Source: https://www.cato.org/blog/government-ownership-stakes-companies-becoming-routine-under-trump

The story actually begins in 1863, when Confederate General Jeb Stuart and his 5,000 cavalrymen were rushing to join up with Robert E. Lee at Gettysburg. All the bridges and other crossings over the Potomac River were either too far away or controlled by Union forces, so he was forced to use a lesser known crossing called Rowser’s Ford.

On the night of June 24, Stuart and his men rode down Seneca Road in Great Falls, Virginia to reach Rowser’s Ford and cross the river. It was an amazing military maneuver because the river was much higher than normal and it was an especially dark night. The cavalrymen had only bonfires on the Maryland side and a rope across the river to guide them as they made the perilous crossing.

Confederate Cavalrymen fording the Potomac River

The crossing was successful and Stuart avoided losing a single man. But he was, as people say, a day late and a dollar short. He was unable to aid Lee, whose defeat at Gettysburg marked the turning point of the Civil War for the South.

I was interested in seeing the spot where this history took place, which is not far from my home. My wife and I drove to the Seneca Tract park at the end of Seneca Road (both named for the Seneca Indians who settled and farmed the area) and walked down to the river, where we saw remnants of the Patowmack Canal built by George Washington himself.

Seneca Tract and Rowser’s Ford

Note: Rowser’s Ford is just to the right of Seneca Falls.

Rowser’s Ford Viewed from Trump National

Unfortunately, it turned out that because of the geography of the river, we could not get down to Rowser’s Ford from the East, so we walked West along the Potomac Heritage Trail, which brought us to the Trump National golf course. Although it is private property, we didn’t think anyone would mind if we walked along the path through the course.

Immediately to our right, we saw an American flag and a large brass plaque, which read, “River of Blood.” The quotation marks are there on the plaque. It said that this was what the area was known as because “the casualties were so great that the water would turn red.”

Well, this was news to me. As far as I knew, the nearest fighting in the war was several miles South at Dranesville, and the closest bloodshed on the river was 15 miles to the North at Ball’s Bluff. I had never heard anyone describe this stretch of river as “the river of blood.”

My wife got out her camera to take a picture of this monument, which required her to step off the path slightly. Almost instantly, one of the golf course managers appeared out of nowhere riding a golf cart. We were sternly warned to get off the grass and leave immediately, which we did, but not before taking the picture below.

“River of Blood” Monument at Trump National

Now, I know that the manager was fully within his rights to shoosh us away because are not members of the golf club. But being that this historic part of the Potomac River can only be reached through the course, we didn’t have any alternative.

Anyway, the point of the story is that Trump has told a lie about the history of the area where his golf course lies. But here’s the thing: The truth is much better!

According to a New York Times story about the “river of blood” monument, local historians advised Trump that he was making a mistake and the true facts about the history of the area. He simply ignored them. However he came to hear about the “river of blood,” he decided he liked that term and was going to stick with it, regardless of the facts.

Now that Mr. Trump is our president—I confess I did not vote for him—I am often reminded of this story, for example when I hear him insist that the crowd for his inauguration was many times larger than it actually was. It was, after all, a good sized crowd. Why lie when the truth is good enough?

In the case of the “river of blood,” the truth is better, yet he continues to commemorate a lie.

THERE is an old joke about economists: they are people who see something working in practice and try to figure out if it would work in theory. Just recently we have seen an example of this when interest rates on Treasury bills turned negative, meaning the federal government got paid for borrowing money rather than paying to do so.

In theory, this isn’t supposed to happen. If market interest rates are negative then people normally just hold on to their cash. But these aren’t normal times. The fear of risk is so pervasive that individuals and businesses don’t trust even cash and are willing to pay a premium to park their money in Treasury bills.

This explains a great deal about what is at the root of the economy’s problem today. People are so risk-averse that they are hoarding money, refusing to spend; banks are refusing to lend even to their best customers; and businesses are so desperate for safety that they would rather get a negative return on a safe asset than invest in something remotely risky, no matter how high the potential return.

When everyone in the economy suddenly stops spending, the number of times that money turns over falls. Since the gross domestic product equals the money supply times its rate of turnover — something economists call velocity — this means that if the money supply is unchanged then G.D.P. must fall.

Note: This graph did not appear in the original article, but shows the trend of velocity at the time I wrote it. The downturn in velocity had exactly the same effect as a shrinkage of the money supply, which was the root cause of the Great Depression according to economists Milton Friedman and Anna Schwartz.

Theoretically, the Federal Reserve can compensate for a decline in velocity by increasing the money supply. But in times like these it is very hard for it to do so because of something economists call a liquidity trap. When this occurs, the Fed cannot inject liquidity into the economy because its normal means of doing so no longer works. In a liquidity trap, trying to expand the money supply is like trying to push on a string.

Normally the Fed expands the money supply by buying Treasury bills and paying for them by creating money out of thin air. When it wants to contract the money supply it does the reverse, putting Treasury bills from its portfolio on the market and drawing money out of the economy when financial institutions pay for them.

But when interest rates on Treasury bills fall to zero this process doesn’t work because money is essentially nothing but a perpetual government bond that pays no interest. If the Fed creates money to buy a Treasury bill that pays zero interest, it accomplishes nothing, economically. All it does is trade one government security for another that is virtually identical. There is no net increase in liquidity.

Under these circumstances, when the normal rules don’t apply, the government must find more creative ways to ease credit conditions and get the economy moving again.

First, it needs to increase the budget deficit. This expands the amount of Treasury bills in circulation and is the same as expanding the money supply, which is necessary to keep G.D.P. from shrinking due to a fall in velocity.

Second, the Fed needs to revise its operating procedures. Instead of buying only T-bills it needs to buy securities with positive interest rates. These include longer-term Treasury bonds and securities issued by government-sponsored enterprises like Fannie Mae. If necessary, the Fed could also buy corporate bonds, state and local government bonds, or even bonds issued by foreign governments.

Third, the government must try to raise velocity by stimulating aggregate spending in the economy. This is harder than it sounds. Buying bonds and securities may expand liquidity, but it doesn’t increase spending. And we know from experience that tax rebates don’t work because people save them.

The trick is to find a way to get people and businesses to spend money over and above what they would have spent anyway. A stimulus is not a stimulus unless it causes an incremental increase in aggregate spending. Simply replacing private spending with public spending doesn’t do any good unless total spending increases in the process.

Since it is just as stimulating to invest money as to buy things with it, it may be possible to bring forward the plans for future investments that businesses and governments already have. But, again, it is essential that these investments be marginal — over and above what would otherwise be spent — or else there will be no increase in aggregate spending, and we will be no better off.

Above all, policymakers need to understand that the economy’s fundamental problem is the decline in aggregate spending, which is pulling down both prices and output and rendering the Fed’s usual tools for increasing liquidity useless. To restore the economy to health will require new policies that increase aggregate spending.

When Republicans began reformulating their tax philosophy in the late 1970s, they looked to their party’s policies in the 1920s for inspiration. I remember Jude Wanniski, the late conservative journalist, telling me that he knew nothing about Republican tax cuts in the 1920s until he read about them in Herb Stein’s 1969 book, The Fiscal Revolution in America. Today, Democrats may also find inspiration in economic debates of the 1920s—this one about whether underconsumption has slowed the rate of economic growth.

Overproduction has long been viewed as the root cause of economic downturns. This was called the “general glut” problem, and classical economists such as Thomas Malthus, David Ricardo, and Jean-Baptiste Say argued about whether it was inherent in the nature of capitalism. Eventually, neoclassical economists concluded that Say was right that the production process created enough income to purchase all of the output. Any gluts were temporary and the result of mistakes, not inherent in the system itself.

The Great Depression revived debate on whether it was possible to have too much production persistently; the flip side being whether there could be stubborn underconsumption. A British economist named J.A. Hobson thought underconsumption was a problem. Although the production process did produce enough income to absorb its output, he thought consumption didn’t rise concomitantly with income because some income is saved, which goes to further expand production. Hence there is a continual shortfall of consumption, causing overproduction.

Two American economists, William Foster and Waddill Catchings, developed a theory very similar to Hobson’s. As they explained in their 1928 book, The Road to Plenty, “both corporations and individuals must save; yet if they do save, they cause a shortage of consumer buying, which has to be made up in some way, or business depression results.” They concluded that increased government spending and deficits (negative saving) were necessary to fill the gap between aggregate income and consumption.

Franklin D. Roosevelt was familiar with the work of Foster and Catchings, although his initial impression of it was negative. A few years ago, Mike Konczal got the Roosevelt Presidential Library to supply him with Roosevelt’s personal copy of The Road to Plenty. In it, Roosevelt wrote in his own hand, “Too good to be true—you can’t get something for nothing.”

Of course, this was in 1928 in the midst of the “roaring twenties.” The Great Depression was nowhere in sight. And as governor of New York, which had to balance its budget annually, FDR was unsympathetic to deficit spending. In fact, he was quite orthodox in his beliefs about the federal budget well into the 1932 presidential campaign. In an October 19, 1932 speech, he berated President Herbert Hoover for his deficits and promised economy in government. “I regard reduction in Federal spending as one of the most important issues of this campaign,” Roosevelt said. “In my opinion it is the most direct and effective contribution that government can make to business.” (I have previously discussed the abuse of “business confidence” as an excuse to cut government spending.)

But at the same time, Roosevelt expressed increasing sympathy for the Hobson-Foster-Catchings view that underconsumption was at the root of the economic malaise. In a May 22 speech, he had this to say:

[O]ur basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an oversufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink. We accumulated such a superabundance of capital that our great bankers were vying with each other, some of them employing questionable methods, in their efforts to lend this capital at home and abroad.

