Siding With Supply
Bethell, Tom
"Siding With Supply" I had to admit that I'd never heard the story told quite that way before. Was Mo nothing but one of those campaign groupies, waiting to be driven off by the first handsome aspirant who winked...
...It is probably the most confusing part of the model...
...Thus, the appeal of supply-side economics...
...The theory fitted the 1930s nicely, because there was at that time deflation, a shortage of money, an underutilized industrial capacity...
...But people working also help to make things, to supply things...
...Tax rates and tax revenues must not be confused...
...Clearly it was time once again to encourage people to make things, not just buy them...
...You can only imagine that the cause of inflation is people working if it is your habit Tom Bethell is the Washington editor of Harper's and The American Spectator's Washington columnist...
...economy is of any concern to us, then we must hope that Messrs...
...Laffer's essential point is that tax rates and tax revenues may be inversely proportional...
...This rate reduction may briefly create deficits, but it will create new expectations for the future, a potential for longterm profit, or capital gain, from business investment...
...These "cures" follow from the idea that individuals cause inflation through their wage and price greed, and that the government had no hand in the decline of the value of its currency...
...Inflation, it seems, is caused by too much consumer spending, people "demanding" too much...
...Ever since, savings have been regarded as a bad thing by Keynesians...
...Then they won't have paychecks, and they will stop showing up in the stores in the guise of consumers demanding goods...
...They consume mightily, but they produce next to nothing...
...There were producers, but few buyers--a consumer shortage...
...Oddly enough, his best known recommendation has a Keynesian ring to it: Unbalance the budget on the revenue, not the spending, side...
...Demand creates supply...
...Now that reassurance is about to be withdrawn...
...The great guru of the supply side movement has been Arthur Laffer, the economist now at the University of Southern California...
...Mo," I said, "I have my Buick Electra parked outside, and it's loaded with options...
...if their activity is withdrawn from the economy then there will be a reduction of supply that is at least equivalent to their reduced consumption (demand...
...But when they are made, appetites are stirred and "demand" foments in the customer's mind...
...And so the ever-growing non-productive sector continued to rest comfortably on the back of the economy, reassured by the Keynesian oracles that its weight was not a burden so much as an inducement to make more and more goods...
...I'm bound for Detroit, so I'll give you a ride all the way there, or I'll let you out anywhere along the way...
...The supply-side argument that he espouses is the way out of the woods...
...She, of course, does not explain why these gluts are bad...
...Dave Stockman of Michigan...
...Perhaps the most important change that would occur as a result of lowered tax rates would be a surfacing of the underground economy (estimated by some to be 20 percent of GNP) and an exchange of non-taxable leisure for taxable work...
...It will be bitterly resisted by those on Capitol Hill who for the past two decades have had a terrific time spending other people's money and being simultaneously reassured that they were thereby acting in the national interest...
...The greater level of economic activity will generate a larger "pie," a greater taxable base...
...The government, on the other hand, will spend it all...
...That is: Before things exist, people don't want them...
...W e l l , " said Mo, in a voice shaded with the wisdom that only deep experience and hard living can provide, "I'll go with you...
...Carter's plan is to balance the budget by increasing taxes still further...
...His principal finding, reported in a recent issue of Cha//en~.maga.'~, is that " a corporate income tax cut has a larger effect on the economy than does a personal income tax cut, which in turn has a larger effect than an increase in government spending...
...As a result, the new revenue may well be no higher than the old...
...Precisely because no one knows this, it is important to have tax cuts across the board so that the benefits will accrue in whatever unexpected direction innovation takes place...
...And I don't say it disrespectfully...
...Instead of increasing spending programs, reduce tax 20 THE AMERICAN SPECTATOR MAY 1980 rates...
...the number of goods grew less rapidly than the money needed to buy them, which spelled inflation...
...They will spend the money, and this new demand will start up the assembly lines...
...This is the doctrine toward which economists have remained deferential for 45 years...
