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September 4, 2005
David Warsh, Proprietor


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Wanniski-ism, RIP

Jude Wanniski died last week, at 69, of a heart attack. He was best known to the public for his 1978 book, The Way the World Works, which helped build support for the election of Ronald Reagan in 1980. Among economic policy veterans, he was better remembered for his “Two Santa Claus” theory.

So it is more than a little ironic that the Two Santa Theory should have been demolished by a storm called Katrina the same week that its creator died.

Wanniski explained in a memo in 1999, “We of course should be indebted to Art Laffer for all time for his Curve….  But as the primary political theoretician of the supply-side camp, I began arguing the ‘Two Santa Claus Theory’ in 1974. If the Democrats are going to play Santa Claus by promoting more spending, the Republicans can never beat them by promoting less spending.  They have to promise tax cuts in order to grow the economy — not to ‘starve the government of revenue,’ which is Milton Friedman’s rationale.”

“Let’s shoot Santa Claus!” says Friedman [in this characterization of his view]. Wanniski replies, “Let’s not.”

It would be absurd for a grown man to speak in such terms if it weren’t for the unmistakable grain of truth in them — and for the long line of politicians who have taken Wanniski’s ideas seriously. Here is how Cato Institute President Ed Crane described their history in the prescient memo to which Wanniski was responding, “The GOP:  Slouching towards Irrelevance”:

“When [U.S. Representatives] Jack Kemp, New Gingrich, Vin Weber, Connie Mack and the rest discovered Jude Wanniski and Art Laffer [in the 1970s], they thought they’d died and gone to heaven. In supply-side economics they found a philosophy that gave them a free pass out of the debate over the proper role of government. Just cut taxes and grow the economy: government will shrink as a percentage of GDP, even if you don’t cut spending.  That’s why you rarely, if ever, heard Kemp or Gingrich call for spending cuts, much less the elimination of programs and departments.”

Last week, the Two Santa Theory suffered the final blow in a slow-motion collision with reality so dramatic as to constitute a natural experiment.  It has unfolded over four years.

First, George W. Bush, who battled his way into office on the eve of a recession, cut taxes to stimulate the economy.  If that had been the end of it, he might have been a hero.  But instead he embraced to Second Santa Theory and rammed still more tax cuts through an all-too-willing Congress in the name of stimulating growth (chiefly benefiting the richest one percent!). Enormous deficits are in prospect, but there are as yet few signs of robust growth.

Then the president gambled on a high-stakes war in Iraq, which not only cost a lot of money, it didn’t work.  Never mind the conventional wisdom that a nation should go into a war with money in its pockets, said Bush.  War had nothing to do with Santa Claus.  War was a matter of principle.

(Thanks to Bush economic adviser Lawrence Lindsey and Yale University’s William Nordhaus we had some pre-war estimates of the likely cost of the Iraq expedition.  Lindsey estimated the upper bound of $200 billion and got fired for his trouble. Nordhaus estimated the costs from $100 billion in the best case to nearly $2 trillion ($1,900 billion) in the worst.  By the end of September, military cost will have reached $186 billion, according to David Francis, economics columnist of the Christian Science Monitor, compared to $66 billion for Afghanistan. By the same accounting, tThe military cost of the Korean War was $361 billion.)

Meanwhile, Bush played a little traditional Santa, sheparding through Congress the addition of an expensive pharmaceutical benefit to the national retirement medical system. Once re-elected, however, he announced ambitious plans to privatize the Social Security system, properly categorized as Shooting Santa in the Wanniski schema. .

Now Hurricane Katrina has laid low a famous American city, and not just any American city, but New Orleans, whose very history is a stark reminder of the slave trade that is America’s original sin.  Rebuilding New Orleans will be nothing like rebuilding a few high-rent city blocks in downtown Manhattan. There are nearly 15,000 refugees in Houston’s Astrodome, with no place to go, and another 94,000 in refugee shelters scattered across nine southern states, according to the Washington Post.

The traditional way to deal with disaster on this scale is to appoint a relief commissioner — Herbert Hoover as founder of the Commission for Relief in Belgium at the outset of World War I, Secretary of State George C. Marshall as the overseer of the Marshall Plan at the conclusion of World War II.

But in an astonishing bit of news, the Boston Herald’s Brett Arends reported Saturday that the Federal official in charge of the New Orleans rescue — the ill-at-ease gent at his side whom Bush embraced as “Brownie” during their Friday tour — had been “fired from his last private sector job overseeing horse shows.”  Former estate lawyer Mike Brown had been recruited to the Federal Emergency Management Agency by director Joseph Allbaugh, his college roommate, after Brown was sacked by the International Arabian Horse Association, just before Allbaugh quit in 2003 to work on the Bush re-election campaign.

