A Supply-Side Foreign Policy

...The message could be spread rapidly, though, by a Reagan foreign policy that encourages the IMF and World Bank to alter their development model and galvanizes the foreign diplomatic service to that end...

...And after seemingly rushing headlong into a restoration of the Nixon-Ford Cabinet, Reagan decided to take his sweet time to assemble his team...

...foreign policy...

...After all, if the U.S...

...The ripple effects were felt immediately in the United States through the financial markets...

...It is now flourishing...

...Where national leadership has ignored or rejected the counsel of the inter...

...Yet all these interlocking connections in the Eastern Establishment count for something, a distinct way of thinking about the world...

...In other words, the U.S...

...Adapted from A.B...

...Allen, slated to become Reagan's National Security adviser, was Henry Kissinger's deputy at NSC in 1969 until the two had a falling out, and Allen went on to become deputy to the White House Council on International Economic Policy...

...Worldwide tax reform would free the energies of the people of the Third World in ways that would make it possible for them to eventually pay down their debts...

...Yet this is exactly the model that our modern economic theorists and policymakers discourage the emerging nations from following...

...Especially in the Third World, the effect has been the collapse of private commerce beyond the level of cottage industry...

...Sri Lanka did the same, experiencing a buoyancy in its economy and a spark of private enterprise that endures...

...Not coincidentally, he now believes that foreign economic policy is the most underdeveloped aspect of U.S...

...Furthermore, a permanent tax system should be designed not merely for one or two years nor for the effect it may have on any given class of taxpayers, but should be worked out with regard to conditions over a long period and with a view to its ultimate effect on the prosperity of the country as a whole...

...But Allen is back, secure enough to be able to thwart extension of the World Bank-IMF model into the Reagan years...

...Laffer Associates...

...Indeed, lacking any other solution, the banks have a profound vested interest in global inflation...

...The only reason it stalled was because of the opposition of Richard V. Allen, Reagan's foreign-policy adviser, who said he did not want to commit the Presidentelect to a major foreign-aid package in advance of his administration...

...economy by hoisting tax rates on North Sea oil and a variety of consumer goods, thereby decreasing the efficiency of the world economy...

...Shultz may not have been acceptable as Secretary of State because he disagrees with Reagan's position in Israel, a not unreasonable posture for a Bechtel executive...

...Uruguay, at the point of economic and political collapse in the early 1970s, eliminated its income tax entirelyit was producing almost no revenue anyway...

...monetary reform is the answer here, again along classical lines, moving toward a gold standard with intermediate steps in 1981 that avoid a deflation which the banks justifiably fear would bankrupt them...

...it must lessen, so far as possible, the burden of taxation on those least able to bear it...

...And there would be plenty of time for Reagan to ruminate on the choice...

...example will eventually be transmitted globally...

...If it goes to a supply-sider in the Reagan administration, the focus of American foreign policy would shift perceptibly, toward global economic advance and away from Club of Rome assumptions about dwindling resources...

...The most immediate and pressing threat to the world economy which the Reagan administration must face is the Third World debt to the international banks, a debt that now exceeds $300 billion...

...President Carter, it was felt, would not dare send up a nomination or the Republicans would howl as wildly as they did in 1968 when President Johnson appointed Abe Fortas to the Supreme Court on the threshold of the elections...

...Any man of energy and initative in this country can get what he wants out of life...

...If such a point of view ever controls our public policy, the traditions of freedom, justice and equality of opportunity, which are the distinguishing characteristics of our American civilization, will have disappeared and in their place we shall have class legislation with all its attendant evils...

...It preserves the illusion of industrial nations followed...

...On November 24, for example, Margaret Thatcher provided yet another shock to the U.K...

...President-elect Reagan essentially campaigned on these principles and has committed himself to them...

...The size of his victory November 4, along with Republican control of the Senate and expanded influence in the House, point toward domestic tax reforms in 1981 along classical lines...

...Clausen, president of the Bank of America, was nominated last October 31 by President Carter to succeed Robert McNamara as president of the World Bank, the news shocked the supply-side movement...

...Tax reform, on the Mellon-Coolidge principle that "high tax rates defeat their own purpose," has brought positive results to Egypt, Chile, and Puerto Rico in recent years...