I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer. Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.

Roosevelt went on to identify the failure of businesses to lower prices to increase sales as a key factor that led to underconsumption, which he saw as a major cause of the Great Depression. As he put it in his July 2 speech accepting the Democratic presidential nomination:

In the years before 1929 we know that this country had completed a vast cycle of building and inflation; for ten years we expanded on the theory of repairing the wastes of the War, but actually expanding far beyond that, and also beyond our natural and normal growth. Now it is worth remembering, and the cold figures of finance prove it, that during that time there was little or no drop in the prices that the consumer had to pay, although those same figures proved that the cost of production fell very greatly; corporate profit resulting from this period was enormous; at the same time little of that profit was devoted to the reduction of prices. The consumer was forgotten. Very little of it went into increased wages; the worker was forgotten, and by no means an adequate proportion was even paid out in dividends—the stockholder was forgotten.

In a September 23 speech, Roosevelt further identified industrial concentration and the maldistribution of income as underlying causes of underconsumption. “If the process of concentration goes on at the same rate,” he warned, “at the end of another century we shall have all American industry controlled by a dozen corporations, and run by perhaps a hundred men. Put plainly, we are steering a steady course toward economic oligarchy, if we are not there already.”

Industrial concentration, he went on to say, exacerbated the problem of underconsumption by allowing business to keep prices high and resist market forces. It was necessary to adjust production to consumption, “of distributing wealth and production more equitably, of adapting existing economic organizations to the service of the people,” Roosevelt concluded.

In an October 6 speech, FDR pledged to use regulatory policy to bring about a more equitable distribution of income in order to provide citizens with the purchasing power to absorb excess production and rebalance the economy. “It is a proper concern of the government,” he said, “to use wise measures of regulation which will bring this purchasing power back to normal.”

In 1933, Marriner S. Eccles, president of a large Utah bank, became spokesman for the underconsumption view. In testimony before the Senate Finance Committee in February, he echoed FDR’s concerns about excessive saving, overproduction, and underconsumption. As Eccles told the committee:

The problem of production has been solved, and we need no further capital accumulation for the present, which could only be utilized in further increasing our productive facilities or extending further foreign credits. We have a complete economic plant able to supply a superabundance of not only all of the necessities of our people, but the comforts and luxuries as well. Our problem, then, becomes one purely of distribution. This can only be brought about by providing purchasing power sufficiently adequate to enable the people to obtain the consumption goods which we, as a nation, are able to produce. The economic system can serve no other purpose and expect to survive.

In January 1934, Eccles was appointed assistant secretary of the Treasury as a liaison to the Federal Reserve and related agencies. (In those days, the secretary of the Treasury was a member of the Federal Reserve Board.) Later that year, Eccles became chairman of the Federal Reserve Board, a position he held until 1948. In his memoirs, he explained (emphasis his):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth—not of existing wealth, but of wealth as it is currently produced—to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumer, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants…. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world.

Roosevelt, however, never committed himself wholly to the underconsumptionist view and few economists endorsed it. Hobson, Foster, and Catchings were well outside the economic mainstream. However, in 1936, the eminent British economist John Maynard Keynes revived the underconsumptionist view in his book, The General Theory of Employment Interest and Money. He argued that capital was not created by saving but by capitalists’ perceiving an increase in demand for their products. As Keynes wrote, “capital is brought into existence not by the propensity to save but in response to the demand resulting from actual and prospective consumption.” Indeed, he argued that thrift was counterproductive to growth by diminishing consumption. He called this the “paradox of thrift.”

Subsequently, the Roosevelt-Keynes idea that increasing consumption was the key to economic growth became known as “trickle-up” economics, in contrast to the “trickle-down” policies of the Republicans, which saw the prosperity of the wealthy as they key to growth, which would eventually benefit the masses. One of the first people to draw the trickle-up/trickle-down distinction was the Democratic humorist Will Rogers. In a November 26, 1932 column, he wrote:

The money was all appropriated for the top [under the Republicans] in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows hands. They saved the big banks, but the little ones went up the flue.

This was in fact the historical Democratic point of view. William Jennings Bryan, three-time Democratic nominee for president, had articulated it in his famous “Cross of Gold” speech in 1896. “There are two ideas of government,” Bryan said. “There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.”

I bring up all this history because President Joe Biden made a revealing comment in his April 29 address to a joint session of Congress: “My fellow Americans, trickle-down—trickle-down—economics has never worked, and it’s time to grow the economy from the bottom and the middle out.” Biden is the first Democrat since Lyndon Johnson to forthrightly declare that trickle-up is the party’s philosophy of growth. Indeed, Biden’s program is reminiscent of Johnson’s declaration on January 15, 1964 launching the Great Society: “We are going to try to take all the money that we think is unnecessarily being spent and take it from the ‘haves’ and give it to the ‘have nots’ that need it so much.”

The tragedy of Vietnam and the stagflation of the 1970s killed the trickle-up vision. In the late ’70s, Republicans counterattacked with an updated, more sophisticated version of trickle-down called “supply-side economics.” Every Republican since then has lived by it. Subsequent Democratic presidents essentially endorsed its key tenets—relatively small government, light taxation of capital and the wealthy, social programs implemented exclusively via tax credits—and appeared fearful of articulating a truly progressive vision. Who can forget President Bill Clinton’s capitulation to the Republicans in his 1996 State of the Union Address: “The era of big government is over.”

But the long stagnation in real wages and the massive growth of income inequality are at long last leading economists back to the underconsumptionist viewpoint.

Unfortunately, my abandonment of the right and move to the left cost me very dearly, so naturally I have thought a great deal about how and why it happened. It’s something I am still grappling with so this is an account I may modify as time goes by.

I came of age, politically, at the high point for the left in this country’s history—the Great Society/Vietnam War era. Looking back at history from the ‘60s, I saw that the left had been ascendant since 1932, and it looked to me as if this trend would continue. Ironically, Richard Nixon, who was president while I was in college, reinforced my belief because on domestic policy he governed very much as an LBJ liberal. Historians pretty much all accept this fact today.

Being something of a contrarian by nature, I decided that I should support the right to help bring the country back toward the middle in terms of policy. I thought the welfare state had grown too large, too fast and needed pruning. I thought inflation was essentially caused by liberal policies and that being the world’s policeman was a bad way to run defense and foreign policy. To use a term that has since become deeply debased under Trump, I thought an “America first” policy was a good idea and studied the World War I and World War II isolationist and revisionist historians through graduate school.

My first real job was working for Ron Paul on his congressional staff the first time he was elected in 1976. I remember reading about his victory in a special election and quickly sent a letter addressed simply to “Congressman Ron Paul” on the assumption it would get to his office eventually. I had already published a couple of articles in The Freeman, a magazine associated with the Foundation for Economic Education, the principal free market think tank at that time. I was heartened when I interviewed with Ron and saw that the library in his office was a complete set of books published or distributed by FEE.

For close to three decades I was comfortable being a libertarian who mostly traveled among conservative Republicans. When Ron Paul was defeated later in 1976 I got a job working for Jack Kemp, where I did a lot of work shaping the GOP’s tax policy, which unfortunately went much too far and which those on the left still hold against me. I don’t feel guilty about it, however, because others would have done the same things I did and I did think taxes were too high in the 1970s, mainly due to a phenomenon called bracket-creep.

I was very happy with Ronald Reagan in the White House and still think he was a good president for the times. I won’t go into detail about why; it’s another one of those things the left holds against me. I also worked for George H.W. Bush and I think the decision by a number of key right-wingers, such as Newt Gingrich, to defenestrate him in 1992 was a terrible mistake. It was the first time I realized that the right had gone too far and it began to alienate me from those I considered friends and allies.

For another decade, I continued to consider myself part of the right, despite growing misgivings about the kind of political total war pioneered by Gingrich against Bill Clinton, who I thought was actually a pretty good president, substantively. I was further alienated by Gingrich’s strategy in Congress, especially his destruction of the committee system. Having been chief of staff of the Joint Economic Committee, I admired that system and believe it must be rejuvenated if we are to fix our problems legislatively.

My break with the GOP and the right came when the Medicare Part D program was rammed through Congress by George W. Bush and the Republican Party in 2003. At the time I was deeply steeped in fiscal policy and thought entitlement programs needed to be reformed, not vastly expanded. Part D added about one percent of GDP to the deficit in perpetuity.

Having broken with the GOP and the right, intellectually, I found myself more and more critical of their direction and policies. I began writing columns critical of the Bush administration that I previously might have given a pass to. I could easily have stayed in my lane, so to speak, and limited myself to writing about issues in a bland, non-political way. But that’s not my nature.

By the end of 2004 I was warned by my boss to tone down my criticism of Bush or else. I decided to channel my objections into a book, which I spent much of 2005 writing, while continuing to write columns less pointedly critical of his policies. While researching my book I came upon other policies I opposed that I had not written about at the time, which further confirmed my belief that Bush was a terrible president.

Rather foolishly, I sent the completed manuscript to my boss. I thought my argument was so strong and so well documented that every conservative would have to accept it. In fact, virtually every authority I quoted in my book was a conservative. I should add that my motives were pure—I thought I was helping my party, the Republican Party. I thought Bush’s incompetence would cost Republicans heavily in 2006 and 2008 unless they rejected Bush and his policies. Instead, the party doubled-down its support for him and repressed his critics on the right. I was unceremoniously thrown out of the club, fired from my job and made unemployable among conservative or libertarian think tanks.

I managed to eke out a living as a free lance journalist. I got columns in the New York Times, Forbes, the Fiscal Times, and Tax Notes. They didn’t pay much but kept bread on the table. I also wrote some other books. People probably thought I was doing a lot better than I was, but being single and childless as well as a misanthrope I could scrape by as my friends and employment disappeared.