...You won't be like the others, will you...
...I'm the one with a difference...
...Demand comes first...
...No matter, the economists continued m assure us: Demand creates supply...
...Little wonder that these kinds of cures for inflation are both unpopular and ineffective...
...This higher savings leads to lower interest rates and higher investment...
...Treasury types will immediately say $5 billion...
...I don't know which side will win the great debate that is likely to ensue~ but if the future vitality of the U.S...
...The principal reason: "A reduction in tax rates increases the incentives of individuals to save by raising the rate of return on assets held by individuals...
...One of the main reasons for this confusion is that many people, including tax-cutters, make the mistake of expressing tax changes in revenues rather than rates...
...As a New York Times editorial said on the same day, I suppose with a touch of irony (hard to tell): "The best the President can hope to achieve now is a speedy descent into recession...
...Very few people in o,~cial Washington have managed to think on the supply side for 40 years at least...
...prevail...
...Jack Kemp of New York has to say about the Phillips Curve in his estimable book, An American Renaissance: A Strategy for the 1980s* : The public is often told that curing inflation requires higher taxes, higher unemployment, slower economic growth and a ceiling on pay increases...
...Later in the 18th Century," he wrote, "supply-side economics was pushed to an extreme by JeanBaptiste Say, whose main theorem was, ,'Supply creates its own demand.' By this Say meant that a general glut in production or a depression was impossible . . . . Unfortunately, however, Say's beautiful theory was killed by the ugly fact of gluts and depressions...
...In the Keynesian model, it's the other way around...
...But not everyone in government accepts the Keynesian model...
...Here is what Rep...
...That kind of attempt to direct the market turns out to be national economic planning in another guise...
...Then a customer comes to the door, with the news that he would like to buy a car...
...How much revenue would you collect...
...I realize that Kemp had a certain amount of help in putting his book together, but if you go and spend an hour talking supply-side theory with him in his office, as I did recently, he will easily convince you that he has really grasped the not-always-simple ideas of supply-side theory at a time when the majority of his colleagues are still mired in demand-side thinking...
...One of the reasons for this is that government officials themselves exist purely on the demand side of life...
...The connection between savings and investment (banks lending out the money that you deposit in a savings account) does not exist in the forecasts and projections upon which the U.S...
...I had never heard a country-music song with this particular theme, so I couldn't know for sure...
...Encourage people to become profiteering entrepreneurs rather than noble consumers...
...But inflation is not caused by workers working, businesses doing business, consumers consuming or producers producing...
...Not a chance," I said...
...He still confuses tax rates and tax revenues~" Kemp told me...
...And in the Wharton School model, too...
...Thus: "a tax-cut of $1 billion" presumably means a rate reduction, which may produce a revenue increase...
...In fact, although more and more commentators are beginning to complain about our low savings rate, the Congressional Budget Office's projections continue to assume that savings have a negative effect on GNP...
...All I knew was that, if Mo were right, then I'd really have to think about things in a new way...
...If you have a lot of something, then the price will go down...
...You can imagine how the politicians loved that one...
...After all, supply-siders would ask that we do something to help businessmen and in many people's eyes this is unforgivable...
...Say's Law was innocently rediscovered in the 1950s by John Kenneth Galbraith, who truthfully pointed out that advertising makes people want things that they otherwise wouldn't...
...The budget will come into balance of its own accord...
...Or was she, as she claimed to be, nothing but the victim, sweet-talked, then abandoned...
...The proposed capital cost recovery act--accelerated depreciat i o n - i s likewise a step in a dangerous direction...
...The most widespread error of officialdom at present is that all current forecasts by the Treasury, the Congressional Budget Office, and government economists generally assume a static world...
...budget is based...
...Was Mo nothing but one of those campaign groupies, waiting to be driven off by the first handsome aspirant who winked at her...
...An economic theory--Keynesianism--which operates only on the demand side is bound to have a certain appeal and cogency to such people...
