How Fast Can We Grow?
Jude Wanniski
August 6, 1996


Memo To: Russell Baker, New York Times
From: Jude Wanniski
Re: How fast can we grow?

How nice to see both your column and mine in today's Times address the same question: How fast can we grow without inflation? Twenty five years ago, when I was a columnist at the old National Observer, I began asking the same question and found that almost no trained economists could answer me to my satisfaction. At first, like you, I thought I must be a dunce, too thickheaded to understand the mysteries of macroeconomics. But I persisted, and without the benefit of a single course in the dark science, I came to the conclusion that the economy could grow to the sum total of human potential at any given period. The error made by the Samuelsons, Friedmans, and Galbraiths is the result of their attempt to turn economics into a mathematical science, when classical (supply-side) economists from Adam Smith to Karl Marx understood it to be a behavioral science. To fit into equations, all human beings have to be reduced to numerical aggregates. In that world of computation, you and I and Joe Doakes become as identical as hydrogen atoms.

When you see Wall Street tremble because the unemployment rate has gone down, it is because the Federal Reserve is largely driven by computations that look at the number of human beings rather than their gross potential, which cannot be estimated except by wild guessing. (See that fellow over there flipping hamburgers? How much training would it take to have him grilling steaks or concocting a souffle? You see that the computers available to Greenspan can't handle this sort of thing.) Note that in my column today, "Hoover's Heirs," I am critical of the Dole tax plan, as it was hatched largely by people who did not know what they were doing. Jack Kemp's advice, and Steve Forbes', was rejected entirely. As with all complex problems, solutions turn out to be simple, once they are discovered. In this case, the Kemp proposal to which I refer should satisfy your craving for reasonable economics: Index past and future capital gains taxation to correct for inflation ~ which increases the reward only for successful investment of one human being in other human beings. This gets the hamburger flipper up to souffles. To prevent inflation, anchor the paper dollar to gold, which is one idea that Smith and Marx could agree upon.

Your wonder that the welfare bill requires people to get jobs, when the 5% unemployment rate indicates there is already an army of people who can't find them, is absolutely correct. Both the Republicans and the President put the cart before the horse (to coin a phrase). I append a column I wrote to my clients recently, "Welfare Politics," which states clearly that if I were the President I would have vetoed the welfare bill for the reasons you state today. Unhappily, in order to have a clear understanding of economics in this modern world, you had better not have studied it in school. By the way, note that President Clinton can do what Jack Kemp proposes without being cruel to anyone or irresponsible on the deficit question. Alas, I'm afraid he will not, because he must also answer to the computers.

July 31, 1996

President Clinton already has vetoed two welfare bills sent him from the 104th Republican Congress. He has now agreed to sign the third version, on the grounds it addresses some of the concerns he voiced regarding earlier efforts to end welfare as we know it. If I were Clinton, I would have been inclined to veto it, on the grounds that the economy is not strong enough to absorb experiments in ending welfare dependency, should they fail. I've agreed with New York Sen. Pat Moynihan for nearly all of the last 30 years that he has been decrying the evils of our welfare system and I agree with him now that it is much too risky to throw the dice the way the GOP reformers recommend. Their position is built upon a best-case scenario patterned after the work of Gov. John Engler of Michigan. Not only is Engler an exceptional man, but he also enjoyed unusual circumstances in carrying out his welfare reforms. His economic policies, after all, were lifting the state economy at the very time his welfare reforms were unfolding. He is a Republican chief executive who has had a GOP legislature in Lansing.

The legislation the President will now sign does not have the advantage of economic growth policies at the national level. Part of the blame for this has been the failure of Senator Moynihan, who is the most powerful Democrat on the Senate Finance Committee, to pull his party in the direction of economic growth. The cross the Senator has carried throughout his Senate career has been his unwillingness to upset the Robin Hood editorialists at The New York Times on matters of tax policy. If the economy continues to contract as it has for the last 30 years, with the exception of the few good years we got from the dreaded Ronald Reagan, the welfare experiments will be the equivalent of rearranging the deck chairs on the Titanic. When the few lifeboats are filled, Moynihan assures us the women and children will not be first.

President Clinton's dilemma on welfare has been that his campaign re-election strategy all along had been assuming that the Republicans would retain control of Congress. For a President who appeared to be a dead duck in the wake of the 1994 elections, Clinton now appears to be headed for a re-election of landslide proportions, at least in the electoral college. He owes this turnabout to the mistakes of the GOP leadership and the skills of his chief political advisor, Dick Morris, who succeeded in getting the President to sign the welfare bill. He had to take on the opposing political argument that if turnout is very low, out of disgust with the available choices in a three-way Clinton-Dole-Perot race, there is always the chance the Republicans will lose one or both houses of Congress. To the liberal Democrats who are extremely unhappy with the shape of the welfare reforms, the President's 20-point lead on Dole in the polls was the chief argument they used on behalf of a veto. Why compromise with the Republicans on welfare at this stage of the game, they said, when better legislation can be written next year when the Democrats have more leverage in Congress? Morris urged the President to sign on the grounds that he has to provide evidence he is capable of working with Republicans on these matters. If he vetoed yet another welfare bill, he will be open to GOP charges that he is simply a front man for Teddy Kennedy, the real power in the Clinton Administration. Republicans would be able to make the charge that even if Dole is unable to make a comeback, the voters should not trust the President with a Democratic House or Senate. This argument becomes more powerful when the campaign issue involves tax cuts. If the President is putty in Kennedy's hands on welfare, how can voters trust him to work with the GOP next year on a growth-oriented tax plan? The White House now is nervously awaiting the Dole plan on taxes which is expected to surface next week, perhaps on Monday. Dick Morris may have warned the President that in signing the welfare bill he gains credibility in being seen as a New Democrat who will work with the Congress on taxes. We can be sure he also is reminding the President that he cannot continue to count on Dole making mistakes without a pause. In The New Yorker this week, Michael Kelly argues that the President's big lead could crack if Dole gave the electorate even a minimal reason for changing horses at this point although Kelly doesn't see Dole getting close to a minimum.

So we have wheels within wheels within wheels. When the two candidates are driven chiefly by a quest for power, with no core system anchoring either, game theory has to replace traditional political analysis.  If he were anchored on traditional Democratic principles, the President should have vetoed the welfare reform bill. To get re-elected with a mandate to work with the Republicans, Morris gave the sounder advice.

Jude Wanniski