Desperately Seeking the Bruce Bartlett of Old

In his brilliant 1981 book Reaganomics, economist Bruce Bartlett observed that "to the Keynesians, all tax cuts are the same." Seeking to show why that was not the case, Bartlett took readers on a masterful ride through tax policy in the 20th century.

As Bartlett put it, the "individual entrepreneur is still the basic motivating force in the economy " and any "measures which suppress entrepreneurship will ultimately cause the economy to stagnate." With the top tax rate at the nosebleed level of 71 percent at the time of the book's publication, Bartlett's cure was among other things lower taxes in order to reduce the cost of innovation.

Fast forward twenty-eight years, and Bartlett is presently promoting a new book titled The New American Economy. In it, he argues that supply-siders have won, so it's time for the individuals behind the cause to "declare victory and then go out of existence." Bartlett correctly points out that the whole notion of supply-side economics (SSE) has been perverted by various give-aways and tax credits authored by the economically tragic George W. Bush administration, and that the concept has lost meaning.

Given the substantial role that Bartlett played in the U.S. economy's classical/supply-side economic revival of twenty-five years ago, it would be foolish to denounce his views out of hand. At the same time, much of what Bartlett is presently suggesting as a way of righting the economic ship he decried long ago; that, or he makes suggestions that are simply untrue.

Bartlett notes that he had a "front-row seat to the creation of SSE", and sure enough he was a staffer for Congressman Jack Kemp as the latter rolled out the eponymous Kemp-Roth tax cuts. Still, as Bartlett's 1981 book makes plain, supply side economics has long been with us, though before Herbert Stein pejoratively coined the phrase "supply side economics", this kind of thinking was phrased "classical economics."

In truth, Bartlett and others simply resuscitated the centuries-old ideas of classical thinkers ranging from Adam Smith to John Stuart Mill to Jean-Baptiste Say. Major media have reduced supply-side/classical theory to tax cuts paying for themselves, but the main point of the original classical thinkers was that demand is an afterthought because our demands are unlimited, so the trick to stimulating economic activity is to remove the barriers to production. Production is itself demand, so if taxes are low, money sound, regulation light and trade free, individuals will produce with strong demand being the certain result.

Bartlett should be lauded for being a part of the revival of this kind of thinking, but for him to suggest that he had a front-row seat at the creation is for Bartlett to somewhat dig spikes into the shoulders of the giants on which he once stood. Incentive economics has long been with us, and well before Bartlett assisted in its happy revival.

While tax cuts have historically loomed largest in historical accounts of the classical economic revival, Bartlett correctly points out that monetary policy played a large role too. The problem there is that Bartlett incorrectly argues that the notion of "money supply" most associated with the late Milton Friedman was a big part of the supply-side/classical mix. Nothing could be further from the truth.

For evidence we can refer first to the late Robert Bartley's 1992 book, The Seven Fat Years, a book widely seen as the diary of the economic revolution that Bartlett participated in. Importantly, money supply was never part of the equation.

As Bartley put it about Friedman's relations with supply-siders, "On most issues - Say's law, price controls, energy efficient markets, deficits, Keynes or whatever - he would be entirely at home at Michael 1. But not on his centerpiece, controlling the ‘money supply.'"

Indeed, as the late Jude Wanniski wrote in The Way The World Works, the book seen by many modern supply-siders as the Bible of the modern classical movement, "Supply-siders are concerned with the quality of money, not its quantity. Nobody, except the market as a whole, could ever know how much of what kind of money is appropriate to finance expansion without inflation." Not only did supply-siders think it impossible to know the correct supply of money, they also knew that with dollars everywhere in the world, efforts to control the supply would fail impressively.

Still, Fed Chairman Paul Volcker certainly did foist Friedman's monetarism on the U.S. economy for three years (from 1979-1982), and the results were disastrous. Money values and interest rates fluctuated wildly, and in a 1981 New York Times piece meant to clearly separate supply-side economics from economy-sapping attempts to control the supply of money, Wanniski observed "How ironic" it was "that ‘Reaganomics' has come to be identified as the twinning of ''tax cuts and tight money".

And with Reagan's presidency imperiled by monetarist prescriptions amid a collapsing economy, Barlett's boss the late Jack Kemp remarked about the Volcker Fed that "One has to question whether or not they know what they're doing." Kemp later asked for Volcker's resignation, but by October of 1982 the Fed ceased its reliance on money-supply targets and the economy/stock market began their long march upward.

