The Politics of Peacetime Conversion Jude Wanniski August 11, 1992

In David McCullough's marvelous, best-selling biography, Truman, we learn that Harry Truman's Kansas City haberdashery went out of business in 1921 as a result of the recession brought on by the Wilson Administration's 1919-20 spending cuts and tax increases. As you may recall, the GOP won a great landslide in 1920 by promising a "return to normalcy," by which Warren G. Harding meant a return to the much lower tax rates that prevailed prior to World War I. Despite the present stance of both political camps, the electorate's desire for normalcy is so strong that a turn toward a flat tax approach is under intense consideration among Clinton as well as Bush strategists.

Throughout history, wars are accompanied by higher taxes of all kinds, budget deficits financed by government bonds, inflations caused by fiat money, and bureaucracies enforcing myriad regulations. People put up with all this during wartime, but when peace comes, they demand an end to sacrifice and a return to opportunity and peacetime expansion. The Ruling Class always seems to wind up urging a few more years of high taxes, inflation and regulation to pay down the war debts, however. In 1945, President Truman resisted Republican appeals for a return to lower tax rates, and the GOP won both houses of Congress in 1946. It seemed for sure Truman would lose in 1948, but the GOP nominated an Eastern Establishmentarian, Thomas E. Dewey, who never mentioned economic growth or lower tax rates. In 1952, General Dwight Eisenhower was handed the GOP nomination over Senator Bob Taft of Ohio, a tax cutter, as the Korean War raged. In his fall campaign, Ike vowed to end the war. He also promised to cut tax rates at war's end. In his first press conference as President in 1953, Eisenhower indicated he would not be able to cut tax rates as promised, right away, because the government was still running a deficit. The top World War II tax rate of 91% was not reduced until 1964, when President Lyndon Johnson pushed through the Kennedy tax cut first proposed by JFK in early June of 1962. LBJ imposed a 10% income surtax in 1967, to help finance the Vietnam war. In 1968, Richard Nixon vowed to end the war and the surtax. In 1969, his economists talked him into leaving the surtax in place for another year while, at the same time, agreeing to a doubling of the capital gains tax. 

Next week in Houston, President Bush will accept the Republican Party's presidential nomination for the second time. He will be the first GOP peacetime nominee since Wendell Willkie in 1940, as we were not yet at war in 1940 and were still engaged in the Cold War in 1988. Once again, the nation is engaged in the problem of peacetime conversion and is asking the Ruling Class to get on with it. As neither the Democratic nor Republican parties seem to be aware that this is what the people are asking for, there appeared briefly an ordinary citizen with a few billion dollars who seemed to know what was needed. As long as Ross Perot was talking radical restructuring of government to accommodate peacetime realities, he was soaring in the polls. 

What have we now? President Bush seems absolutely determined to offer the American people a few more years of high taxes, inflation and regulation. His political experts have not only concluded that the American people are eager to hear a message of deficit reduction, they are also persuaded that the reason Ross Perot excited a huge body of disenchanted Americans was that he was a budget balancer. Robert Teeter, the President's pollster, has come to this conclusion by examining, through one-way windows, ordinary voters answering deficit questions put to them by his helpers. The mistake is that when a voter is asked if he favors spending cuts, the voter is in control and can have in mind the spending he wants cut. When a voter hears a candidate promise general spending cuts, he is not in control and must assume the worst. The President's image makers at this moment are getting warmed up for the Convention in Houston by running TV spots promising the American people that George Bush wants to maniacally slash federal spending. The spots show the President in extreme close-up, a crazed look in his eye, quietly advising Americans that he will base his second term on three principles, the first of which is SPENDING CUTS! 

Most Americans, I suspect, will never hear the second two principles. As with Ike in 1953 and Nixon in 1969, good things are promised after we have experienced enough bad things. The first draft of the Republican Platform prepared by the White House for adoption in Houston read: "As the deficit comes under control, we aspire to further tax rate cuts, strengthening incentives to work, save, invest and innovate." The formula is rigidly Hooverian, nonsensically putting the deficit before growth. The language is also "demand driven," in the sense that supply-siders should not be interested in increasing "work" or "saving and investment," but in simply removing impediments to a larger, more efficient economy -- one in which people can actually work less and consume more. Rep. Vin Weber yesterday got the platform committee to drop the deficit language, but the White House seems very nervous about all this.

The Clinton Democratic platform remains just as rigidly in a traditional Keynesian mode, with austerity reserved for high-income Americans. There is increased spending for education and infrastructure, on the grounds that these will have long-term productive payoffs. As usual, this is mere assertion. If the Government merely educates another 780,000 lawyers and 75,000 Keynesian economists, we will surely be in worse shape. The formula is a "meaner and cheaper Keynesianism" than we have seen before, as David Goldman sees it, but it would not necessarily produce a less desirable economy than what we have now. Governor Clinton is at least committed to indexing the capital gains tax and I suspect he would actually get that through a Democratic Congress next year. This alone would put the economy on a faster track. Because there are no genuine supply-siders advising Clinton, though, it's only by accident that some of the measures in his program would actually produce meaningful growth. 

In today's New York Times, we read that Clinton is criticizing President Bush for not favoring investment in America and for favoring a capital gains tax cut! This is pure demand management. In a demand model, a capgains cut only encourages people to sell assets, using some portion to increase consumption! If the government wants to increase investment, as Clinton wishes, it must tax or borrow money away from people who would otherwise use it for consumption, and aim it at desirable investments. In wartime, this is exactly what the government must do, because only the government is equipped to wage war, and defeating the enemy brings the highest return on investment. In peacetime, this method of capital allocation is inherently unsound, inevitably producing suboptimal returns on investment. Over time, such an economy will always lose to a market economy where the government simply maximizes the pot at the end of the rainbow, stands back, and watches.

Carrying this Keynesian model on his back would ultimately do in Clinton, unless President Bush insisted on keeping Herbert Hoover on his back. The one thing that could save Clinton is advocacy of a flat tax -- the kind that Jerry Brown promoted in the early primaries. This morning The New York Times, which understands the political appeal of a flat tax and worries the President might be moving toward one, nudged Clinton in this direction, which means that Clinton will probably be moving soon toward a flat tax. If the tax code is flattened enough, it doesn't matter what theory is used to describe its effects on aggregate demand or aggregate supply. The economy would boom and all economists would take credit for having masterminded it. 

If you recall, Ross Perot was essentially a flat taxer, arguing that the country should now, in peacetime, design a new tax code on a fresh sheet of paper. Little by little, with a nudge from Jerry Brown, another from Perot, a shove from Vin Weber and Jack Kemp, and now The New York Times, for goodness' sake, the Ruling Class may wind up going in the right direction after all. The Houston GOP Convention may turn out to be more interesting than we'd imagined, spurring further competition with the Democrats on the supply side. The Reaganauts in both parties may actually be courted as I suggested last month, when Perot dropped out. I may go to Houston after all, and show a little ankle. Why not? The war is over. It's about time we had some fun again.