To: Alex Cockburn & Jim Ridgeway
From: Jude Wanniski
Re: The Battle for Reaganís Mind
Here is the second half of the interview I gave the Village Voice in April, 1980, 20 years ago, when I sensed the campaign to elect Ronald Reagan would be diverted by the Old Guard Republican Establishment. The supply-side "wild men," of which I was one, Jack Kemp another, managed to preserve the essential ingredients of the economic planks -- especially the tax cuts -- that were essential to Reagan's victory over Jimmy Carter that November. Note in this second part the discussion of the International Monetary Fund as a dark force that had to be overcome... Reagan's hope for a gold dollar and reform of the IMF were the two main ingredients that eluded us, then and now.
Village Voice, April 7, 1980, -- continued
AC/JR: Let's say you put supply-side economics into operation. How would it enable my life to be any easier? Take any one who doesn't want to work for government, but wants to go on their own, making a living, be their own man, run their own thing. How will supply-side economics help me?
Take some really industrious young black on the South Side of Chicago who has the idea of opening up a fast-food chicken restaurant. Just examine him and all the problems that he faces before he can serve his first customer. And it's not only the tax rates, it's the level of wealth of the whole economy that is at issue. If you could -- it sometimes sounds like trickle-down economics -- if you have the most talented and creative and energetic individual in your whole economy, somebody who's a J.P. Morgan, who is discouraged by the high tax rates on his own income and therefore spends more of his time playing polo and sailing his yacht, and less of his time trying to figure out more efficient ways of financing enterprise through the whole top of the system, then there have to be more people underneath him to do the same amount of work and as a result the capital of the country is used up before any smidgen of it gets down into the South Side of Chicago where this guy only needs $1200 in order to get into business. So there's an interconnection all the way up to the top. It's not just a zero sum game where you can say, We can solve this guy's $1200 problem by credit controls, by instructing the banks that they cannot lend to J.P. Morgan, but to lend it to him. That decreases the efficiencies that J.P. Morgan brings to the whole system. If you can find ways to take people in the country who are productive and get them to give five minutes a week more of their intellectual energy to the economy, which means five minutes less to playing polo, then these efficiencies will work their way down as well. You have to raise the level of wealth of the whole economy, then this guy has his $1200. He still faces the Board of Health of the City of Chicago. He wants to hire a kid and the government says, No, you have to pay him $3.65 an hour minimum wage. The Board of Health says he has to have three toilets within 12 feet of the fried chicken grill. He has to go out and hire lawyers, he has to go out and hire accountants. It's a big deal just to open up a little fried chicken restaurant.
Let me give you an idea of what we are talking about. In Spain in the 17th century, they had the idea that wealth and prosperity lay in accumulating gold. So they had all the universities producing the cream of Spanish manhood to make them navigators, scientists, and pilots. They would take the best craftsmen to make ships. They would load all these people on the ships and travel across the Atlantic, with soldiers and sailors, and go to the New World. There, they would encounter hostile Indians who had possession of some small amounts of gold, do battle with them and a lot of Spanish lives would be lost. But they'd still overcome the Indians, get their gold, put it on the ships, take it all the way back to Spain, and then they would dig holes in the ground and bury the gold. All of that goes on, and if you stand back and look at the net result, nothing has changed except that some gold that was in that part of the world now is in this part of the world. Meanwhile, you have expanded 10 or 20 or 50 years worth of the best children that the women could bear and could have educated going to this totally fruitless enterprise. Because people thought that wealth was gold.
And now we have armies of lawyers and accountants and bureaucrats in the federal government dueling with lawyers and accountants and managers in the private sector over various directives and rulings and tax laws and Nobody Producing Anything. And these are the cream of our whole country! The top of the class of Harvard Business School, of Stanford Business School. All of them involved in wars over things that really do not contribute.
AC/JR: What is productivity?