...We need a glut of energy, we need a glut of jobs...
...savings actually detract from GNP in the econometric model of one of the leading forecasting services, Otto Eckstein's Data Resources, Inc...
...Some will stop filing tax returns, others will devote a greater proportion of their time to non-taxable leisure, others may emigrate, many more will find ways to underreport their income...
...Wages, prices and profits no more cause inflation than wet streets cause rain...
...But you're the one who'll end up deciding how far we ride, not me...
...It leads inexorably to such follies as the Chrysler bailout...
...There are also a fair number of conservatives in Congress who vote as though they were putting supply-side theory into practice, but because they don't publicly discuss the theory (or "the model," as Kemp puts it) they are not given credit for being in the intellectual vanguard and tend to be taken less seriously...
...This Keynesian dictum was to make intellectually respectable a rex, ersal of something called "Say's Law," named for Jean Baptiste Say, an 18th-century French philosopher who said, in essence: Supply creates demand...
...Some people, like Leonard Silk of the New York Times and Herbert Stein in the IVall Street Journal, have tried to discredit the idea by arguing that it is antiquated...
...When Silk heard about supply-side theory the other day, he grabbed his pen in a desperate attempt to stop the rot...
...Fortunately, Michael Evans of Evans Economics, formerly head of Chase Econometrics and one of the designers .of the Wharton model, has recently completed a new, supply-side model under contract with the Senate Finance Committee...
...This, the paper added, "used to be called the 'Republican Solution' " to inflation...
...This pattern of economic thought, truly dismal, is based on the "Phillips Curve" (named after a British economist), which purports to demonstrate a trade-off between unemployment and inflation...
...Laffer, Kemp, Evans, et al...
...If you see that, then you are thinking on the supply side...
...You will spend part of that above-mentioned dollar, but you will save some of it, too...
...But the problem was that the ranks of those being induced began to grow rather thin, and eventually the burden did become insupportable: Supply failed to keep up with demand, even when plants were operating at full capacity or near it...
...How much will the government collect now...
...Finally, k. is high time that the "Keynesian multiplier" was thrown o u t , thus at last depriving politicians of their rationale for spending more of our money, rather than less, whenever the economy seems to need stimulating (which, as Paul Craig Roberts has pointed out, is at all stages of the business cycle these days...
...We need gluts," Kemp said when 1 brought the subject up...
...THE AMERICAN SPECTATOR MAY 1980 21...
...Thus if a million people are paying one quarter of their earnings to the government, and the average earnings of the million are, let us say, $10,000 a year, the government witi collect $2.5 billion...
...New plants were needed, but high tax rates discouraged the necessary investment...
...In case you think that Silk's word isn't gospel, this is what Judith Miller, a Times economic correspondent, wrote four days later in the same newspaper: "Later in the same century Jean.Baptiste Say pushed supply-side economics to its illogical extreme, arguing that 'supply creates its own demand.' Periodic gluts, and ultimately the Great Depression,.among other things, proved him wrong...
...Therefore, the solution is to cause a recession, knock people out of their jobs...
...to think solely on the demand side of the economic equation...
...It is important to understand that a supply-side tax cut does not mean a cut aimed at a specific location in the economy, thus channeling economic activity in that direction...
...And we won't have to worry about food or fuel, because I've got my campaign credit cards, and I don't think they're going to take them away from me...
...The manager calls up the workers and they dutifully start up the assembly line...
...Reps...
...The day I went to see .Jack Kemp in the Rayburn Office Building he told me he was "discouraged...
...The well instructed supply-sider will point out that all attempts to channel economic activity assume that politicians know more than businessmen, and in particular that politicians are clairvoyant enough to foresee where industrial innovation is going to occur...
...Gluts would be the perfect solution to our problem" We also need a general income tax and corporate profit tax cut...