To this day it's fascinating that Volcker is given so much credit for the 1980s boom. The truth is that the dollar collapsed once he began targeting money supply, and only came back once Reagan's election (and a return to strong-dollar policies) became likely. The reality is that growing economies need more money, not less, so the idea that money supply should be vainly restricted amid tax cuts was and is a perversion of the growth idea altogether. Rather than a Reagan ally, Volcker's monetarist flirtation nearly made Reagan a one-term president.

On the government-revenue front, Bartlett seeks a "tax system capable of raising considerably more revenue at the least possible economic cost", and among other things has said we need a VAT tax imposed to pay for the enormous unfunded liabilities in our future. As evidenced by Bartlett's book Imposter, he's of the view that the U.S. is bankrupt.

Not excusing the ridiculous spending under George W. Bush and others for one second, if the U.S. is bankrupt, it's funny how the market for Treasuries suggests something quite the opposite. Bankrupt entities pay enormous rates of interest on debt, and that in no way describes our present situation.

Furthermore, Bartlett was at least in the past a fan of Muslim philosopher Ibn Khaldun, and in Reaganomics prominently featured Khaldun's observation that "at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments." Bartlett is clear about his desire for higher taxes, but what's not been explained is why he thinks higher assessments will be any more successful today. Reaganomics is full of statistics about how lower tax rates frequently yield higher revenues, along with quotes (including one from Woodrow Wilson) bolstering the claim, but now Bartlett seems to think history with regard to taxation lacks meaning.

When it comes to the call for tax cuts during the financial crisis of one year ago, Bartlett has written that he really doesn't understand "how tax cuts could have done the slightest bit of good when millions of people had no income." What's confusing here is that back in 1981 it was very apparent to him why tax cuts would work well in periods of high unemployment. They would because as Bartlett noted in Reaganomics, "the largest proportion of important new inventions are still the result of individuals working virtually alone, rather than by big corporate laboratories."

Taxes are once again merely a price put on work, and while Bartlett would doubtless know better than anyone that tax cuts can be overrated, if he still believes that the individual is the source of economic health, one way to stimulate the minds of idle individuals would be to reduce the cost of their economic innovations. If it's agreed that tax cuts aren't the be-all, end all that some suggest, Bartlett's clear logic of long ago makes plain that they're less than hurtful, and more likely effective in facilitating economic creativity.

Considering budgets and deficits, Bartlett decries a Republican Party that has abandoned "the balanced budget as its signature economic policy". So while only a blind partisan could defend egregious spending during the GOP's control of same, one question has to be asked: would we prefer a balanced budget amid $2 trillion in spending, or a $250 billion deficit with $500 billion in federal spending?

The answer is obvious, and in pure economic terms the aforementioned deficit in concert with lower spending would be much preferred. Government spending is a tax like any other for depriving private interests of capital, so for Bartlett to elevate a balanced budget is for him to similarly elevate a great deal of economy-enervating spending.

Bartlett seeks higher taxes to balance the budget, and correctly notes an utter lack of discipline when it comes to Congress appropriating the massive amounts of dollars that reach Washington. A fair point for sure, but if Congress is as wasteful as Bartlett suggests, isn't it the height of naivete for him to suggest that our legislators would somehow discover their inner parsimony if tax increases actually produced the higher revenues he desires?

What's interesting about all this is that during George W. Bush's presidency, Bartlett happily exposed the revolting spending increases on the watch of a Party that billed itself as fiscally prudent. Nosebleed spending under Bush logically did nothing for the economy, and Bartlett is owed a great debt for revealing Bush as an "Imposter."

But despite the fact that it didn't work for the Bushies, Bartlett has turned in the other direction, has found his own inner Keynesian, and believes that heavy federal spending is now the cure for a weakened economy. As he sees it, the New Deal failed because FDR "didn't run deficits nearly large enough until the war forced his hand."

In making the claim that deficits would serve today's economy well, Bartlett ignores simple history from the ‘20s and ‘30s. Indeed, the U.S. economy roared back from a 1920 downturn greater than the one which began what is termed the Great Depression despite spending cuts that he newly scoffs at. Back then legislators correctly knew that government spending would retard the flow of capital to the private sector.

