A BATTLE FOR Ronald Reagan's economic mind is now on. On one side are the "supply-side" forces of Jude Wanniski, Rep. Jack Kemp, Reagan's policy coordinator, and Prof. Arthur Laffer, the theorist behind the 30 percent tax cut that is the most seductive element in Reagan's appeal to the working-class and middle-class Democrats who could well propel the governor to victory in November.
Opposed to this group are such mainstream conservative Reagan supporters as Arthur Burns, Milton Friedman, Alan Greenspan, George Shultz and William Simon. Along with many in Reagan's entourage such as domestic issues adviser Martin Anderson, they see Reagan captured by zealots, or "hard-line ideologues," as Business Week terms the Wanniski-Kemp-Laffer group.
The most articulate spokesman-strategist among the "wild men" is Jude Wanniski, a former Wall Street Journal editorial writer and author of "The Way the World Works." The following interview with him, conducted by Alexander Cockburn and James Ridgeway, is excerpted from The Village Voice:
Q: What's the difference between the Reagan of 1976 and the Reagan of 1980, so far as economic policy is concerned?
A: The Reagan of 1976 did not have the concept of the Laffer Curve, [which is] the law of diminishing returns applied to tax policy. You can raise a tax rate to a point where individuals are so discouraged from producing that they produce less, and then the government gets less revenue as a result. That's all the Laffer Curve is about.
In 1976, Reagan got into difficulties with his $90 billion spending-cut plan because people jumped on him for collapsing the social safety net. Now he understands that there's a way to move the economy to a higher level of efficiency and productivity without first throwing the widows and orphans out into the snow.
Q: Give us a simple picture of your views.
A: The problem is stagflation. This is the problem that hits the western economies, and all the western economists are operating on the demand model: "How do we get money out of their pockets when there's inflation?" Or "How do we get money into their pockets when there's recession?" There's no way of dealing with the two problems at once, except in the Marx Brothers movie -- "A Day at the Races," I think -- where Harpo is putting money into the guy's pocket and Chico is taking it out the other end.
So then we have Laffer coming along and saying it's not demand that moves the economy, it's supply. Every individual on the face of the planet will demand as much as he or she can possibly consume. We all want to live like Frank Sinatra, to move from place to place in our own private jets. What limits us is our ability to supply our talents in the marketplace in order to exchange for the jet planes and everything else we want. So that's why we are called supply-siders. We want to maximize the individual's ability to fulfill his potential.
When we see an unnecessarily high tax rate imposed on an individual by the Keynesian trying to take money out his pocket, we say, "Hey, look, that's not doing any good for the economy. Get the level of tax rates up to where you're financing the government debt and providing for goods and services, but don't do it in a way that holds that individual back."
The only thing the government does is to provide for the security of the marketplace. It keeps the bandits out. It makes sure people don't come in and sell tainted bread and wine that will poison us. It provides for the mails and an army and navy and so forth.
The only recessions that occur, occur because the goverment suddenly introduces a barrier that keeps you and me from transacting our goods. Now the demand-modelers come along. The Keynesians say we should tax goods away from those who have them and give them to those who do not have them . . . or borrow them from this group by issuing bonds. That's deficit financing. The monetarists have said, "Hey, look, why work all these resources through the central government, through taxes or deficit finance? There's a far easier way to do it, through the private sector. Increase the money supply through the banking system, increase the amount of bank credit and we will not have to make the government bigger."
This is why the monetarists have tended to be more conservative, Republican, and the Keynesians more liberal and Democratic, just depending on their tastes in how to manipulate demand, through the public or private sector. That is why we supply-siders object as violently to the Friedmanites as we do to the Keynesians.
Q: Does Reagan really believe in supply-side economics?
A: Yes. Reagan loves the stuff. John Sears, before he left, kept telling Kemp that he should spend more time on the campaign trail with Reagan, because whenever he spent a day or two with Reagan, Reagan came alive. When Kemp leaves, Reagan subsides. He is now at the point where he is getting better and better all the time.
Q: What happens when the press gets a bit specific as when they asked him on "Issues and Answers" about the 30 percent tax cut and he covered up?
A: That was just confusion, because he wasn't briefed. That was one of the points Sears made when he departed. The biggest problem is getting Reagan briefed.