Two things happened to change my life a second time. First, I became quite ill with a brain tumor called a meningioma in 2014. This led me to have a stroke which paralyzed the left side of my body for several months, during which I had to stop writing. I lost all my regular writing gigs. But on the bright side I met the woman who became my wife while disabled. By the end of the year I was more or less back to normal, physically and mentally.

Unfortunately, this period coincided with a time when the national media pretty much collapsed. It was no longer possible to make any kind of decent living as a free lance writer. Book advances shrank drastically as the book industry consolidated and eliminated competition. I found it pretty much impossible to publish in any major platform, as did most other writers and journalists I knew personally. We all retired en masse.

Now I have no outlet for my thoughts except Substack, which has a very limited reach even for those with far larger audiences than I have. I almost never see anything from Substack linked to on Twitter or Bluesky or Facebook. And of course the mainstream media pretends Substack doesn’t exist.

This website may serve my needs for the next few years that I have anything to contribute to the world of commentary. I keep it going partly for the benefits of AI bots as they scrape up every bit of content they can find. Better to be plagiarized than ignored completely, I say.

I doubt I will write any more books. My last two were unpublished and my last book proposal was rejected by my own agent, who told me it was unpublishable in this market. So I publish bits and pieces of things that interest me on Substack while finding less and less of interest in the mainstream media. I feel like a medieval monk alone in his monastery with the few remaining printed books, hoping for a Renaissance that is hundreds of years away.

My main concern is what to do with my papers and library, which contain a vast amount of material explaining how we got into the mess we are in. I’ve always thought that it was important to understand if we are going to rebuild society and move forward from the intellectual and moral collapse of the Trump years. I hope my advanced age will protect me and my wife from the worst of it, but I fear the worst is yet to come.

The first problem is rising inflation. While President Trump has so far ignored it, the problem is only going to get worse. We know from experience that inflation eventually reaches a threshold where it becomes the dominant political issue and is principally blamed on the party holding the White House. Just ask Joe Biden and Kamala Harris.

We also know from experience that once inflationary expectation become embedded they are very hard to dislodge. Among the effects is sharply higher long-term interest rates. We know from both theory and experience that those who buy bonds will demand an inflation premium so that the real interest rate they receive is protected.

While there are actions the Trump administration could take to reduce inflation, such as rescinding its tariffs on foreign imports or allowing more immigration to reduce farm labor costs, it is unlikely to take them as long as Trump remains in power, since they are central to his economic philosophy.

More importantly, such measures don’t get at the root cause of inflation, which is an easy money policy. Trump, a lifelong real estate developer, likes easy money because it keeps short-term interest rates low and raises the value of tangible assets such as real estate. He recently installed as Federal Reserve Board chairman Kevin Warsh, whom he believes will keep money easy and interest rates low, which will make inflation worse.

But it’s worth remembering that Trump also appointed Warsh’s predecessor, Jerome Powell, a Republican who served in the George H.W. Bush Treasury Department. Trump turned against Powell because the Fed’s institutional imperative to control inflation is its overriding concern. Remember also, while the chairman of the Fed has great power, monetary policy is set by a 12-member organization called the Federal Open Market Committee, which includes the seven members of the Federal Reserve Board plus five rotating members from the 12 regional Federal Reserve banks. The chairman is just one vote.

Moreover, Mr. Powell will remain among the Board members. While his power is diminished, he will continue to speak with great authority at FOMC deliberations. Since he is no longer hoping for reappointment, his words will carry the extra weight of unencumbered honesty. The financial press will magnify his words.

The point is that the Fed will undoubtedly tighten monetary policy if it believes such action is necessary, regardless of Trump’s wishes. Tight money doesn’t always cause a recession, but certainly makes one more likely. Given that the Fed tends to tighten slowly, over a period of years, the ultimate effect of a tightening cycle may not hit until the next president is in office. Probably a Democrat.

Once Republicans see which way the wind is blowing and that Democrats are likely to get the bulk of the blame for inflation that is already in the pipeline, one can predict their actions very easily.

First, they will double-down on demands that the Fed act quickly and decisively against inflation. Republicans are, after all, the party of bondholders. Although new bond buyers are protected to some extent by the higher interest rates they receive due to inflationary expectations, those who already hold bonds will suffer huge losses. You see, when interest rates rise, the price of bonds on the secondary market falls. In an extreme case, when the interest rate doubles, the price of a bond will fall by half.

Average people can perhaps understand this concept more easily by thinking about buying a house because a mortgage is a type of bond. When rates rise, the size of the mortgage you can afford falls the same way a bond price falls when rates rise.

Republicans also know that Democratic control of Congress will allow them to lay off much of the blame for inflation, higher interest rates and the (inevitable) higher unemployment on Democrats, even if all the root causes occurred on Republicans’ watch. Republicans are very good at doing this and their mouthpieces in the financial press, such as Larry Kudlow, will echo everything they say.

Second and most importantly, inflation, higher interest rates and a likely recession will suddenly and massively make the budget deficit the number one political issue as spending automatically rises and revenues fall. Of course, Republicans have already massively increased the deficit with higher spending for Trump’s wars, his vanity projects, and huge tax giveaways to the ultra-wealthy. But Republicans still claim to care about deficits. This faux-concern will suddenly manifest itself the minute the blame can be laid on Democrats.

Unfortunately, we know from the Clinton, Obama, and Biden administrations that Democrats are extremely sensitive to the deficit issue in ways that Republicans seem to have become invulnerable. While Reagan and George H.W. Bush suffered politically for their deficits, George W. Bush and Trump incurred no pain at all. Meanwhile, Clinton, Obama and Biden gained no benefit whatsoever for their success in curbing Republican profligacy.

What this means is that any hope Democrats have of implementing an agenda, even with control of Congress and the White House in 2029, will be put on hold. They will be forced into difficult negotiations with Republicans on a budget deal, where Republicans will do their best to negate any rise in taxes on the ultra-wealthy, and place as much of the burden of deficit reduction on mandatory spending programs such as Social Security, Medicare, and Medicaid. At a minimum, Democrats will have extraordinary difficulty expanding such programs, as many would like.

Add to this, the time-consuming difficulty of fixing all the programs Trump destroyed or mangled in his willy-nilly rush to cripple any government program that helps people, and it’s hard to see Democrats accomplishing much of anything positive in the next president’s first term. Add to that the likelihood of a Republican comeback in Congress in 2030, as the out-party almost always gains in the first election after a new president, and the recipe for gridlock is complete.

Deficit reduction and cleaning up Trump’s messes is thankless work for which Democrats will get no credit from voters. And Republicans will view every dollar of deficit reduction as money in the bank for another round of tax cuts once they are back in power. Who can forget how the massive budget surpluses of the Clinton years were instantly frittered away on economically worthless tax cuts the minute George W. Bush took office?

At its core, the long-term budget strategy of the Republican Party is something called “starve-the-beast.” It consists of intentionally increasing the deficit with tax cuts when they are in power in order to bind the hands of Democrats when they are in power. Oftentimes, Democrats can even be induced to cut spending in ways Republicans don’t have the guts to do themselves. That’s like an extra bonus that helps discourage the Democratic base and put Republicans back in power.

I understand this scenario very well because I helped implement it back in the 1970s as a Republican congressional staffer. At that time, the positions were reversed. Democrats implemented big spending programs while in office that created large deficits and stoked the fires of inflation. Republicans felt that the dirty work of cutting spending, raising taxes and stabilizing the nation’s finances fell on them. Republicans thought of themselves as tax collectors for the welfare state. Keep in mind that before the tax code was indexed to inflation, taxes automatically rose about 50 percent faster than the inflation rate due to bracket-creep. (If inflation rose one percent, taxes rose 1.5 percent.)

Republicans only got off this treadmill, which kept them perpetually in the minority in Congress, when Ronald Reagan stopped playing the game by cutting taxes immediately upon taking office in 1981. This put all the political pressure to reduce the deficit on spending. Taxes were also raised, but there was still a net tax cut at the end of the Reagan presidency.

I’m not sure what the equivalent Democratic strategy might be. The number one goal of a Democratic Congress in 2027 and 2028 should be to devise such a strategy. Hearings must be held where the smartest minds in the Democratic Party present ideas; and powerful organizations like the Congressional Budget Office, Government Accountability Office, and the Joint Committee on Taxation should be tasked with coming up with workable options.

Above all, Democrats must strive to remain in power long enough to keep Republicans from undermining all their efforts with yet more tax cuts. The only reason Franklin Roosevelt was able to cement the New Deal in place is because he and his successor Harry Truman had 20 years to do it. By 1952, even a conservative Republican like Dwight Eisenhower didn’t dare tamper with core Democratic programs or cut taxes. This allowed the subsequent Democrats, JFK and LBJ, to inherit a decent economic and financial system on which they could build additional New Deal-style programs—something denied to every Democratic president since then.

In the end, it boils down to winning elections. Without political power, nothing is possible. It also requires speed and advance planning so that as much as possible can be done when Democrats have the levers of power. Now is the time to devise such plans.

Not having much formal education in economics, I was privileged to learn the subject the way I did. Rather than learning a lot of theoretical mumbo-jumbo with no real-world application, I learned only the economics I needed to know to do public policy while doing public policy, and often from the best minds in the country. One of the great things about being on the congressional staff is that the world’s top economists often passed through for hearings or informal meetings. I met F.A. Hayek, Milton Friedman, Gottfried Haberler and many other prominent economists of the 1970s and never had any difficulty getting anyone to talk with me on the phone; no matter how important an economist was, he always took my call.