Productivity is doing the same work with less effort. I wrote a memo to Governor Reagan this morning, saying, Carter will boast that he increased the number of jobs, since he took office, that there are more jobs now than there were in 1977 when he was inaugurated. But be should not be able to boast about this. The only reason there are so many jobs now is because his economic policies have forced so many people to go to work to make ends meet. If you'd had correct policies followed in 1975, 1976, and 1977, you would have maybe 10 million fewer people working today. The object of economic policy is not more work, it's less work. You want to be able to expend the same amount physical effort, intellectual effort, to get the same amount of goods. That's the object of economic policy. We are in the process of destroying capital now as a result of forcing so many women because of the inflation, because of the contraction in the economy, to go out and work, rather than stay home and help their children with the reading lessons and drilling them on the times tables...
Is Prostitution Productive?
AC/JR: You say productivity is determined by the marketplace. If I make widgets and no one wants to buy them, I would be deemed by the marketplace to be essentially nonproductive. Now, supposing I was a madame running a brothel, and the economy turns down and my middle-class clients can't afford to come by. So my business is failing and my girls are nonproductive in the marketplace. Enter President Reagan, the economy picks up, the tax rates are lower, the middle-class clients have more money in their pockets, come to the brothel, and therefore the girls bring in more money. Now are they being more productive? Are they and the brothel contributing to higher productivity, which we all want?
Anything in the economy that satisfies the tastes of individual Americans, individual citizens, is productive. Prostitution is productive. What you will see happening, the more the institutions of government are arranged in a way that will permit people to fulfill their potential, their legitimate potential, is less prostitution, less drugs, less pornography, even abortion. All of these come as a result of the impoverishment of the economy. If you had a real expansion of the economy, in the sense that people will fulfill their own potential at every level, the pressures of people to seek equilibrium in their own lives, either through deadening their senses or through eliminating an unwanted child through abortion -- these pressures fade away.
AC/JR: So you are saying that Reagan's social policies -- anti-ERA, a revulsion against women going into marketplace to make up the family budget, anti-abortion -- these attitudes stem not from bigotry or theological puritanism or whatever...
No. They're a reaction against the forces of Malthusian darkness.
AC/JR: So you are saying that the forces of darkness are in fact the liberals -- pro-ERA, pro-abortion, and so on.
It's not a matter of Keynesians or Friedmanites. The impulse goes back thousands of years -- to those who believe in progress and those who do not. If you believe in progress, then you see a whole set of social attitudes developing because you are expanding opportunities for individuals, even though individuals are multiplying like mad.
AC/JR: Let's take this regulation/deregulation thing and look at some small airline. Suppose some commuter pilot says he wonít land because thereís a fog, and the boss says, Look, godammit, we're here to make money, You go ahead and land, and he does, and it crashes. Now, at that point, would you protect the marketplace?
Oh no, absolutely not. If you commit me to the idea that we're going to have continual contraction from this year, say to the year 2000, then I will revert to Marxism and total regulation and control, because I know that when you have a shrinking pie, there will be business guys and smart guys swarming all over the economy, cutting corners constantly at my expense, to try and make ends meet.
AC/JC: But in the expanding economy of the 19th century, you had children dragging coal carts along in the mines, right?
In an expanding economy, the individual expects more. He will move from the entrepreneur who is cutting corners to the entrepreneur who is not cutting corners. In an expansion, you have less need for regulation. If you provide an environment that is conductive to opportunity and growth, then competition will result in more safety and health and more concerns for the environment, but not without vigilance by the collective, maintaining watchdogs.
AC/JR: There seems very little between your position and some guy like Ralph Nader.
It's probably true. There's not much different between my views and Nader's views, except Nader does not think in terms of production, he only thinks in terms of redistribution, like [Ted] Kennedy or Galbraith.
Banks and Slavery
AC/JR: Doesn't your program also depend on harnessing some of these institutions, i.e., big banks and big corporations, which are just as evil as the central government? In other words, to achieve supply-side economics, don't you have to get involved in curbing big-business institutions which are interlocked with big government?