...Bechtel is virtually an extension, the operating arm of the international banks...

...The three pivotal test cases of foreign policy likely will be Jamaica in the Western hemisphere, Turkey in Europe, and Israel in the Middle East...

...Commerce flourishes only in the subterranean economy, which pays no taxes...

...Eventually, these kinds of success stories will spread, as one nation after another goes to the brink of revolution...

...After a shaky start on foreign policy before the election, Reagan is now doing very well...

...In attempting to promote or defeat legislation by arraying one class of taxpayers against another, he shows a complete misconception of those principles of equality on which the country was founded...

...This is why it is so critical that a new president, at the very outset of his administration, shape a foreign policy that has as a key ingredient the transmission of classical economic reforms to the rest of the world...

...This was all to the good, since there will be supply-side representation in his administration...

...This could be accomplished only by an end to the Western inflation that discourages citizens of the West from contributing to the global savings pool...

...He also blasted a China that is shedding the Maoist, gang-of-four goal of equality of result (where reward is the same regardless of individual effort) in favor of economic incentives to individual enterprise...

...It is a classic as well as a classical statement, one that now lies at the heart of domestic "Reaganomics...

...Seaga, told "Face the Nation" on November 24 that he is forced, more than ever, to count on the production and export of marijuana to bolster the economy...

...and it must also remove those influences which might retard the continued steady development of business and industry on which, in the last analysis, so much of our prosperity depends...

...national financial institutions, the opposite has been the result...

...The classical formula focused on human capital, on "people," not "things...

...The maximum tax rate on all income, then, would be 45 percent in 1981, which means the effective rate of tax on capital gains would be roughly 15 percent...

...Shultz, a member of the Council on Foreign Relations, was the establishmentarian's candidate for Secretary of State until he withdrew his name from consideration...

...In the last few months in particular," he said, "it has almost been the lifeline economically in providing dollars and foreign exchange which the Bank of Jamaica could not provide...

...The objective of the supply-siders is a tax bill that ends the distinction between "earned" and "unearned" income, bringing the top rate on saving-and-investment income to 50 percent from 70 percent...

...Mellon said, in part: The problem of the Government is to fix rates which will bring in a maximum amount of revenue to the Treasury and at the same time bear not too heavily on the taxpayer or on business enterprises...

...If the rest of the world economy follows perverse economic principles-moving up the Laffer Curve even as we head down-it will transmit those negative effects to the United States, offsetting our gains and perhaps swamping them...

...But the reverse is also true...

...economy is swamped by international economic distress in 1981, the example itself will be submerged and discredited, here as well as abroad...

...Because the United States is such a large part of the world economy, domestic economic reforms that boost productivity will have beneficial effects around the world-in the same way that economic growth in California following passage of Proposition 13 in 1978 had buoyant effects on the rest of the United States...

...It was, of course, known that McNamara would be ending his 12-year tenure late next spring, which left supply-siders with high hopes for a Reagan-appointed successor who would replace the bankrupt development model with a classical one...

...The surprise was that Carter would gain Reagan's approval of a "non-political" appointment on the transparently bogus grounds that quick action was necessary to keep the Europeans from snatching the job...

...the Kemp-Roth reductions would proceed from that level...

...The new Prime Minister ofJamaica, Edward P.G...

...Clausen might be able to lobby ii -hrough...

...Insofar as they have been part of the IMF-World Bank one-two punch, Clausen and the Bank of America have been part of the problem, with $8.2 billion in debt exposure in the Third World...

...But when that initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends...

...It must produce sufficient revenue for the Government...

...Little resistance would be encountered if the quidpro quo for economic assistance is growth rather than austerity, and the seemingly intractable U.S...

...W hen A.W...

...It is exactly the model that should now serve as the economic backbone of American foreign policy...

...For its own.success and that of the nation, then, the Reagan administration cannot act as if movement toward correct economic policies at home will be sufficient, perhaps believing that the U.S...

...It would be surprising not to find the socialist impulse flowering in the Third World...

...There was cause for concern when he approved the Clausen deal, during the intense pressure of the campaign...

...On the face of it, there is no prospect that this debt can be repaid, and because the amount exceeds by many, many times the amount of capital in the international banks, these banks would be technically bankrupt were it not for continued currency inflation...