...QOQIQ0Q4Qq0Qgjg000O0QIIQI~6g0~gmI0Q0I00G0080QIQQOgQg0OQQ~oD0QQQQQ~40QQ0~QiQO0IIQQ6Q4gQl~0QO~Id48QQQIOgqIg0QQBQ0Q8QQQiq~Q0~QgggD0g06QiiOag0~ggI00 On March 19, a day or two after the market responded to President Carter's fourth and latest anti-inflation program by falling 23 points, its biggest drop in months, Art Pine wrote in the Washington Post: The new signs of heightened economic slowdown generally were welcomed by the Carter Administration, which is seeking to dampen consumer spending in an effort to slow the inflation rate...
...Robert Bauman of Maryland and John Ashbrook of Ohio come to mind...
...The more you have of one, the less you have of the other...
...The reasoning for this was grounded in an assumption that was built into the equations from the beginning: that money saved plays no role in the development of an economy...
...What...
...In fact," I added, "you won't have to worry about me...
...When Jeffrey Bell ran for the U.S...
...Senate in New Jersey, he used to illustrate the point about rates and revenues by discussing the toll on the Tacony-Palmyra Bridge in Philadelphia...
...Keynes got it into his head that the Depression had been caused by too much saving...
...In consequence, capital will be redirected away from bonds, real estate, and gold (in which positions capital may be said to be "on strike"), and into productive investment...
...This is fairly representative of the conventional wisdom on such matters...
...This is common sense, but in the context of the present statism, it is little short of revolutionary...
...Suppose you had a $100 toll on this bridge (your "tax rate...
...It conjures up the following image in the mind's eye: A factory manager stands in an empty factory beside a stationary assembly line...
...The House had just voted through the windfall profits tax (a tax rate increase on oil production which is assumed, no doubt quite erroneously, to bring in $227 billion in the course of a decade: the true revenue figure will surely be lower than that...
...But confusion isn't the only thing preventing the general acceptance of supply-side theory...
...The supply-sider on the other hand will say that you have to assume a "dynamic world" in which the increased tax rate will elicit entirely different behavior from our million people...
...The solution: pump up the economy, put money in people's pockets, put them to work (even if only sweeping leaves), and pay them with money not yet in the Treasury...
...Later on, mathematical economists came along with the statistical mumbo-jumbo needed m give Keynesianism an air of irrefutable science, tn particular they "discovered" the "Keynesian multiplier," which says that if the government spends a dollar taken out of your pocket, it will multiply faster in the economy than if.you had spent it...
...In addition, Kemp and a group of legislators had met President Carter in the White House that morning...
...He is joined in this achievement by one or two of his colleagues, of course, notably Rep...
...Thus, revenues will catch up with spending without having to increase taxes...
...Suppose you lowered the toll to $1, would your revenues increase or decrease...
...That would be a good way to tackle the problem of inflation, no...
...This increase in productive activity would in turn mean a larger pie, a greater taxable base, with the result that a reduction of tax rates is likely to produce an increase in tax revenues...
...It may be lower...
...Here, as elsewhere in his book, Kemp is addressing the most important problems facing the United States today, nearly all of which derive," in one way or another, from the encrustation of many decades of faulty *Harper & Row, $8.95 THE AMERICAN SPECTATOR MAY 1980 19 economic analysis...
...tax rates were raised even more and the threshold at which they took effect was lowered, in order to try to elicit the revenues needed to pay for the ever-expanding array of government programs...
...John Maynard Keynes, the British economist, decreed in the 1930s that it was at times permissible for governments to spend more than they took in, in order to unbalance the budget (but only in lean years...
...Now raise the tax r a t e so that these people will pay on average half their salary to the government...
...Beginning around the early 1960s, the United States became less and less a country whose business was business, and more and more a featherbed for those whose lives were spent on the demand side: consumers, tax-eaters of various stripes, government payroilers, welfare recipients...
...The supply.side "model" is really a mirror image of Keynesianism...
...Demand will drop, prices will stabilize, and inflation will go away...
Vol. 13 • May 1980 • No. 5