I don't find government to be evil, or corporate America to be evil, except insofar as they come up with the wrong answers as to what is good for the whole people. Bankers, by their very nature and training, are put here on earth to get their loans paid back. When you suggest to them that they will get their money paid back easier by lowering tax rates, they don't want to believe it. They would rather believe that it is much easier to get the money paid back by raising the tax rates...An example: I went down to Puerto Rico in the spring of 1976 to talk to Teodoro Moscoso, the chief economist in the Hernandez Colon administration. The unemployment rate was 20 per cent. The economy was in a tailspin. I asked Moscoso, Why in God's name, when this economy is reeling in recession, do you put on a new tax rate? He says, Well, the bankers in New York said it would be a good thing to restore confidence in the economy: I said, Oh Mr. Moscoso, if you went to the bankers and said you've taxed your people to the limit, that the only way to put off the bonds you owed them was to sell a third of the people of Puerto Rico into slavery, they'd say, Don't tell us. Do it.
Now we go beyond the shores of the United States to the International Monetary Fund. At the Reagan sessions in January, I sat there like a bump on a log, listening to the discussions: How the CIA is no longer effective, how our intelligence agencies are no longer effective, and how we have to do something, All these military people. So I suggested that all we really have to do is to hire one guy to keep track of the traveling schedule of the IMF. And wherever the IMF goes, you know, in six months there's going to be a revolution.
AC/JR: What are the leading objections to your tax ideas?
That the first effect is to put more money into people's pockets...The first thing that happens is that a worker, say in Toledo, Ohio, winds up getting an extra $4.12 in his paycheck (after a tax cut). He rushes out with that $4.12 and buys some scarce good, and therefore puts upward pressure on the price and we have more inflation. Now, even Herb Stein and the other Keynesian economists say that, maybe in the long term, people will run around in such a way as to build more plants and equipment to produce this scarce good that costs $4.12. But in the interim, they say, you have this inflationary effect. For the economy as a whole they see that all you are doing is deferring a tax. If the government is going to give $4.12 to the worker by lowering the tax rate, and it has the same level of expenditures, it must finance $4.12 with a bond. That means sometime in the future the Toledo worker will have to pay another $4.12 in taxes. In other words, it washes out over time. What we're saying is that the lower rate, in and of itself, will cause the whole economy to expand. The tax base will broaden, and even the Toledo worker will begin to observe that the liabilities of the government will be spread over a broader tax base and that therefore the claims on his future taxes will drop to $3.81. He will then be able both to consume and to save.
AC/JR: Is there any proof of this?
This is all theory...All we're saying is that there is an extra effect in the economy by having a lower rate which encourages people to produce more, that encourages capital and labor to come forth with greater production.
One of the first insights I had was when I asked Laffer, How can these incentives be instantaneous? Won't we have to wait three years for them to occur? Laffer said, How long does it take you to reach over and pick up a $50 bill in a crowd. Aah! That's how quick. it is, If the incentive is there, the production is there.
There is a refreshing wholeness to the economic and social vision and prescription offered by Wanniski. It represents the struggle for a world view. The central problem, to any eye not trained in the intricacies of model-building, is that the ideas do not seem to touch at all on the basic functioning structure of the U.S. economy. On its simplest level, it seems hard to believe that a central government in the late 20th century can operate without some sort of a plan, whether it emanates from a government strategy or one articulated by the corporate sector. The structure of the economy will remain as it is, dominated by large corporate entities which are interrelated intimately with the central government.
It is difficult to see how cutting taxes by 30 per cent will alter the structure, consequently the inequities visible and cumulative throughout the capitalist era. The politics of the economy -- even with the drastic surgery proposed by Wanniski and his allies -- would remain the same: IBM, General Motors, Exxon, etc., will run things as they did before.
Take productivity. The electric-utility industry is nonproductive. The reason for its lack of productivity lies partly in its anachronistic management, but more significantly in its devotion to nuclear power, which doesn't work. The ideas of the ideologues, were they applied to this industry, would possibly brush aside hindering regulation, but would end the nonproductive syndrome, since the industry's commitment to nuclear power is political, not economic.
Economists will, in the next few months, thrash over the equity or inequity of the proposed tax cuts, their inflationary effects, and so forth. But if the wild men prevail in the battle for Ronald Reagan's mind, and if Reagan prevails in the fight for the nomination, the voters in November will at least be facing a real choice.