...Private enterprise cannot compete with public enterprise when returns on private capital are confiscated by taxes that the public enterprise does not face...

...Israel's national fabric is also being shredded by a 125 percent inflation rate and austerityinduced economic stagnation, and successive finance ministers can only think of adding new taxes to curtail "excessive consumer demand" (although Arthur Laffer has been invited to visit the country in January to offer counsel...

...The international bankers, confounded by the spiraling Third World debt that threatens to engulf them, simply have not been thinking big enough...

...The big banks, though, would not even have to wait that long to get relief...

...In foreign policy, it can make all the difference in the world...

...The real reason, no doubt, was that the World Bank would try to get another $3.2 billion out of the Congress in the current lameduck session, that Republicans were not supporting the legislation, and that a Reagan-approved A.W...

...As long as he retains the confidence of Reagan, which seems likely, we can expect his innovative influence to shift the policy framework away from that of the Council on Foreign Relations and Trilateral Commission to pro-growth strategies, which will benefit the international banks in spite of themselves...

...A sound tax policy must take into consideration three factors...

...Personal income tax rates in each are on the order of 60 percent encountered at $7,000 to $10,000...

...If the savings pool in the West were enlarged, Third World debt would rest more easily on the books...

...In domestic policy, it will provide him with a foundation for economic revival through his tenure...

...Each has had its private, entrepreneurial sector decimated by currency devaluations, savage inflation, and steep tax progressivity, which means they are testing the upper limits of the Laffer Curve...

...After a decade of rampant global inflation, income tax rates around the world have risen sharply, tax progressions being almost universal outside the Communist bloc...

...Admittedly, there is little talk of this in the public prints, and Federal Reserve governor Henry Wallich announces confidently that there is "zero chance" of it, but it is in the wind, as well as in the Republican platform and in the back of the mind of the President-elect...

...The key appointment will be the Undersecretary of State for Economic Affairs, a post now held by neo-Keynesian Richard Cooper, formerly of Yale...

...Turkey, a NATO ally, is in similar, desperate shape after a decade of IMF shoves up the Laffer Curve, and urban terrorism is being held in check, temporarily, by authoritarian rule since the military takeover of last September...

...The three are economic basket cases as a result of either systematic doses of IMF austerity schemes, selfinflicted wounds, or a combination of both...

...He is, in fact, the pivotal figure in putting economics into the backbone of a Reagan foreign policy...

...India experimented with sharp cuts in unproductive income tax rates in 1976, with spectacularly successful results, but there was no follow through...

...I have never viewed taxation as a means of rewarding one class of taxpayers or punishing another...

...And if money would hold its value, people would be encouraged to save and invest greater shares of their production-the government would not have to tax it away and invest it for them...

...The "fundamental principles" of taxation, as he called them, were laid out by Treasury Secretary Andrew Mellon in a 1924 statement...

...The man who seeks to perpetuate prejudice and class hatred is doing America an ill service...

...Such change would have substantial effects on national productivity, lift the value of financial assets, and provide a solid foundation for domestic economic gains through the Reagan years...

...The citizenry is driven toward public solutions when private solutions are closed off...

...Fidel Castro singled out these nations for special censure at his Havana Third World conference in 1979...

...When the World Bank request for $3.2 billion surfaced in the lame-duck session, with a push from the lame-duck president, it was backed by Clausen and Shultz...

...Policy did not focus on consumer demand for things, but on encouragement of individuals to supply their talents and energies to greater production...

...foreign service might find it attractive to promote populist reforms instead of powerbloc politics...

...And there was cause for concern when the campaign cut loose Richard Allen, after a flurry of stories in the national press raised questions about his business in consulting to foreign corporations...

...The deal was arranged with George Shultz, former Nixon Treasury Secretary, who is now executive vice president of the Bechtel Corp., the leading multi-national packager of Third World infrastructure...

...Shultz got close to Reagan this year through Caspar Weinberger, who was Reagan's finance director in the Sacramento days, who followed Shultz as OMB director in the Nixon years, and who until his nomination as Reagan's Secretary of Defense was also an executive at Bechtel...

...economy was built in an environment conducive to individual enterprise: low rates of taxation, minimal central planning, and hard money...