The Free-Lunch Supply-Side crowd seems to be playing Barbra Streisand’s Memories of late. For example, Greg Kaza traces Federal Reserve articles as far back as 1981 – each noting that incentives matter. Of course, mainstream economists have never doubted this proposition, but we also note that there is something called the law of scarcity, which in macroeconomic speak becomes the crowding-out effect – as in when “giving the people their money back” to consume more without cutting government purchases means less savings and investment.
The good news is that those Google alerts from the Kerry economic advisors still come to my inbox on occasion with one linking to a Jude Wanniski discussion of the 1964 tax cut:
The biggest reason, I think, is that since Jack Kemp began promoting Kennedy-type tax cuts in 1976, the Democratic Establishment has been rewriting history to show that the JFK tax cuts were demand-side, Keynesian stimulants to the economy … In proposing the tax cuts in late May of 1962, Kennedy cited the incentive effects, not the income effects that a Keynesian would argue. And when the legislation was introduced by Rep. Wilbur Mills of Arkansas, then chairman of the Democratic House Ways Means Committee, his floor speech was all “supply-side,” actually written by the late Norman Ture, an economic consultant to Mills.
Wanniski accuses Democrats of rewriting history when it is his crowd that so misrepresents the discussions of macroeconomic policy some forty years ago. About 20 years ago, I listened to Richard Rahn try to convince us that the 1964 tax cut was Lafferian supply-side effects only to hear him quote the Kennedy-Johnson CEA talk about multipliers and aggregate demand effects. I had the delight of meeting Richard Musgrave who chuckled as he said this was the Keynes-Laffer effect and not some supply-side magic.
At other points, I have had the delight of hearing two CEA members discuss a December 1965 meeting with President Johnson where they advised the President that the combination of tax cuts, rising transfer payments (the Great Society), and rising defense spending (Vietnam) would put the Federal Reserve in a difficult situation. The FED’s first response was to run tight money leading to the 1966 Credit Crunch – classic crowding-out. When the President ignored the CEA’s advice and jawboned the FED, inflation accelerated.
The Wanniski never mentions this history as they wish to blame the Keynesian economists at the CEA for the acceleration of inflation, but in truth the blame goes to Norman Ture – who was indeed the forerunner to Art Laffer. Johnson told his economists that politically he would need the assistance of Congressman Mills to push for a tax increase. Ture told Mills that we should not worry about excess demand in much the same way modern proponents of this free-lunch branch of the supply-side school scoff at real economists.
We should remember the real lessons of history as modern fiscal policy is cutting taxes as transfer payments and defense spending have risen. And the Greenspan FED is showing signs that it will raise interest rates, which will crowd-out investment. This trip down memory lane by the free lunchers reminds me all too much of the mistakes made two generations ago.
Hit tip to Lawyers, Guns, and Money for a discussion of the changing rhetoric from this free-lunch crowd.