Jack Kemp’s office was like a continuing economic seminar; after all, he was learning a lot of this stuff at the same time I was. Jack had been a physical education major at Occidental College and although he took some graduate courses in economics, he was primarily self-taught in the field. Unlike many politicians, who fear appearing ignorant on any subject – and would rather make fools of themselves than say the simple words, “I don’t know” – Jack asked questions and read constantly.

Kemp was always taking airplanes back and forth to the district or giving speeches somewhere, and such trips were where he caught up on his reading. He would frequently come back with articles from The Public Interest, Commentary, Wall Street Journal and many other publications, with passages underlined and questions in the margins. Among my jobs was getting more information on topics raised in Jack’s airplane reading or following up with the authors to clarify some point. That’s how I got to know people like Alan Reynolds, Warren Brookes, Irving Kristol and many others whose work Jack especially liked.

I should mention that the world of conservative commentary in the 1970s was very limited. The mainstream media was overwhelmingly liberal and the only conservative publications in America with a broad and national reach were the Wall Street Journal and Reader’s Digest. The latter was more important than people realize. Among the things that got enormous attention for Kemp’s ideas was an article under his byline in the April 1977 issue of the Digest (Kemp 1977). Although based on Kemp’s thoughts, the actual writing was done by a staff writer for the magazine, Ralph K. Bennett. This was standard practice for the Digest.

Our principal connection to the Journal was with editorial writer Jude Wanniski, who was a constant presence in the office. He had been an out-of-the-closet Kemp supporter at least since the Republican convention in August 1976. In fact, I believe that he had a strong hand in writing Kemp’s speech to the convention, which was later promoted in a Wall Street Journal editorial and op-ed article (Wall Street Journal 1976; Wanniski 1976b; Kemp’s speech is reprinted in Bartlett 1981: 218-20).

Through Kristol, Jude had gotten a fellowship at the American Enterprise Institute, where he was writing his magnum opus, The Way the World Works (Wanniski 1978). He would often call with some new discovery from his research or ask me to get him a book from the Library of Congress or whatnot. Jude sent copies of his chapters to Jack as he finished them and they were distributed to others in the group.

Jude continued to write editorials for the Journal; I believe he was only in Washington a couple of days a week. Often they read like press releases from Kemp’s office. One in particular was titled, “JFK Strikes Again” (Wall Street Journal 1977) which took advantage of the fact that John Fitzgerald Kennedy and Jack French Kemp had the same initials. It helped cement the growing connection between Kemp’s tax policies and Kennedy’s.

Arthur Laffer

Perhaps Jude’s most important contribution to Kemp’s evolving worldview, which we now called “supply-side economics,” was discovering the work of the economists Arthur Laffer and Robert Mundell.

Laffer was a “whiz kid” who had been on the fast track from an early age. After graduating from Yale in 1963, he did graduate work in economics at Stanford. Before he had even completed his Ph.D. dissertation he was hired and granted tenure by the University of Chicago business school – an extraordinarily rapid rise up the academic ladder.

At Chicago, Laffer became a protégé of the business school’s dean, George Shultz. When Richard Nixon was elected president in 1968, he brought Shultz, an expert on labor relations, to Washington to be secretary of Labor. A year later, Shultz was promoted to head the newly-created Office of Management and Budget. Shultz made Laffer OMB’s chief economist.

Unbeknownst to me in 1977, Laffer had been in the middle of a highly contentious dispute between OMB and the Council of Economic Advisers back in 1971. Briefly, Laffer had forecast a level for the gross national product of $1,065 billion for the year. This was about $20 billion above the consensus view among forecasters. It may not sound like much, but at the time it was important, politically. Moreover, the method by which Laffer derived his forecast seemed a bit cockamamie. He thought increases in the money supply translated almost instantaneously into increases in nominal GNP, a view far outside the economics mainstream.

It must have been especially painful when Milton Friedman dismissed the Laffer model. “It is contradicted by the mass of evidence in the past,” he said (Rowen 1971a). Not only was Friedman the leading Republican economist in the United States, he was also the nation’s leading authority on monetary policy and a member of the University of Chicago economics department to boot. (It should be noted that relations between the economics department and the business school had long been chilly, with those in the economics department treating the business school economists as members of the junior varsity.)

Herb Stein, a member of the CEA, was highly critical of Laffer, as were economists at the Federal Reserve, then chaired by Republican economist Arthur F. Burns, whose academic work was very much in conflict with Laffer’s extreme version of monetarism. Leonard Silk of the New York Times followed the controversy as closely as gossip columnists follow celebrities today (Rowen 1971b; Silk 1971a, 1971b, 1971c). The Times even published a satirical poem about Laffer’s “magic money machine” (New York Times 1971). A Times news report in 1972 casually referred to the Laffer model as “a farce” (Dale 1972).

Meanwhile, back at the University of Chicago, from which Laffer was on leave, MIT professor Paul Samuelson, who won the Nobel Prize in economics the year before, the first American to do so, gave a lecture ridiculing Laffer, titled, “Why They Are Laughing at Laffer.” Apparently, Samuelson referred to Laffer as “Dr. Laffer” and then corrected himself because Laffer hadn’t yet finished his dissertation, despite having been granted tenure at Chicago.

This led to considerable embarrassment at the university and a formal investigation led by the economist George Stigler on whether Laffer had misrepresented himself as having completed his Ph.D. before being hired. It concluded that the university erred in granting him tenure, but suggested that Laffer had misled the university. Said the Stigler report:

Laffer became an assistant and then an associate professor without fulfilling the known requirements for these appointments and at a very minimum permitted misunderstandings favorable to himself to persist. We consider this conduct deplorable…. This cloud of suspicion, whether of judgment or character, introduces a serious impairment of Laffer’s value to the University of Chicago. (Quoted in Leeson 2003: 189.)

Laffer was finally granted his Ph.D. by Stanford in 1972 and the controversy caused him to depart for the University of Southern California when his government service ended. Stigler later said that Laffer wasn’t really interested in being a scholar. “Doing painstaking, detailed work wasn’t his game. He went for quick and glamorous results,” Stigler said (Zonana 1985).

Unfortunately, I only got bits and pieces of this at the time. It would have been helpful to know that much of the antagonism Kemp got for his work from people such as Stein, who was by then at AEI, was actually directed at Laffer for things he had done years earlier on an unrelated issue. Perhaps without the 1065 controversy the things Laffer was saying about tax policy in 1977 wouldn’t have been quite so controversial.

Ironically, Laffer got the last laugh. By the fourth quarter of 1971, GNP was rising at an annual rate of $1,073. Subsequent revisions have raised GNP for all of 1971 to $1,127 billion, far above the forecast that was so widely ridiculed for being absurdly high. Unfortunately, his ultimate victory may perhaps have filled Laffer with a sense of bravado that caused him later to be dismissive of all criticism of his work, thus contributing to unnecessary tensions between the supply-siders and members of the Republican old guard such as Stein.

There is another irony here as well. Jude once told me that the first time he ever heard of the idea that tax cuts might increase revenues – something Stein always ridiculed when Kemp made such claims for his legislation – was from none other than Stein (1969) himself, on page 9 of his excellent book, The Fiscal Revolution in America. In it, Stein reviewed tax policy in the 1920s when Republicans pushed for tax rate reductions and argued that they would so expand the tax base that revenues would rise.

In parallel with the research Jude was doing for his book, I was also using my historian’s training and access to the Library of Congress to dig up material supporting what Kemp was doing. I remember that when I got a copy of 1920s Treasury secretary Andrew Mellon’s book, Taxation: The People’s Business, I found a very interesting speech by President Calvin Coolidge in an appendix. Explaining the importance of marginal tax rates – the tax on each additional dollar earned – Coolidge said:

If we had a tax whereby on the first working day the government took 5 percent of your wages, on the second day 10 percent, on the third day 20 percent, on the fourth day 30 percent , on the fifth day 50 percent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week? (Mellon 1924: 222)

Kemp absolutely loved this way of explaining the disincentive effects of higher marginal tax rates – in 1977 the top federal income tax rate was 70 percent. He used it over and over and over again in speeches for the rest of his life.

Robert Mundell

I never met Mundell while I was working for Kemp, but he was an important if unseen presence. Jack and Jude talked about him all the time as the ultimate guru to whom we were all indebted. It took me a long time to understand why his work was so important. Also, the works of his that I had read at that time weren’t especially insightful. I remember asking Jude what work of Mundell’s I should read and he told me, Man and Economics (1968). I did, but it failed to enlighten me much on the subject of tax policy.

Me, Laffer, Wanniski and Mundell in 1999

What I did know is that an extremely important conference had taken place in Washington in May 1974, sponsored by AEI. The program had been put together by Laffer and the economist David Meiselman, a close associate of Friedman’s. Its focus was primarily on bringing together divergent strains of monetarist thought on the problem of inflation, which was growing in importance daily (Meiselman & Laffer 1975).

Jude was at the conference and it was the first time he met Mundell. Mundell recently told me in an email that the two of them went up to his hotel room after he spoke and they talked for a long while. By that time, Mundell had left the University of Chicago, where he influenced Laffer, and joined the economics department at Columbia University after a 3-year stay at the University of Waterloo in Canada (Overtveldt 2007: 191; Warsh 1993: 195; Laffer discussed his debt to Mundell in Laffer 1999). Mundell told me that after he returned to New York following the AEI conference, Jude stayed at his apartment for several days and slept on the couch – Jude’s home was in New Jersey – reading Mundell’s papers and being tutored by him.

