Supply-Side Economics Today
A few Saturdays ago, while taking a morning stroll through Philadelphia's Society Hill, I espied one Don Devine, whom I'd met once before. Quickly I went up to him, reintroduced myself, and offered my congratulations. Who's Don Devine? Only the greatest Reaganite who has ever graced the planet.
Devine was Reagan's head of civil service. Guess what he did in that job, which put him in charge of federal hiring. He cut, cut, cut. In the 1980s, not only did the civil service not grow with respect to GDP. It did not grow with respect to inflation. Spending on the civil service fell remorselessly "“ I should say gloriously "“ in the Reagan years. It declined big in nominal terms from 1980 to 1987, from $13 billion to $7 billion. This made for a real decline "“ against inflation "“ of 58%. Against GDP, civil service spending went down by two-thirds.
Now I have no idea how Devine fended off the lobbyists, the Congressional petitioners, the Bud Shusters who called for this pork and that special favor. Especially since these people generally bring guns to knife fights. Obviously Devine yanked their shorts down without their knowledge. But one thing I do know, as a matter of record. Devine was perfectly willing to get killed in the press, particularly the Washington Post "“ where he was the "terrible swift sword of the civil service" for canning 100,000 jobs "“ as well as to be a pariah in town. He loved to quote the old Capitol adage: "If you want a friend in this town, get a dog."
Would anyone care to say that those jobs were missed "“ especially in view of an unemployment rate that relentlessly ground downward in the 1980s? Surely one partial reason why employment, growth, and entrepreneurialism surged in the 1980s is that care of Don Devine, so many were freed from being chained to the federal desk and struck out into the real economy.
All this is suddenly pertinent again, in that a chorus is now being heard that supply-side economics is irrelevant because it focuses on the easy stuff, tax cuts, as opposed to the hard stuff, spending cuts. Obviously we need the latter today, in a big way. But it remains true that we still need the former.
Kevin Williamson, in National Review, is hoisting this argument, and it is getting play. The basic idea is that since supply-side economics entertains the idea of higher revenue after tax cuts, the electorate is made falsely confident that outsized spending can be taken care of somehow. If supply-side economics had stricter bona fides on the spending and revenue side, it would be better placed for the challenges we face today.
Now, Williamson correctly notes that real supply-siders were always very modest about how much revenue their tax system would generate. But he doesn't go far enough. The reality is this. The idea that supply-siders said revenues would boom given tax cuts is a historical absurdity. From 1976 to 1981 "“ which is to say the five years before the supply-siders got into the halls of presidential power "“ here was the trend of federal revenues as a percentage of GDP: 17.2, 17.8, 18, 18.5, 19, 19.6. The federal government had already discovered the magic formula for increasing revenues every year. Why on earth would the supply-siders have campaigned on the platform, "We have found the magic formula for increasing revenues!" FDR might has well have chosen to run on repealing prohibition in 1936, and Ike on ending Korea in 1956.
The supply-siders presented themselves to American politics on one criterion and one criterion only: We can solve economic crisis. Remember the long 1970s? That's when the price level tripled, the misery index and prime hit 21, you needed a cost-of-living raise plus 50% every year to keep your purchasing power against bracket creep, and stocks lost more than in the 1930s. These real conditions were not tangential to why the supply-siders were clamoring to get in the arena circa 1980. These conditions were the reason.
And lo, supply-side economics killed off stagflation with extreme prejudice. It delivered comprehensive benefits across the board to the American people and those abroad wise enough to fall in with imitation. Growth boomed, inflation collapsed, unemployment sunk, interest rates fell, and investments were a moonshot, most of this lasting stably for twenty-five years. So supply-side economics cannot be the problem, but one whopper of a solution. Did someone mention federal revenues? Well of course they were comfortably over the 20-year moving average the whole time. How could they not be? With that kind of real performance, even the most sad sack tax system would rake in the dollars.
The only reason deficits exploded in the 1980s was that Reagan's Congressional opposition insisted that the high inflation rates of the 1970s were a permanent fact of life, indeed that Reagan's tax cut would make them worse. Every year, Congress insisted on budgeting for 8-10% inflation, even though as early as 1982 it was fully apparent that inflation, after three straight years of double-digit rates, was down for good to 3%. So the budget kept getting increased to cover inflation, and the inflation never came. You want federal revenues to increase in real terms by 6-7% every year? They won't, and thank heaven for that. It remains a scandal that no one ever cites William Niskanen and Paul Craig Roberts, who were shouting about this fraud at the time. I myself had to put it in lights in Econoclasts.
It's as clear as day that the current administration and Congress are not solving the economic crisis that's been festering for some twenty months now. Moreover, they can't do it, on account of intellectual inflexibility. This does not change the historical record. Supply-side economics is the single most poisonous thing that has ever happened to economic crisis. After the creation of the Fed and the income tax in 1913, economic crisis must have felt that the world was its oyster. But you know how that Darwinian universe works. Some great counter-strike is always out there breeding in some forgotten niche, primed to eat your lunch just when you sit down to it. Supply-side economics is simply one of the greatest public policy victories in the modern history of government. To say "Goodbye Supply-Side," as Williamson does in the title of his article, is essentially to forget how economic crisis has been put to pasture in our past. And we happen to be in economic crisis just now.
Don Devine took Alan Reynolds's advice. In 1975, Reynolds told Robert Bartley "“ both of these guys as central as anyone to the development of supply-side economics "“ that you should cut taxes in recessions and spending during booms. After a few cycles, you'll have a shrinking state. Not to say a flowering economy and society.
Here's Kevin Williamson's article in National Review:
http://article.nationalreview.com/print/?q=NmE3Yzg4MmFjNWZhZDZiNThhNzU3MjllZjU3NzZhMWY=
and the Wall Street Journal pointing out how bush league is the Obama recovery:
http://online.wsj.com/article/SB10001424052748703871904575216282773704608.html
May 2, 2010 10:01 PM
The Greatest Reaganite of All
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