VOODOO II! MORE DISCREDITED supply-side numerical magic! “Loony . . . irresponsible . . . incredible!” So says the team of Panetta and Tyson — that’s Laura D’Andrea, not Iron Mike. The Clintonites consider Bob Dole’s long-awaited economic plan, of which a $ 548 billion tax cut over six years is only a part, even less realistic than Ronald Reagan’s. (Forget for a moment that Reagan produced the largest peace-time boom in America’s history, with economic growth averaging about 4 percent annually and almost 20 million new jobs created.) Why even less realistic? Well, the Reaganites predicted that 20 percent of the lost government revenue caused by tax cuts would be made up as economic growth increased the flow of tax dollars into the treasury. Dole expects 27 percent back (his people having opted against more optimistic estimates). The Clintonites dismiss this estimate as wishful thinking on the part of a flip-flopping one-time budget balancer.
Although one is tempted to defer to Clinton’s expertise when it comes to flip-flopping, the truth is that neither Dole nor his critics can do more than guess at the extent to which energies unleashed by the tax cuts will generate more rapid economic growth. What’s more, history provides little guide to the impact that tax cuts in 1997 might have on the deficit. The Democratic argument that fiscal chaos will follow as certainly as did soaring deficits after President Reagan’s tax cuts in the 1980s is simply misguided. That was then; this is now.
First, there’s no Soviet Union to contend with. Reagan’s tax cuts were enacted (with Bob Dole leading the charge in the Senate) at a time when it was necessary to spend hundreds of billions of dollars to restore America’s defenses after they were parlously neglected by Jimmy Carter. Although a President Dole will certainly spend more on defense than would a reelected President Clinton, the increase would not be enough to interfere with the goal of balancing the budget by 2002.
More important, Reagan cut taxes in an entirely different political environment. The Democrats controlled Congress in 1981, when existing entitlements were considered sacrosanct and the hunt for new ones a sport likely to be rewarded by the voters. The public yawned when warned of the fiscal consequences of increased spending on social programs and was not yet fully aware that in the war on poverty, it was game, set, and match for poverty, with government programs the losers.
So although Reagan could rally support for his tax cuts — no political risk there — he couldn’t get the Democrats to rein in social spending. Dole faces no such problem: Witness the fact that half the Democrats in the House and more than half in the Senate voted to end welfare as we know it, after which the president signed a bill that rejected his call for a $ 10 billion increase in welfare spending and instead hacked $ 55 billion from these programs over the next six years.
Thus, if Dole is elected, he will undoubtedly be working with a Congress amenable to roiling back the reach of the federal government, and both branches of government will have the backing of a public clamoring for less, rather than more spending. In short, Congress will have to live within its means and find some way of balancing the budget with less money coming in. Another Reagan pitfall avoided.
Better still, Dole is not relying solely on tax cuts to generate growth. His program includes a healthy dose of the deregulation that President Clinton has preached but his bureaucrats have refused to consider (witness the State Department’s recent decision to fight for specific numerical ceilings on the emissions that it thinks, but cannot demonstrate, are causing global warming).
Finally, Dole will have something no president has ever had — the line- item veto. And here his much-derided legislative experience should stand him in good stead. He will know where the bodies are buried, where the pork is, and which slices of it can be eliminated at acceptable political cost.
He will know which seemingly inexpensive programs are likely to balloon in the infamous budgetary “out-years.” And he will be in a position to cut the budgetary heart out of cabinet-level agencies he considers beyond re- invention, such as the Commerce and Energy departments.
In short, the odds are better that Dole’s plan can achieve its dual goals of lower taxes and a balanced budget than they would have been in those years when different conditions compelled Dole to be skeptical that lower tax revenues would constrain the spending of Kennedy, Waxman, Gephardt, Rangel & Co. The late John Maynard Keynes, when criticized for changing a position he had espoused some years previously, replied, “When I find I am wrong, I change my position. What do you do, sir?” (or words to that effect). Dole might well paraphrase that remark by saying, “When circumstances change, I change my position to accommodate the new reality. What do you do, Bill?” As if we didn’t know.
Which brings us to the only really serious question that can be raised about the Dole plan: Can the economy grow more rapidly than it has in the Clinton years without uncorking inflation? Some quite good economists contend that the economy is now operating so close to capacity that it just can’t grow any faster without running into inflation-inducing bottlenecks. Other equally reputable academics disagree. The question is certainly worthy of the debate for which Republican Jack Kemp and Democrat Tom Harkin have been calling.
But the question cannot be answered by distorting the historical record. In its editorial rejecting the Dole plan the day before it was announced, the New York Times cautioned its readers not to leap to the conclusion that the plan might work from the fact that the Kennedy — and Reagan — era tax cuts did indeed stimulate growth.
“Those,” we were informed, “were years of economic slack, when tax cuts can make sense. Now, the economy is operating near capacity.” Oh, really?
President Kennedy committed himself to his tax cut in June 1962, when manufacturing plants were operating at almost 81 percent of capacity and the unemployment rate was 5.5 percent. Dole’s suggestion comes at a time when manufacturing plants are operating at 82 percent of capacity and the unemployment rate is 5.4 percent. When Reagan’s cuts were enacted, plants were running at 80 percent of capacity and the unemployment rate was 7.4 percent.
So Dole is no more of a gambler with inflation than was the sainted JFK, whose policies rewarded his successor with a 5 percent growth rate. Indeed, Dole has proved himself a bit more daring than Reagan — which he can afford to be, given the end of the Cold War and the public’s new support for cuts in entitlement programs.
The only sensible answer to the question of whether Dole’s cuts are consistent with more rapid non-inflationary growth seems to be “Yes, if . . .” If the day of ever-expanding entitlements is truly over. If Americans, with the carrot of being allowed to keep more of their own money and the stick of reduced government support, work harder and smarter and retire later (as Harvard’s Dale Jorgenson predicts they will). If tuition vouchers are introduced to raise educational levels and thereby increase productivity. If regulations that are not cost-effective are repealed, relieving businesses of billions in wasted outlays. If the social fabric can be rewoven sufficiently to bring down the cost of crime and welfare. If, in short, Bob Dole is elected.
Irwin M. Stelzer is director of regulatory policy studies at the American Enterprise Institute.