The discovery of Mundell’s work led Jude to write an article that appeared on the Wall Street Journal editorial page on December 11, 1974 that first laid out Mundell’s prescription for stagflation: tight money to fight inflation and tax cuts to stimulate growth. Mundell told me that he essentially co-wrote the article and Wanniski quoted him as saying:

The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes – asphyxiated. Taxes have increased even while output has fallen because of the inflation. The unemployment has created vast segments of excess capacity greater than the size of the entire Belgian economy. If you could put that sub-economy to work, you would not only eliminate the social and economy costs of unemployment, you would increase aggregate supply sufficiently to reduce inflation. It is simply absurd to argue that increasing unemployment will stop inflation. To stop inflation you need more goods, not less (Wanniski 1974).

This article led directly to Mundell being invited to a White House meeting on December 19, 1974 to discuss options for economic stimulus, at which he repeated his tight money and tax cuts policy mix proposal (Dale 1974; Gannon 1974). Mundell told me he met Kemp for the first time that day on his trip to Washington for the White House meeting. The following day, Kemp mentioned Mundell for the first time in a House speech, quoting extensively from Jude’s article from the previous week (Congressional Record 1974: 41906-10). A few weeks later, Kemp was mentioned in a Wall Street Journal editorial for the first time (Wall Street Journal 1975). Jude was undoubtedly the author.

Subsequently, the Ford administration rejected Mundell’s idea for a permanent tax reduction in favor of a one-shot tax rebate, which President Ford proposed in his first State of the Union address. The Tax Reduction Act of 1975 gave taxpayers a 10 percent rebate on their 1974 federal income tax payment, with a minimum of $100 and a maximum of $200, payable in the second quarter of 1975. A key reason for the administration’s reticence to cut taxes permanently was its view that deficits were strongly inflationary (Council of Economic Advisers 1975: 131; Dale 1975). Ironically, Kemp voted against the rebate primarily because he thought it was inflationary (Congressional Record 1975: 4629-30).

In the spring of 1975, Jude wrote an article for The Public Interest, a small journal edited by Kristol, on the “Mundell-Laffer hypothesis” (Wanniski 1975). The vast bulk of the article had to do with international monetary policy, Mundell’s and Laffer’s specialty. It was only in a footnote that Jude mentioned tax policy:

“There are always two tax rates that produce the same dollar revenues,” says Laffer. “For example, when taxes are zero, revenues are zero. When taxes are 100 percent, there is no production, and revenues are also zero. In between these extremes there is one tax rate that maximizes government revenues.” (p. 49)

As far as I can tell, this is the first public mention of what came to be called the Laffer curve. Although economists dating back to Adam Smith knew that tax rates that were too high could depress revenues, Laffer’s simple curve explained the concept in a way that was very easy to understand. Kemp used it all the time.

It wasn’t until many years later that I came to understand Mundell’s central contribution to the work I was doing for Kemp, which first appeared in an obscure pamphlet published by the Princeton University economics department’s international finance section in 1971 (Mundell 1971). In it, he explained that the problem with a pure tight money solution for inflation, which most conservatives supported, was that it would cause the economy to tank as businesses, workers and consumers readjusted their expectations. Mundell told me that his tax-cuts-and-tight-money policy mix dated back to his earliest work for the International Monetary Fund (Mundell 1962; see also Vane & Mulhearn 2006).

Mundell argued that simultaneous tax cuts would both cushion the blow from tight money and make it more effective by increasing real output and the demand for money. Insofar as inflation resulted from too much money chasing too few goods, increasing production was inherently anti-inflationary. As he explained in his 1971 essay:

Monetary expansion stimulates nominal money demand for goods, but, without rigidities or illusions to bite on, it does not lead to real expansion. But growth of real output raises real money demand and thus abets the absorption of real monetary expansion into the economy without inflation. Tax reduction increases employment and growth and this raises the demand for money and hence enables the Federal Reserve to supply additional real money balances to the economy without causing sagging interest rates associated with conditions of loose money. Monetary acceleration is inflationary, but tax reduction is expansionary when there is unemployment (pp. 24-25).

The reason this was important is because it was the exact opposite of what mainstream economics taught at that time. The dominant view was that low unemployment, and hence fast economic growth, was inherently inflationary. Insofar as tax cuts increased growth, it would be like pouring gasoline on a fire. Most economists thought Mundell’s tight money and tax cuts formula was the equivalent of stepping on the gas and the brakes of a car at the same time.

It is not now remembered, but the strongest argument made against the Kemp-Roth bill was that it would be dangerously inflationary (House Budget Committee and Senate Budget Committee 1978; House Ways and Means Committee 1978). High taxes were actually seen as curbing inflation by reducing consumers’ purchasing power (Sloan 1985). Indeed, that belief was so widespread that Congress enacted a big tax increase in 1968 precisely because it thought this action would reduce inflation (Janssen 1968a, 1968b, 1968c). It didn’t because the inflation problem was primarily monetary, not fiscal (Eisner 1971; Springer 1975).

The Politics of Kemp-Roth

The biggest problem we had selling Kemp-Roth was that in those days Republicans actually cared about the deficit. Many were very reluctant to support any tax cut unless offset dollar-for-dollar by simultaneous spending cuts. Some said we needed to pay off the debt first and perhaps even needed a budget surplus before a tax cut could be contemplated. Of course, that meant that taxes would never be cut no matter how high they got.

It’s worth remembering that a substantial number of Republicans voted against the Kennedy tax cut for this reason. On the final House vote on September 25, 1963, only 48 Republicans voted for the tax cut, with 126 voting against it. The final Senate vote was on February 7, 1964; 21 Republicans voted yea and 10 voted nay (Bartlett 2014).

The fact was that Kemp-Roth would unquestionably raise the deficit – at least according to standard revenue-estimating methodology. On March 28, 1977, Kemp got the Joint Committee on Taxation’s official estimate for Kemp-Roth, shown in Table 1.

The estimate was done by JCT economist Pete Davis, whom I have stayed in touch with over the years and is now an economic consultant. He said that the revenue estimate was the easiest one he ever did. Davis later told me he thought the bill wasn’t going anywhere. “It became law to my shock and amazement,” he said.

We didn’t advertise the JCT estimate, which assumed no changes in economic behavior. We were happier with the Congressional Budget Office estimate, which showed a substantial positive economic impact, including a much smaller increase in the deficit than the JCT calculated. Although the economic benefit was based purely on a Keynesian increase in disposable income that would raise spending, rather than a supply-side impact on labor supply and investment, it was better than nothing. The CBO results are reproduced in Table 2 (see appendix).

Kemp’s dominant argument was not economic, but political. Huge Republican losses in 1974 in the wake of the Watergate scandal dropped Republican membership in the House to 143 in 1977 – their lowest number since 1939 – and 37 seats in the Senate. Loss of the White House in 1976 meant that Republicans basically had no leverage at all. Consequently, they were unusually receptive to any idea that might restore their political fortunes, even if it was against their better judgment.

One of Jack’s first projects for me when I joined his office was drafting a confidential memorandum for every Republican in Congress. Jack worked very hard on it, sending back many comments and revisions to the language, which he wanted to be just right. I think the memo was partly an exercise in thinking through the politics of tax cuts for himself. Kemp was already convinced about the economics, but selling the idea of a big, permanent tax cut in the face of high inflation, big deficits and the Republican Party’s long obsession with a balanced budget wasn’t going to be easy.

Craig Roberts told us that the third concurrent budget resolution for fiscal year 1977 presented an ideal opportunity to showcase the difference between the Republicans’ economic policy and the Democrats’. This resolution was necessary because Jimmy Carter wanted a $50 tax rebate to stimulate aggregate demand and raise growth, which required Congress to make room for the revenue loss in the budget. But Craig and Jack saw that the same revenue could just as easily accommodate the first year of a permanent tax cut.

The emerging supply-side view emphasized the greater economic impact of a permanent tax rate cut versus a one-shot tax rebate. The former would increase work, production and saving and, thereby, increase the supply of goods and services, which would be anti-inflationary. Rebates were ineffective because they did nothing to change incentives. It was critical that Jack be able to sell the idea that tax cuts weren’t gasoline on the fires of inflation if he had any hope of getting support. Anything that was viewed as being inflationary would have been dead, politically.

It’s clear that Jack’s thinking about the politics of tax cuts owed much to Jude’s article, “Taxes and a Two-Santa Theory,” which appeared in the National Observer on March 6, 1976 (Wanniski 1976a). The National Observer was a weekly newspaper published by Dow Jones back when the Wall Street Journal was only published 5 days a week. It appeared from 1962 to 1977. The obscurity of Jude’s article and the unavailability of the National Observer online have caused its importance to be lost to history.

The gist of Jude’s argument was that Democrats won elections by offering people something for nothing – spending programs paid for with deficits. Republicans opposed deficits, which was the right thing, economically, but a disaster, politically. Republicans needed a political counterweight to spending, which was a tax cut.

The problem with Jude’s theory is that he assumed that Congress operated under an implicit balanced budget constraint. At a minimum, he assumed that there was a political limit to the deficit. Thus tax cuts would force spending cuts. Wilbur Mills had even made this argument with regard to the Kennedy tax cut. As he told the House of Representatives on September 24, 1963: “The greatest psychological factor that we can create to control spending is the denial of additional revenues to the Treasury of the United States” (Congressional Record 1963: 17909). Other Kennedy tax cut supporters also alluded to the power of it to force spending cuts (Associated Press 1963).

Jude said the electorate would choose the mix of taxes and spending it wanted by voting for the party of spending (Democrats) or the party of tax cuts (Republicans). It was a theory that made some sense in 1976 because many members of Congress on both sides of the aisle cared deeply about deficits, as did the electorate, which viewed them as the ultimate cause of inflation and high interest rates. A politician promising lower inflation and interest rates from deficit reduction, even if it involved tax increases, had a powerful card to play.