Conversely, FDR asked Congress for a $7 billion deficit in 1933, achieved a record deficit of $4 billion that year, but the economy essentially achieved a round-trip in terms of growth. In short, heavy spending in the ‘30s did little to nothing for economic growth, while the economy boomed after the ‘20s recession for the federal government doing next to nothing. Bartlett sees doing nothing now as some kind of libertarian fantasy, but it surely worked in the early ‘20s.

But more important in considering the ‘30s through Bartlett's eyes is his failure to account for one of the most basic laws of economics, one taught in Econ 101 classes around the country. Specifically, it is the law telling us that human wants are unlimited.

Thinking about the above, to believe Bartlett's take on why the economy didn't revive in the ‘30s, one would have to believe that for ten years the most entrepreneurial individuals on earth buried their natural instincts and simply chose to do nothing. What Bartlett presumes flies in the face of basic economic logic, not to mention human nature most notable in a uniquely American culture which elevates productivity above most everything else.

Worse, assuming his present views hold sway, to believe Barlett's contention that a government possessing no resources other than those provided it by private individuals helped us exit the Great Depression (through excessive wartime spending) is for one to believe that the production of weapons meant to kill potential customers (not to mention all the human capital the U.S. lost during WWII) and destroy economic assets is somehow stimulative.

Bastiat is doubtless spinning in his grave that someone as smart as Bartlett could buy into one of the oldest fallacies in the book that to kill and destroy is the way to grow an economy. Bartlett would also have to explain why the U.S. economy continued to grow in the war's aftermath despite a demobilization of the military. One possible hint exists in Reaganomics, as in Bartlett notes that the total U.S. tax burden had the average American working "only" three months a year to pay taxes versus 6 plus months today.

More realistically, it is government intervention that has caused every downturn in the history of mankind, because only government can create the needless wedges between work and reward. As Albert Jay Nock put it in explaining the 1930s downturn, "The present paralysis is due solely to State intervention, and uncertainty concerning future intervention."

Bartlett used to know all this, and sure enough on page 89 of Reaganomics he scoffed at a CBO study suggesting that there is a greater economic effect from government spending than tax cuts. As a modern reviver of classical economics, Bartlett knew then that government spending is the equivalent of shifting $50 from one set of pockets to another, while creating no incentives to produce. Rather than stimulative, those redistributed to would have less reason to work and produce, while those redistributed from would work less for their enterprise being expropriated.

Bartlett of course argues now that times are different, that we're in a "liquidity trap" and only government can spend our way out. And despite a dollar testing all-time lows versus foreign currencies and gold, Bartlett suggests we're suffering from deflation.

He misreads both. For one, no act of saving on the part of an individual ever detracts from demand. The liquidity trap he speaks of is far from a deflationary concept (when money rises in value), but instead the predictable result of monetary debasement. Indeed, who would lend to or invest in productive concepts if their returns are to be eroded by inflation?

Bartlett correctly points to the Fed's role in tight liquidity, but rather than an argument for a government with no resources expropriating funds from the productive, this merely points to the need for the Fed to float the cash rate it sets. If it does, individuals will achieve a market rate of return on their savings, and banks will lend those savings out.

Contrary to Bartlett's assertion that the banks in the ‘30s lacked money, in truth they were awash in cash during the Depression years as William Greider noted in Secrets of the Temple. But the problem then, much as it's the problem today, is that banks were fearful about lending due to a federal government that felt a need to involve itself in most aspects of the private economy. Leaving aside the inflation and resulting capital disappearance that Bartlett incorrectly sees as deflation, is it any wonder after the treatment of Chrysler's secured bondholders (to name one wronged source of capital) that investment is presently tight?

Ultimately Bartlett believes that "what the supply-siders did was good for the economy, good for the country and good for the advancement of science." Despite that, he now feels it's time for the concept to take a rest for the George W. Bush years having distorted it altogether.

But as Bartlett correctly states, the Bush years had very little to do with supply-side economics. From two stimulus packages, to record spending, to regulation of the Sarbanes-Oxley variety, to the imposition of tariffs on foreign goods, to dollar debasement, the Bush years were the very opposite of the idea that Bartlett says is spent.

In truth, and as Bartlett so helpfully shows us, supply-side economics at least in modern times never was. So rather than a signal that the classical viewpoint should be put to bed, it's time for the experts such as Bruce Bartlett to revive supply-side's true meaning. In short, those of us who admired Bruce Bartlett for years are desperately seeking the old Bruce Bartlett. We need him to revive an idea that always works, but that was wholly discredited by a Republican administration that never practiced it.