A Hoover Fan at Treasury Jude Wanniski April 1, 1998

Memo To: Larry Summers, Deputy Treasury Secretary
From: Jude Wanniski
Re: Financing tax cuts

I watched you on C-SPAN's "Washington Journal" March 30, interviewed by Brian Lamb. You sounded downright conservative — approaching Herbert Hoover, for goodness sakes — in arguing that whenever a U.S. government bond is retired and not replaced by another one, the liberated funds become available for more productive investment. I hear you saying that budget deficits reduce economic growth because the return on investment from bond finance of government spending is lower than private spending. Did I hear right? Is this what you were taught at Harvard? Is this a version of Keynesian economics that has not yet made it into the Samuelson textbook?

What particularly amused me, Larry, was the dark frown that crept over your visage when you thought of the preposterous idea of selling bonds to finance a tax cut. You managed a look of sheer disgust that anyone would be so reckless, even stupid, to do such a thing. Yet this is the other leg of John Maynard Keynes, the one who would run a deficit to finance higher government spending or higher individual spending in order to produce a higher level of economic growth.

If public finance means anything, Larry, it means the financing of investment in public goods and services that will improve the commonweal. If a tax rate is higher than it should be to produce a desired level of public goods, it makes eminent sense to lower the rate as long as the higher level of production will produce revenues that will pay the interest on the bonds. You told Brian Lamb and the C-SPAN audience that the financing of a tax cut would be irresponsible. Do you really believe this, or do you have to say so because it is a condition of employment? Keynes in fact offered as his best guess that any income-tax rate above 25% would be counterproductive, yet here we have a rate above 38% that President Clinton put up on the advice of his economic team and which he later apologized for having done. Do you think he should have apologized?

Really, if you believe what you told Brian Lamb and the C-SPAN audience, I predict a very short career for you in public service. You are now living on the economic expansion engendered by the Reagan tax cuts and the tax cuts forced upon the President by the 105th Congress. If you can think of nothing better to do with the emerging surplus than pay down debt, you have learned nothing from your Keynesian training or the supply-side revolution that has passed before you. All that's left is Hoover.