In fact, this had been a problem for John F. Kennedy as well even though tax rates were substantially higher during his administration, since the wartime rates enacted during World War II and the Korean War were basically still in effect. A July 1962 Gallup poll showed 72 percent of people opposing a tax cut if it would raise the deficit. Even among people who thought their taxes were too high, a tax cut was opposed by 61 percent of people (Gallup 1962).

The big problem in the 1970s was that higher taxes didn’t need to be legislated; they grew automatically because of inflation and consequent bracket-creep. A common estimate was that income tax revenues grew about 1.6 times the inflation rate. Thus budget projections always showed sharp deficit improvement just down the road if the line on spending was held. But Congress tended to spend right up to the point where the deficit reached its limit of intolerability. Thus there was a sort of treadmill in which higher taxes led to higher spending and there was never any real improvement in the deficit.

Wanniski and Kemp correctly saw this treadmill as bad both for the economy and the Republican Party. By resisting tax reduction in the name of fiscal responsibility, Republicans were aiding and abetting higher taxes and the Democrats’ program. In his memorandum, Kemp said that Republicans had become tax collectors for the welfare state. I believe that is the first time this widely-held Republican belief was articulated. One still hears it today.

Support from Republican Leaders

Republican leaders quickly recognized the political potential of Kemp’s program, even if the rank-and-file had doubts about its efficacy. House Minority Leader John Rhodes of Arizona wrote a number of “Dear Colleague” letters asking for cosponsors and often made supportive floor statements. Senate Minority Leader Howard Baker of Tennessee and Republican National Committee Chairman Bill Brock, who had lost his bid for reelection to the Senate in 1976, were also strongly supportive.

Ronald Reagan was encouraging as well. After losing the Republican presidential nomination in 1976, he had some leftover campaign funds that he used to establish an organization called Citizens for the Republic. At its request, I drafted an article that Kemp had in its October 1, 1977 newsletter. The article states that Kemp-Roth “has the valuable support of Ronald Reagan.”

I don’t think we knew it at the time, but Reagan did a very favorable radio commentary about Kemp’s tax work on March 23, 1977 (Skinner, Anderson & Anderson 2004: 131-32). This may have been the impetus for Citizens for the Republic asking Kemp to write something for its newsletter. Reagan had previously published a column supporting JCA (Reagan 1976). I don’t remember knowing about this column when I worked for Kemp; for some reason, it wasn’t among the reprints of articles he routinely handed out. Kemp had done some work for Reagan when he was governor during the off-season.

Although Kemp quickly got support from the House members who had previously supported JCA, there was a hard core of Republicans who strenuously resisted tax cuts without spending cuts. The standard Republican view had been well articulated by Gerald Ford in an October 6, 1976 national radio address. It would be “dangerous and irresponsible” to enact a permanent tax cut without a dollar-for-dollar cut in spending. The result, he said, would be more inflation and higher unemployment (Greene 1995: 79-80).

I think Kemp’s position on the issue of spending has been misunderstood. It wasn’t that he was opposed to cutting it, he just thought it was futile as long as the economy was growing slowly and there was high unemployment. Under such circumstances, people depended on government and it would have been cruel to make them pay the price for macroeconomic conditions beyond their control. The time to cut spending was when growth was restored, Kemp thought.

Kemp also thought that the only meaningful measure of spending was as a share of the economy – gross national product in those days. If Congress could just hold the growth of spending to less than the growth of nominal GNP, and tax cuts increased the growth of GNP, then spending would quickly fall as a share of GNP. To put it another way, if spending grew X percent and GNP grew X plus something percent, then, mathematically, spending had to fall as a share of GNP over time.

I would further note that spending growth only needed to be held to the rate of inflation for revenues to catch up because they always grew faster than inflation due to progressive tax rates – indexing of the tax system didn’t begin until the 1980s. Moreover, growth in nominal GNP was what mattered for the spending/GNP ratio. Thus a rise in inflation was as good as a rise in real economic growth insofar as reducing the ratio was concerned. This fact became important in 1981 because the Reagan program implicitly assumed that inflation would be much higher than it turned out to be, from which a big part of the 1980s deficits emerged (Bartlett 2009: 119-21).

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Wanniski, Jude. 1975. “The Mundell-Laffer Hypothesis – A New View of the World Economy.” The Public Interest (Spring): 31-52.

Wanniski, Jude. 1976a. “Taxes and a Two-Santa Theory.” National Observer (March 6).

Wanniski, Jude. 1976b. “Looking for the Right Broom.” Wall Street Journal (August 17): 18.

Wanniski, Jude. 1978. The Way the World Works. Basic Books.

Warsh, David. 1993. Economic Principals. Free Press.

Zonana, Victor F. 1985. “Economist Laffer: Life in Fast Lane.” Los Angeles Times (March 22): 28. At the time this article appeared, Laffer was running for the U.S. Senate.

Appendix

After Ron Paul was defeated in November 1976, everyone on the staff was immediately looking for a job except Gary North, who was happy to get out of Washington as fast as he could. But it was tough because friends tend not to return your calls when they know your boss was just beaten, since they assume you are job hunting.

Nothing much developed for me until early December, when a woman on the staff said she heard that Jack Kemp was looking for a staff economist. I didn’t know much about him except that he was a former pro football player who cultivated a moderate image (Gannon 1976). As someone more in tune with Ron Paul’s radical point of view at that time, this didn’t especially endear me to Kemp. But a job was a job.

I remember it was a late Friday afternoon when I called Kemp’s office to inquire about the position. I spoke to Randy Teague, Kemp’s chief of staff. I knew Randy’s name because he had been executive director of YAF when I was in college. He told me he left YAF to work with Howard Phillips in his failed attempt to abolish the Office of Economic Opportunity during the Nixon administration.

Randy later told me that when he and Phillips got to OEO they were anxious to find any potential allies among the staff. So they put out the word that there was going to be a reduction in force and all the department managers should submit names of expendable staff. They got a list of every Republican working at OEO. Phillips called them into his office and told them they were now in charge.

I asked Randy about the Kemp job and he said that they had been interviewing people for some time and had narrowed the list down to two people. A final decision would probably be made the following week. I said it wouldn’t cost him anything to look at my resume and he said I should put it in the inside mail.

The following Tuesday, I got a call from Kemp’s secretary, Janet, who said Kemp wanted to see me that day. I went by his office around four while he was putting on a tuxedo. He said it was for the last state dinner of the Ford administration.

We chitchatted for a while and then Kemp asked me if I was a “supply side fiscalist.” (The term was coined by the economist Herb Stein in April 1976. See Stein 1984: 241.) Well, I had never heard that phrase before in my life and I had no idea what he was talking about, so naturally I said yes I was, wasn’t everybody? I suppose it was the right answer because Kemp ran off and Randy and I went out for pizza, where he questioned me further about various things. At the end, I was offered the job.

Only after I had the job did I really learn what I was in for. I was replacing Paul Craig Roberts, a well-known conservative economist whose work I was familiar with. His books on Marxism and the Soviet Union had received high praise in conservative publications (Roberts 1971a, 1971b; Roberts & Stephenson 1973). I didn’t realize he had been working on Capitol Hill.

Although Craig had a Ph.D. in economics, he had been hired by Kemp to work on defense policy. As the ranking Republican on the defense appropriations subcommittee, Kemp was deeply involved in national security issues. He also got a staff slot from the Appropriations Committee, which he used to hire Craig. (Craig’s Appropriations slot was taken by Bill Schneider, who held very high-level positions at OMB and State during the Reagan administration.)

Randy told me that Kemp had been a big supporter of the Vietnam war and this was a major focus of his attention after his election to Congress in 1970. Kemp always said that the reason he was elected is because he threatened to come back and play for the Buffalo Bills for another year if he lost.

Kemp Turns to Economy

By 1974, the war was over and the economy was the nation’s number one problem. Kemp turned his attention to it, introducing his first major piece of economic legislation, a bill to restrict growth of the money supply to fight inflation. This was pure monetarism based on Milton Friedman’s idea that the Federal Reserve should increase the money supply by a fixed percentage yearly, come hell or high water.

Table 1 is a list of Kemp’s economic legislation and major statements in the years before I joined his staff in December 1976 that Randy prepared for me, which I have edited a bit. I added references to some of the speeches Jack used to hand out to people – reprints were a big business in his office – so I assume he thought they were especially important. Kemp handed out so many reprints of speeches and articles that he actually had his own printing press, which the male interns quickly learned to operate as they cycled through the office.

As one can see, there was a gradual evolution in Kemp’s thinking, starting out as a conventional conservative, but eventually adopting unconventional conservative positions. For example, in the 1970s, it was widely believed by both liberals and conservatives that excessive economic growth and an unemployment rate that was too low were inherently inflationary. This view was enshrined in something called the Phillips Curve, which showed that there was a trade-off between inflation and unemployment – the higher one was, the lower the other would be (for example, see Silk 1978).

By 1975, Kemp had rejected the Phillips Curve and the idea that economic growth was inflationary. This put him well outside the economic mainstream, including among conservatives. But his focus at that time was almost entirely on giving incentives to corporations to invest, which would lead to noninflationary growth and increase jobs.

Randy told me there wasn’t a great deal of analysis underlying the particular tax provisions in Kemp’s various bills during this period. Since Kemp wasn’t a member of the tax-writing Ways and Means Committee there wasn’t much he could do to actually enact tax legislation, nor did he have easy access to the tax experts at the Joint Committee on Taxation, whose first priority was to members of the Ways and Means and Senate Finance committees.