Q: But supposing Reagan takes a couple of clouts. There are some moderately technical questions, and the old boy will maybe stick his foot in the trough a couple of times, and there'll be a fuss about Reagan blundering. So then the other camp, the official advisers, will come to the governor and say, "This Wanniski-Laffer-Kemp stuff is a bit off the wall. Let's get back to the old verities."
A: I wrote a three-page memo to Reagan. I told him questions he was going to be asked, and in the last paragraph I said to Reagan, "No matter what sort of a box you get yourself into, one thing you've got to remember is Be Stubborn. Even if you're confused, you still think this is the right thing to do. That's all the electorate is going to watch for, that you are absolutely determined in the face of all critical questions."
Q: But, Jude, here's how it will go: They'll say, "How can you possibly pay for the defense system you are calling for, Gov. Reagan?"
A: Out of the bigger economy.
Q: And they'll say, "Gov. Reagan, it seems to be some sort of magic you're calling for here." And your answer would be that the old man has to hang onto the rope, no matter how the winds buffet him?
A: Look at the Business Week interview. Reagan really handled it well. Even on "Issues and Answers," he got to the point where he didn't know what they were talking about, so he switched to Proposition 13 in California.
Q: He went into a neutral corner?
A: He went into a neutral corner. Our argument is that the voters know what the problem is. The most they have to be persuaded is that this guy is serious and he's not going to let himself be danced around and do nothing 180 degrees opposite once he's elected.
Q: Let's pretend it's the best of times. Reagan has won the election and there's even a Republican Congress. What's the first thing Reagan does?
A: His program in 1981 would contain at least the following elements if he remains a keen supply-sider: a 30 percent reduction in marginal income tax rates at 10 percent a year; indexing the tax system to offset future inflation; elimination of the gift and inheritance taxes; abolition of the windfall profits tax on the domestic petroleum industry; reform of the central bank to restore a convertible dollar-gold exchange rate.
Q: Will welfare and social programs be cut?
A: No. Social programs are left in place. "The safety net," we call it. Government spending is reduced via economic expansion that makes people ineligible for welfare, unemployment, food-stamp benefits, etc. by virtue of having good jobs and incomes.
Q: Take anyone who doesn't want to work for government, but wants to go on their own, run their own thing. How will supply-side economics help me?
A: 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 all the problems he faces. And it's not only the tax rates, it's the level of wealth of the whole economy that is at issue.
If you have somebody who's a J.P. Morgan, who is discouraged by the high tax rates on his own income and therefore spends more time playing polo and less trying to figure out more efficient ways of financing enterprise, 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 $1,200 to get into business.
If you can find ways to take people 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 $1,200.
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 these people on the ships and travel across the Atlantic, with soldiers and sailors, to the New World. There they would encounter hostile Indians, do battle with them, and a lot of Spanish lives would be lost. But they's still overcome the Indians, get their gold, put it on the ships, take it all the way back to Spain and then dig holes in the ground and bury the gold.
If you 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 expended 10 or 20 or 50 years' worth of the best children that the women could bear 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! All of them involved in wars over things that really do not contribute.
Q: What is productivity?
A: Productivity is doing the same work with less effort. I wrote a memo to Gov. Reagan saying Carter will boast that he increased the number of jobs since he took office. But he 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. The object of economic policy is not more work; it's less work. We are in the process of destroying capital now as a result of forcing so many women to go out and work, rather than stay home and help their children with the reading lessons and drilling them on the times tables.
Q: You say productivity is determined by the marketplace. Suppose 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?
A: 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 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.
Q: So you are saying that Reagan's social policies -- anti-ERA, a revulsion against women going into the marketplace to make up the family budget, anti-abortion -- stem not from bigotry or theological puritanism or whatever.
A: No. They're a reaction against the forces of Malthusian darkness.
Q: Let's take this regulation/deregulation thing. Suppose some commuter pilot says he won't land because there's a fog, and the boss says, "Look, dammit, 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?
A: 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.
Q: But in the expanding economy of the 19th century, you had children dragging coal carts along in the mines, right?
A: In an expanding economy, the individual expects move. 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 conducive 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.
Q: There seems very little between your position and some guy like Ralph Nader.
A: It's probably true. There's not much difference between my views and Nader's views, except Nader does not think in terms of production. He only thinks in terms of redistribution, like Kennedy or Galbraith.
Q: What are the leading objections to your tax ideas?
A: 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, 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 [tax] 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.
Q: Is there any proof of this?
A: 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?" That's how quick it is. If the incentive is there, the production is there.