...
...Or government may subsidize non-work (as by welfare payments) to such a degree that individuals will deem idleness more enticing than productive employment...
...This is the crucial assumption of the Kemp/Roth bill...
...We are informed that the protective tariff "stumbled the world into a second international war" in 1939...
...Is the correlation between tax rates and productivity, for example, as precise and predictable as Wanniski maintains...
...Was American tax policy in the 1920s and 1930s as determinative of boom-and-bust as he states...
...In 1932, President Hoover, with the aid of Congress, compounded the Smoot-Hawley disaster by drastically raising tax rates up to their 1921 levels, thereby expanding the domestic "wedge" and undoing Andrew Mellon's magnificent achievements of the preceding decade...
...The history of the world is not reducible to the history of taxation...
...And so, inevitably, the Great Depression persisted throughout the 1930s...
...Political upheavals, will follow as the electorate "votes" its disapproval by resorting to emigration, revolution, assassination, or other forms of social protest...
...It is at this point, in Wanniski's formulation, that government appears on the horizon...
...An the course of this romp through history with the Laffer Curve, Wanniski mounts a vigorous critique of competing economic models...
...But if the state is not careful, if politicians in power do not correctly divine the will of the electorate, government may expand the "wedge" so much that it will discourage the very transactions it is taxing...
...Yet, as he sensibly observes, individuals will only work when they perceive a reason for doing so...
...But Wanniski does not strengthen our confidence in the Laffer Curve by trying to convert it into the key to the entire course of civilization...
...Its function is to register and evaluate information affecting future economic transactions-above all, the likely impact of government policies on commerce...
...Those laboring under mountainous public debt and appallingly progressive rates have not...
...Neither Keynesians nor monetarists can account for the prosperity of the Harding/Coolidge era, claims Wanniski...
...Although it may strike some readers as daring or even pretentious, it does underscore the ambitious enterprise upon which Jude Wanniski has embarked...
...All these theories and observations are presented with lucidity and gusto, and they make for provocative reading...
...According to its teaching, there are two tax rates at which government may garner the same amount of revenue...
...If a widening of the interventionist "wedge" appears likely, stock prices will plummet...
...A far lower rate, in fact, may actually yield more revenue because taxable economic activity will increase...
...Richard Nixon's hairbreadth election to the presidency, it turns out, was probably the result of Lyndon Johnson's 10 percent surtax of 1968...
...And he confesses a "soaring faith in mankind" and its future-an optimism, he says, which follows from his model...
...For while government can bring about efficiencies which will induce individuals to enter the public (or money) economy, government must also obtain money to finance itself...
...Without an economic system which encourages production and entrepreneurship, increased demand without increased supply will merely cause inflation-the legacy of ossified Keynes-ianism, the specter of the middle class...
...During a war, for example, the masses may accept stratospheric rates which would be considered intolerable in peacetime...
...Through his Wall Street Journal editorials, his friendship with Representative Jack Kemp, and other proselytizing activities, he has succeeded in altering the framework of current political discourse in the United States...
...Above all, The Way The World Works has helped to crystalize a growing intellectual challenge to the perceived inadequacies of establishment economics...
...Many workers will then find it advantageous to drop out of the money economy and engage in nontaxable "leisure," barter, or other tax-avoidance behavior beyond the government's ken...
...It was Mellon's brilliant tax-cutting policies, Wanniski argues, that created the extraordinary economic boom of the 1920s-without Keynesian deficit spending and without inflation...
...Nor does it need to be instructed by professional economists before it makes a political choice...
...Invoking certain criteria of social stability, Wanniski even remarks that "it is by no means clear" that the Soviet Union's "political economy is inferior to that of the United States...
...Wanniski specifically denies the monetarist contention that contraction of the money supply was responsible for the Great Depression...
...Theoretically, at any given moment an optimum tax rate should exist, although it may vary substantially over time, depending upon the current desires of the electorate...
...If government taxes at too high a rate, it may actually obtain little revenue because total taxable transactions will shrivel as individuals learn how to escape the tax...
...None of them, he says, can adequately explain the simultaneous inflation and contraction of the past decade...
...And even if Wan-niski's economic model is eventually modified or discarded, the experience of pondering his insights will have proved beneficial...
...But eventually the bonds must be paid, out of ever-higher future taxes...
...And again the result is the same...
...To insure self-preservation on a fickle and sometimes hostile planet Earth, the masses are obliged to save- that is, accumulate capital...
...One would also like to hear further from the Chicago School monetarists, some of whom are known to be decidedly skeptical about the Laffer Curve and its rationale for Kemp/Roth...
...One suspects it is the author's hope that The Way The World Works will now decisively supplant Keynes as the authoritative economic guide for our time...
...in fact, it is never overpriced...
...By contrast with America, Great Britain in the twenties failed to lower its steeply progressive tax rates after World War I. Economic stagnation was the inevitable consequence...
...This "electorate" does not need politicians or elites to educate it about its best interests...
Vol. 12 • March 1979 • No. 3