Table 1

History of Economic Legislation and Major Speeches by Jack Kemp, 1971-76

Source: Congressional Record

Randy hit on the idea of getting big corporations and trade associations to lobby for Kemp’s legislation. The Business Roundtable had been established in 1972 to increase the clout of big businesses in legislative debates, and many corporations were becoming increasingly active as well, establishing Washington offices for the first time, hiring lobbyists and so on. Today we take this for granted, but in the 1970s it was a new thing.

Teague simply asked various corporations and trade groups for their “wish list” of tax legislation and built Kemp’s early tax bills around them. The idea was that business lobbyists would do the heavy lifting of getting visibility for the legislation and make it viable, legislatively.

By the time I got to Kemp’s office, his principal economic legislation was the Jobs Creation Act (JCA), cosponsored with Senator Jim McClure of Idaho. It was often called the Kemp-McClure bill and had 14 provisions including a cut in the corporate tax rate, an increase in the Investment Tax Credit, tax credits for increased saving by individuals, larger depreciation allowances and other business-oriented tax cuts.

The Business Roundtable contracted with the consulting economist Norman Ture to analyze the economic effects of JCA. His analysis showed an overwhelming impact, so great that federal revenues would actually increase. I never saw the original Ture study, but was told that it all appeared in an American Enterprise Institute study. Table 2 shows Ture’s results.

Table 2

Economic Effects of the Jobs Creation Act

(dollar amounts in billions of 1974 dollars)

Source: AEI 1976: 31

The version of JCA that Randy gave me to work on had been revised from the previous Congress. Kemp wanted something in the new version that would help individuals and added a 10 percent across the board reduction in statutory tax rates. Subsequently, that was the element of the legislation that he talked about pretty much to the exclusion of all the other provisions. This diminished business support for the legislation, but improved its political popularity at a time when bracket-creep caused by inflation was raising effective tax rates rapidly. Kemp often said that a big tax cut was needed just to keep taxes from rising (Congressional Record 1977b).

According to the Tax Policy Center, the average federal income tax rate (taxes divided by income, not including payroll taxes) for a family with the median income (the exact center of the income distribution) rose from 7.1 percent in 1965 to 9.9 percent in 1976. It would continue to rise to 10.4 percent in 1977 and 11.1 percent in 1978.

Additionally, the marginal tax rate (the tax on each additional dollar earned) rose from 17 percent in 1965 to 22 percent in 1976 and 1977, and 25 percent in 1978. The cause was inflation. As workers got cost-of-living adjustments, they were pushed into higher tax brackets even though their real income had not risen.

The Supply-Side Gang

Eventually, I learned that the two people I had beaten out for the job in Kemp’s office were Stuart Sweet and Jan Olson, both of whom were more qualified than I was. Stu had a MBA from the University of Chicago, where he had studied with the economist Arthur Laffer, and Jan had handled economic policy for Senator Jim Buckley of New York, who had been defeated in the 1976 election. (I believe that Jan wrote the AEI study, although she is uncredited.)

I’ve asked Randy a couple of times over the years why he hired me and not one of them. He has always demurred. I suspect that Stu’s Laffer connection and Jan’s Buckley connection might have made them a bit too independent for his taste. My virtue was that I really didn’t know a damn thing about tax policy and not much about economics, either. Hence, I was more reliant on Randy’s guidance and direction than they would have been.

It didn’t really matter much as things developed. Stu got a job doing economic policy for newly-elected Rep. David Stockman of Michigan. Dave had been on the congressional staff for some years as an aide to Rep. John B. Anderson of Illinois, chairman of the House Republican Conference and the third ranking Republican in the House.

Stockman was so close to Kemp that he was virtually an adjunct member of the staff. Randy told me that Stockman told Kemp he wanted to work for him if he lost his congressional race. Even after he became a member of Congress, Stockman still acted like a de facto Kemp staffer and Stu and I worked closely together for as long as we were on Capitol Hill.

Jan went to work for incoming Senator S.I. Hayakawa of California. He was extremely well known for his run-ins with campus demonstrators while president of San Francisco State College. Hayakawa was also an expert on semantics and knew how to give good quote, as they say in Washington. Consequently, he got an enormous amount of press attention whenever he wanted it. This was very helpful to the cause.

Hayakawa’s wit was on full display in an article he wrote for Harper’s magazine about the insanity of assigning him to the Senate Budget Committee when he couldn’t even balance his own checkbook. But he soon discovered, it wasn’t as hard as it looked.

The numbers you work with on this committee turned out to be very simple. You are always dealing in hundreds of millions – or billions. Therefore, when we say 1.0, that means $1 billion. Then we have .1; that means $100 million – and that’s the smallest figure we ever deal with in the Budget Committee.

A member of the committee will say, for instance, “Here’s an appropriation for such-and-such. It was 1.7 for 1977. So for the 1978 budget we ought to make it 2.9.” So all we do is add 1.2; that’s not hard. The next item is 2.5. The members discuss it back and forth, and someone says, “Let’s raise it to 3.7.” They look around at each other. “Everybody in favor?” “Yes, sir. Okay.” So in five minutes we have disposed of 2 billion bucks – 2 billion, not 2 million. I never realized it could be so easy. It’s all simple addition. You don’t even have to know subtraction (Hayakawa 1978: 39).

Craig Roberts, meanwhile, was now on the House Budget Committee staff. He told me he thought it offered a better opportunity to influence policy because the Budget Act of 1974 required Congress to adopt an annual budget resolution spelling out aggregate spending and revenues. Since tax cuts could not be considered without a provision in the budget resolution, it provided an ideal opportunity to debate the economic effects of tax policy (Roberts 1984: 7-33).

One of the keys to using the budget resolution as a forum for debating tax cuts was that there could be a discussion about the complex interrelationship between taxes and the economy and the subsequent revenue feedback effects.

Historically, Congress had not always bothered with revenue estimates. Taxes were often raised or cut without them. When estimates were prepared, they were done on a strict accounting basis – a 10 percent cut in tax rates would reduce revenues by exactly 10 percent – and only for one year. Estimating the out-year effects was impossibly difficult until computers began being used in the policy process in the 1970s.

Recognizing its need for better data, Congress established the Congressional Budget Office when the congressional budget process was established in 1974. CBO was charged with making 5-year estimates of the effects of tax and spending changes. Moreover, it attempted to incorporate the economic effects of such changes on the economy and to integrate those effects in its budgetary estimates.

To do this, CBO made use of macroeconomic models created by private companies such as Data Resources, Inc. (DRI). These models had thousands of mathematical equations designed to represent different sectors of the economy, and were all linked together so that one could see the impact of a change in one sector on other sectors.

These models were very useful to businesses needing to know, for example, how an increase in home sales would affect demand for lumber, dishwashers and so on. My sister worked with DRI when she was with a large paper company. She told me that DRI would ask its clients for internal estimates of production and sales in order to make its model more accurate.

My sister’s company was happy to do so because it was thereby able to infer important business data from its competitors. It knew that its competitors were also DRI clients. Knowing the production and sales data her company had given to DRI gave it insight into its competitors’ sales and pricing plans. For example, if my sister’s company was projecting a price of $100 per ton for some product and DRI was projecting a price of $110, it was likely because its competitors were planning to increase the price even more. Thus it was an indirect method of price collusion without violating the antitrust laws.

The point is that these models were not built to analyze public policy, but were nevertheless pressed into doing so by CBO. There were a lot of problems with this, which became a key focus of the emerging supply-side view (Congressional Record 1977a: 6835-36). Supply-siders argued that tax rate reductions wouldn’t lose nearly as much revenue as standard revenue-estimating methods showed because they would stimulate growth. And as Ture’s estimates showed, the stimulus might be so great that there would be no net loss in revenue even in year one.

The Kennedy Model

Critical to the development of this tax-cuts-won’t-lose-revenue idea was a memorandum that Kemp received from the Congressional Research Service on August 3, 1976. He had asked for data on the estimated revenue loss from the 1964 tax cut – which reduced the top tax rate from 91 percent to 70 percent and the bottom rate from 20 percent to 14 percent – and actual revenue collections. The tax cut had been proposed by John F. Kennedy in 1963, but not enacted until 1964 under Lyndon Johnson (Bartlett 2013, 2014). We always called it the “Kennedy tax cut.” Table 3 shows the data Kemp received. (I reprinted the entire CRS memo in Bartlett 1981: 213-14.)

Table 3

Estimated Revenue Loss and Actual Revenue Gain, 1963-67

(billions of dollars)

We used this table so often that I could recite the numbers in my sleep. Its purpose was to imply that tax cuts could actually increase federal revenues. But of course it didn’t actually show that because we didn’t know what the projections for federal revenues were in the absence of the tax cut. For all we knew, federal revenues would have been higher by the amount of the revenue loss without the tax cut. However, a 1978 report by the House Budget Committee and the Joint Economic Committee found revenues modestly exceeded projections, and a 1981 CBO report examined Treasury revenue estimates and found that federal revenues came in well above forecast during the 1964-67 period, which at least partially proved Kemp’s point (Congressional Budget Office 1981: 4).

Nevertheless, the CRS data were a powerful selling point for JCA. Combined with the Ture estimate, we often argued that Congress could enact it without needing a provision in the budget resolution because it wouldn’t lose net revenue (Congressional Record 1977a, 1977b. See also Wanniski 1976).

With the Kennedy tax cut being such an important part of our argument for JCA, I spent much of my time on Kemp’s staff doing historical research on it – giving me some value from my education after all. I believe I was the first one in the group to discover Kennedy’s Economic Club of New York speech on December 14, 1962, in which he made a powerful supply-side argument for his tax cut:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance our budget just as it will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions, and any new recession would break all deficit records.