So not only is the economy not growing satisfactorily. Not only is the nation less safe than if Bush hadn’t bungled the war in Iraq. But now the government is broke and can’t afford to fulfill its legitimate and essential  functions in a time of disaster. If that’s not a conclusive result for a president who has been given the benefit of every doubt, what is?

Bush, along with the rest of the Republican executive leadership that first tasted power in the post-Watergate autumn of 1974, Cheney, Rumsfeld and the rest, will be swept out of office at the end of 2008.  Likewise, the “Two Santa Claus Theory,” once and for all.  The recipe for economic growth will remain the one that Adam Smith offered some 250 years ago — “peace, low taxes, and a tolerable administration of justice.”

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Like most crackpots, Jude Wanniski went off on a tangent from real ideas. He fell in with a couple of University of Chicago dropouts, Robert Mundell and Arthur Laffer, in 1971, at a momentous time.

In The Way the World Works, he describes Mundell as “the modern [Leon] Walras, a general equilibrium economist in a world dominated by partial equilibrium economists” — by whom he especially meant, without naming him, University of Chicago professor Milton Friedman.  In fact, a far-reaching revolution in general equilibrium methods (which is what Wanniski meant when he spoke of the mysterious “Mundell-Laffer hypothisis”) really was sweeping technical economics in the early 1970s, made possible by developments in modern computing.

But it was Chicago’s Robert Lucas, not Mundell, who displaced Friedman from his position of leadership in the pantheon of technical economists. He was joined there in short order by Ronald Coase, James Buchanan and a raft of others. By that time, however, universities had dropped out of Wanniski’s story altogether. He doesn’t so much as mention, not even in his endnotes, Mundell’s manifesto of ten years before, Man and Economics, a far more substantial book than his own.

But then, Mundell, too, had all but dropped out of economics by 1978, walking out of Chicago to the University of Waterloo in his native Ontario, then accepting a sinecure at Columbia University.  He returned in the late 1990s to accept a Nobel Prize for the work he had done in the 1950s. Meanwhile, leadership of the “supply-side” movement shifted to Robert Bartley and The Wall Street Journal’s editorial page.

With the publication of The Way the World Works, Wanniski became the latest in a long line of self-proclaimed political economists who derogated mainstream views. His immediate predecessor probably was Eliot Janeway (the subject of a very interesting off-speed book by his son Michael C. Janeway, The Fall of the House of Roosevelt: Brokers of Ideas and Power from FDR to LBJ). The elder Janeway, in turn, lionized Sir Norman Angell, whose 1910 critique of imperialism, The Great Illusion, eventually sold over two million copies in twenty-five languages, won him the Nobel Peace Prize, and gave rise to a theory popularly called “Norman Angellism.”  Before Angell there was Henry George.

An even better way is to understand Wanniski, though, is as the product of a particular place and time — the over-ripe, slightly out-of-control America of the 1970s. Indeed, he had most in common with another journalist who reacted to the circumstances in a similar way, namely the late Hunter Thompson, author of Fear and Loathing in Las Vegas.

In certain respects, the two men were almost a matched pair. Thompson was born in 1937, Wanniski in 1936. Both spent formative years writing for the same newspaper, The National Observer, an ill-fated general interest weekly published for most of a decade by Dow Jones. Both were subsequently launched into orbit by more influential organs of opinion — Thompson by Rolling Stone and Wanniski by the WSJ editorial page. Both were absorbed by the recent American phenomenon that was Las Vegas. Both favored exotic dress. (For his first day on the job as Washington columnist for the National Observer, Wanniski was reported to have shown up driving a silver convertible, wearing a gold coat and mirror sunglasses, accompanied by a Las Vegas show girl.) Both were engaging men, loved their families and had large circles of loyal friends.

Each man strayed far from the path of conventional journalism that a new adjective had to be coined to describe the variant that he practiced, a brand name that became common parlance after a time. Thompson’s specialty was gonzo journalism. Wanniski invented supply-side economics.  The terms meant roughly the same thing: over the top. The difference is that in politics, Hunter Thompson never went farther than Duke, the smooth-talking outlaw based on him in the Doonesbury comic strip. Wanniski, equally raffish in his own way, put in motion the forces that are wrecking the Republican Party.

* * *

Last week, I credited MIT’s Olivier Blanchard with co-authorship of an interesting paper on the possibility that a high social rate of return may account for Europes’s more generous vacations. Blanchard has written to good effect on the work/leisure tradeoff, but not in this particular case. The real co-author of “Why So Different?” is Harvard chairman Alberto Alesina.

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One Trackback/Pingback

  1. Subtle change at WSJ editorial board | Talking Biz News on Monday, January 27, 2014 at 4:03 pm

    […] to modulate the  spirit of intransigence that dates back to 1972, when editor Robert Bartley and Jude Wanniski initiated a new era of political economic discourse in US politics. (The mutual contempt of the […]


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