Dole and Supply Side Economics
Politics makes strange bedfellows. If Bob Dole has problems with the conservative social issues crowd, he faces almost as difficult a task presenting a harmonious message on economic policy. European monarchs' marriages of convenience pale in comparison with Dole's selection of ardent supply-sider Jack Kemp as his backup.Traditional conservatives, the "deficit hawks," have argued that until government lives within its means, the private economy can never function very well. Unfortunately for them, theirs has always been a politics of doom and gloom because they demanded real cuts in return for rewards that were speculative at best.Enter the supply siders. They argued we could have our cake and eat it too. Government should cut taxes and thereby create more incentives for Americans to work harder and invest more. Economic growth could then enlarge government revenues and narrow the debt. And best of all, Republicans wouldn't have to touch the universal and popular programs, Medicare and Social Security.The proof of this delightful theory was reportedly sketched on a napkin at a restaurant one night by supply side guru Arthur Laffer. The Laffer curve's implication that lower tax rates might actually increase total government revenue never sat very well with most traditional Republicans, including Alan Greenspan, George Bush -- and Bob Dole. George Bush labeled the theory Voodoo economics, a gibe he dutifully retracted when Ronald Reagan made his own marriage of convenience.One can make a theoretical case that when the top tax rate citizens pay is very high, taxes may in fact discourage some work and some risk taking. But even as far back as twenty years ago, when the top income tax rate stood at about twice its current figure, only those whose accountants were brain- dead paid anywhere near half their income in taxes. Unlike the natural sciences, economists are very seldom able to test their theories directly. Policy making is a messy process, and there are many variables one cannot control. But supply side economics did receive about as much of an experimental test as any theory in recent memory. The personal income tax was cut dramatically; the deregulatory efforts begun under Jimmy Carter were accelerated under Reagan.The results of the Reagan years are now clear. There was an initial short term spurt in job creation and economic growth. Nonetheless, yearly deficits as a percentage of GNP doubled. Worse still, high levels of private spending and public borrowing went to finance luxury consumption and military expansion rather than needed improvements in plants and technologies. Worker productivity continued its sluggish expansion. As deficits escalated and growth remained sluggish, political pressure to cut spending for needed improvements in roads, transit systems, and schools levels grew. The Reagan revolution gave us a nation armed to the teeth but ill prepared to provide long term economic security for its people. When Alan Greenspan, who had never been a fan of supply side politics, curbed the excesses of this party, George Bush, appropriately enough, paid the price for his bargain with the devil.Bob Dole hopes our current economic woes will give him an opening once again to offer the tonic of supply side miracles. Democrats may chant happy times are here again, but most citizens know better. Secure jobs that pay good wages -- and health care benefits -- are getting harder to find. But Dole will have a hard job selling a new version of an agenda he and most mainstream Republicans have always distrusted. Income taxes by both historical and international standards are already low, and arguments about incentive effects are extremely tenuous. (Will Michael Jordan try any harder to win another NBA title if his taxes go down a few more percentage points?) Cuts in the capital gains tax, that other great supply side target, did not yield substantial growth under Jimmy Carter and are today as likely to encourage megamergers and downsizing as any solid job growth. Once these tax cuts foster increasing deficits, pressure will mount to cut the last big federal domestic programs, social security and Medicare. This fall's campaign promises to be a war of negatives. Clinton will correctly remind voters that big tax cuts increase deficits. Dole and Kemp will correctly point to an economy where productivity, growth, and job security continue to lag. Each ought to draw some insights from a broader sweep of our nation's history.Republicans are right that "government can't buy prosperity." But the corporate sector isn't automatically productive either. The U. S. prospered in the post World War II period because there was relative harmony between labor and management on the shop floor and because economic growth and high wages in Europe stimulated economic expansion here. Today's trade treaties drive wages down worldwide and business responds to competitive pressures by putting the screws to workers and their unions. And those forms of public spending that even Adam Smith acknowledged were needed to keep markets going (because private business has no incentive to provide them) such as education, basic research, and energy-efficient transit systems, are targeted in the rush to balance budgets.But given the unwillingness of most political leaders to broach these controversial themes, Dole and Clinton are at least fortunate to have each other. Otherwise, what would they talk about?