Towards the Next Generation

How to move beyond "supply-side" economics

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Posted in Contemporary economics, Newspapers Tagged with: , , , ,

Fifteen years after the 9/11 attacks triggered its ill-starred invasions of Afghanistan and Iraq, the United States finds itself engaged in a three-way contest for global influence with its old rival Russia and a surging China. Climate change is a growing threat around the world.  In response, the Republican Party is seeking a tax cut.

The heart of the undertaking is a reduction of relatively high US corporate tax rates.  That much is a measure on whose desirability experts right and left can agree.  But to compensate for revenue losses arising from various accompanying provisions in the 440-page bill (including inheritance tax abolition, personal income tax cuts), versions in both the House and Senate rely on an array of tax hikes and implicit spending cuts aimed squarely at the middle class.

The measure would add an estimated $1.5 trillion, or around five percent of its current level, to the national debt, over the course of the next decade, and, possibly, a good deal more. By the end of that time, either most tax cuts will expire, or further spending cuts will be required on virtually every government program but defense –especially Social Security and health care. The beneficiaries of the tax cut? Mainly the rich.

Martin Wolf, the respected economics columnist of the Financial Times, wrote yesterday, “How, one must ask, has a party with such objectives successfully gained power?” Wolf identifies three main channels. Give disproportionate power to the wealthy. Foment animosity towards and among the less fortunate. And, first, and perhaps most important, tell a story:

[F]ind intellectuals who argue that everybody will benefit from policies ostensibly benefiting so few. Supply side economics, with its narrow focus on tax cuts, has been the main theory employed, because it directly justifies tax cuts for the very wealthy.

As it happens, I have been reading George Melloan’s Free Markets Free Minds: How the Wall Street Journal Opinion Pages Shaped America (Encounter, 2017) the better to remember where tax cut came from, long ago.

Melloan, 90, retired in 2006, after 54 years at the Journal, first as a reporter, then as a foreign correspondent, and, for well over half of that time, an editorial writer. He joined the editorial board of the paper in 1970, under the beloved Vermont Royster, and, practically alone among then-current members, survived the transition to Robert Bartley, Royster’s successor, in 1972. (Interim editor Joseph Evans had died suddenly.)

For thirty years, Melloan served as Bartley’s deputy. He was ten years older than his boss, an in-house “anchor” to counterbalance the effects of the “sail” of the younger man’s more extravagant enthusiasms. In 1987, after Daniel Henninger was named Bartley’s official understudy, Melloan and his wife lived in Brussels, while he edited the editorial pages of the European and Asian editions of the paper.

Victors write our history – at least they try to.  Melloan relates the official version.  The way he tells it, supply-side dogma devised by Robert Mundell, of Columbia University, elaborated by University of Chicago Graduate School of Business assistant professor Arthur Laffer, supplanted Keynesian demand-side fiscalism, at least in the minds of Bartley and editorial writer Jude Wanniski.

Mundell and Laffer may have been academics, public intellectuals, but they had ceased to be economists, inasmuch as they no longer sought to persuade other professionals of the validity of their views. They appealed directly to the public instead. (Many years later, Mundell was recognized by a Nobel Prize for work he had done in the 1950s on currencies.)

In the beginning, in the 1970s, Bartley, Wanniski, Laffer, Mundell and their confederates in the Congress – quarterback-turned-congressman candidate Jack Kemp in particular – exhibited a raffish charm in an age that otherwise took itself too seriously, an appeal whose spirit I sought to evoke last week by reprinting a piece written long ago.  Bartley related the origin story himself, in 1992, in The Seven Fat Years: and How to Do It Again, a book whose message was blunted by seven even fatter years under President Bill Clinton, who began his term by persuading Congress to raise taxes.

Bartley responded with his crusade against “Arkansas mores,” a campaign not entirely misplaced, but memorable chiefly for its no-hold-barred bitterness and perverse effects.  Bartley died in 2003, at 66, months after the invasion of Iraq, an adventure he had strongly supported.

Melloan’s plain-spoken account of a hundred years of Wall Street Journal history is a pleasing exercise in nostalgia, displaying precisely the eyes-wide-open sophistication that the corps of Midwesterners of which he was a member brought to what had been a parochial Manhattan financial daily before World War II.  His version of the foundational story of how General Motors pulled its advertising after the Detroit bureau scooped the company’s annual-model pageant, only to later meekly return to the fold, is especially good.

Omitted from Melloan’s account is most of the story of how editorial writer Lindley Clark, a monetary economist who had been among Milton Friedman’s first students at the University of Chicago, was squeezed out of the editorial page by the choice of Bartley.  Clark returned to the news pages as a columnist for several years, and, with colleagues Alfred Malabre, Jr., and Paul Blustein, conducted guerilla campaign against the editorial pages’ extravagant claims.

Nor does Friedman himself come up, except in passing.  Friedman’s record as an economic forecasters wasn’t perfect, but he was a far better guide to the action than gold-standard enthusiast Mundell.  Nor is mentioned the role of Harvard University economist Martin Feldstein in straightening out Reaganomics.  Economist Bruce Bartlett’s early advocacy is cited approvingly—but not his long-running and trenchant apostasy.

The fact is that WSJ economics has been dominated by quacks in the nearly fifty years since Bartley turned its editorial page into the nation’s principal voice of economic reform. (Emerson: “The two parties which divide the State, the Party of Conservatism and that of Innovation, are very old, and have disputed the possession of the world since it was made…. Now one, now the other gets the day, and still the fight renews itself as if for the first time, under new names and hot personalities….. Innovation is the salient energy; Conservatism the pause on the last movement.”)  For the most part the strategy worked, though mostly not for the reasons given.  Monetary stringency, deregulation, tax simplification, trade legislation, and budgetary discipline all had far greater influence. Tax-cutting itself apparently contributed relatively little to economic growth.

Thirty-five years after the “supply-side revolution,” the WSJ has little to show for it except books by its staffers and columnists. As far as I can tell, the GOP tax bill has no significant allies, no outside endorsers, besides the Republican Congressional leadership and those who will benefit from (and repay) their largesse.

Those who write the editorials seldom display signs of having gotten wise to themselves.  I’ve read those pages every day for nearly fifty years, and, with the exception of regular forays into the microeconomics of particular situations, on which they (and Holman Jenkins, in particular) remain sharp,  today the editorials seem so cautious and hamstrung by their inconsistencies as to be interesting mainly when they contradict themselves.

No amount of back-channel complaints by professional economists, much less carping by the likes of me, is going to change things.  There is, however, a solution. When old Man Murdoch finally loosens his grip on the newspaper he bought, in 2007, to serve as his flagship, his sons should hire back Bret Stephens, 44, to replace editorial page editor Paul Gigot, 62.

Stephens quit the WSJ last spring to become a columnist for The New York Times.  For months he had become ever more critical of Donald Trump’s candidacy – and of the surprising tolerance of it shown by his fellow editorialists.  Melloan judges Stephens to have been “no longer comfortable with the Journal’s traditions.”

In fact, the WSJ’s post-Royster traditions of innovative reform have deteriorated from their peak to the point of self-parody. Stephens at one point defined conservatism as “a principled commitment to limited government, free markets, constitutional rights, equal opportunity, personal responsibility, e pluribus unum and Pax Americana.” But Stephens, at least as I read him, is no originalist.  My guess is that he would renew the newspaper’s commitment to intelligent true conservativism – that is, defending the state of things as they are.