In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. The experience of a number of European countries and Japan have borne this out. This country’s own experience with tax reduction in 1954 has borne this out. And the reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.

I repeat: our practical choice is not between a tax-cut deficit and a budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve—and I believe this can be done—a budget surplus. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future.

Of course, there was a considerable amount of pushback against Kemp’s assertion that the Kennedy tax cut actually raised revenues, so I was quite excited when I heard that the economist Walter Heller, who had chaired the Council of Economic Advisers for Kennedy, was scheduled to testify before the Joint Economic Committee on February 7, 1977. I was in the hearing room when Senator Jacob Javits of New York asked Heller about the revenue effects of the tax cut, referencing the CRS data that Kemp had put into the Congressional Record.

Senator Javits. I wanted to ask this question: We have had a set of figures developed by the Library of Congress which were published in the Congressional Record January 4, 1977, on page 1432, which analyzed the tax revenues after the tax rate cuts of 1964 and which indicate a uniform pattern growing right through from 1963 to 1968 inclusive, which were years of actual revenue gains. There were rate cuts producing gains instead of losses even though some of the rate cuts were very, very high. Some of those occurred in the Kennedy years. I wonder, Mr. Heller, whether you have studied them?

Mr. Heller. What happened to the tax cut in 1965 is difficult to pin down but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major factor that led to our running a $3 billion surplus by the middle of 1965 before escalation in Vietnam struck us. It was a $12 billion tax cut which would be about $33 or $34 billion in today’s terms, and within one year the revenues into the federal Treasury were already above what they had been before the tax cut…. Did it pay for itself in increased revenues? I think the evidence is very strong that it did (Joint Economic Committee 1977: 161. See also Heller 1967, 1968, 1981).

I was incredibly excited when I heard this. Here was irrefutable proof straight from the horse’s mouth that the Kennedy tax cut paid for itself. People could continue to argue about whether a similar sort of tax cut would have the same effect a decade later in a different economic environment, but at least we were on firm ground in asserting that the Kennedy tax cut paid for itself.

With all of this emphasis on the Kennedy tax cut, it was probably inevitable that Kemp would be drawn toward the simple idea of just replicating it. My recollection is that one morning, out of the blue, Jack stuck his head in the door of my office and told me to draft a bill along those lines. I said okay and got right on it.

It was immediately clear that replicating the Kennedy tax cut required some thought since, obviously, the economy and tax structure were different. I set about asking various people such as Craig Roberts and others what sort of tax cut would effectively replicate the Kennedy tax cut in 1977.

Norman Ture

The person who was most helpful to me was Ture. I’m not sure to what extent I realized at the time that he had been intimately involved in creating the original Kennedy tax cut; I knew him mainly because of his study of JCA. It may not have been until after he died in 1997 that I learned the full extent of his experience.

Briefly, Norm had been on the staff of the JEC and one of its members was Wilbur Mills, the longtime chairman of the powerful House Ways and Means Committee. Mills used Ture as his staff economist (Zelizer 1998: 105-8). Ture also had a connection to Kennedy through his involvement with a task force he appointed after the 1960 election to recommend measures to increase economic growth (Nossiter 1961).

It appears from recordings Kennedy made of Oval Office meetings that the tax cut originated from a meeting with Mills on August 6, 1962. This led Kennedy to call a meeting with his economic advisers on August 10 at which the idea of a permanent tax rate reduction was further developed. Kennedy was attracted to the idea that conservatives would have difficulty opposing it despite their opposition to budget deficits. It was Keynesian economics with a conservative twist (Naftali 2001: 234-84). Indeed, the conservatism of the Kennedy tax cut is why his economic tutor at Harvard, John Kenneth Galbraith, then on leave as ambassador to India, strenuously opposed it (Galbraith 1969: 331). This advice was private, but upon returning to Harvard, Galbraith went on record with his negative view of the tax cut. As he told the Joint Economic Committee (1965: 13):

I was never as enthusiastic as many of my fellow economists over the tax reduction of last year. The case for it as an isolated action was undoubtedly good. But there was danger that conservatives, once introduced to the delights of tax reduction, would like it too much.

Tax reduction would then become a substitute for increased outlays on urgent social needs. We would then have a new and reactionary form of Keynesianism with which to contend.

I later learned that Ture wrote much of the speech that Mills gave on September 24, 1963 in defense of the Kennedy tax cut (Kudlow & Domitrovic 2016: 138). Mills even said it would raise revenues – proof of Ture’s influence:

I have reached the conclusion that this bill will provide a sufficient increase in the gross national product so that the larger revenues derived from this additional income will result the federal budget being balanced sooner than would be the case in the absence of this tax cut.

Mr. Chairman, there is no doubt in my mind that this tax reduction bill, in and of itself, can bring about an increase in the gross national product of approximately $50 billion in the next few years. If it does, these lower rates of taxation will bring in at least $12 billion in additional revenue (Congressional Record 1963: 17907).

Note: $12 billion in 1964 would be equivalent to about $300 billion today.

At some point, everyone seemed to agree that reducing the top tax rate from 70 percent to 50 percent and the bottom rate from 14 percent to 8 percent roughly duplicated the Kennedy tax cut. We simply asked the Joint Committee on Taxation to calculate an equivalent cut for all the rates in between. Randy just cut and pasted the computer printout into the actual bill.

While we were talking about the Kennedy tax cut bill, Kemp got a note from Senator Bill Roth of Delaware praising him for some speech Kemp had recently given and suggesting that they work together. We didn’t know much about Roth, but we liked that he was a member of the Senate Finance Committee who also cultivated a moderate image. Moreover, we felt that Jim McClure hadn’t done much to promote JCA, so we asked Roth if he was interested in being the Senate sponsor of the Kennedy bill and he was.

The deal was finalized at a lunch in the Senate dining room in late February 1977. My counterpart on Roth’s staff was Bruce Thompson and we worked closely together afterwards (Smith 1988: 289). I recall that Ture was also present. Roth’s main concern was that we should phase-in the tax cut to minimize the static revenue cost. Kemp was resistant, but after I pointed out that the Kennedy tax cut had been phased-in over two years, he agreed. Roth also didn’t want the bottom rate cut so much because the revenue loss was so large since every taxpayer paid some taxes at that rate. Kemp agreed to raise the proposed bottom rate from 8 percent to 10 percent.

The Kemp-Roth tax bill was introduced on July 14, 1977 to little fanfare. As I recall, there was only one real reporter in the room where Kemp and Roth held a press conference announcing their bill – from the principal Delaware newspaper. There were at most two dozen people in the room including staff. No one in the room imagined that the legislation would be enacted into law almost exactly four years later.

References

AEI. 1976. Reducing Unemployment: The Humphrey-Hawkins and Kemp-McClure Bills. American Enterprise Institute.

Bartlett, Bruce. 1981. Reaganomics: Supply-Side Economics in Action. Arlington House.

Bartlett, Bruce. 2013. “Kennedy Proposed His Big Tax Cut 50 Years Ago.” Tax Notes (January 21): 367-70.

Bartlett, Bruce. 2014. “The 50^th Anniversary of the Kennedy Tax Cut.” Tax Notes (February 17): 749-51.

Congressional Budget Office. 1981. A Review of the Accuracy of Treasury Revenue Forecasts, 1963-1978 (February).

Congressional Record. 1963. Congressional Record (September 24): 17907.

Congressional Record. 1971. Congressional Record (May 31): 13086-89.

Congressional Record. 1973. Congressional Record (Dec. 12): 41131-35.

Congressional Record. 1974a. Congressional Record (April 23): 11443-45.

Congressional Record. 1974b. Congressional Record (July 2): 22053-55.

Congressional Record. 1974c. Congressional Record (July 24): 25029-31.

Congressional Record. 1974d. Congressional Record (September 12): 30951-53.

Congressional Record. 1974e. Congressional Record (December 20): 41906-10.

Congressional Record. 1975a. Congressional Record (February 5): 2380-86.

Congressional Record, 1975b. Congressional Record (February 5): 2380-86.

Congressional Record. 1975c. Congressional Record (February 19): 3663.

Congressional Record. 1975d. Congressional Record (March 13): 6616.

Congressional Record. 1975e. Congressional Record (July 28): 25271-79.

Congressional Record. 1976a. Congressional Record (April 8): 10088-92.

Congressional Record. 1976b. Congressional Record (April 28): 11638-46.

Congressional Record. 1977a. Congressional Record (February 22): 4935-36.

Congressional Record. 1977b. Congressional Record (March 8): 6602-4.

Congressional Record. 1977c. Congressional Record (March 9): 6835-36.

Congressional Record. 1977d. Congressional Record (March 15): 7640-41.

Congressional Record. 1977e. Congressional Record (March 24): 9085-86.

Galbraith, John Kenneth. 1969. Ambassador’s Journal. Houghton Mifflin.

Gannon, James P. 1976. “Unemployment as a Political Issue.” Wall Street Journal (February 12): 16.

Guzzardi, Walter, Jr. 1978. “Business Is Learning How to Win in Washington.” Fortune (March 27): 52-58.

Hayakawa, S.I. 1978. “Mr. Hayakawa Goes to Washington.” Harper’s (January): 39.

Heller, Walter. 1966. New Dimensions of Political Economy. Harvard University Press.

Heller, Walter. 1968. Perspectives on Economic Growth. Random House.

Heller, Walter. 1981. “Kennedy’s Supply-Side Economics.” Challenge (May/June): 14-18.

House Budget Committee and Joint Economic Committee. 1978. Economic Stabilization Policies: The Historical Record, 1962-76. U.S. Government Printing Office.

Joint Economic Committee. 1965. January 1965 Economic Report of the President, part 2, 89^th Congress, 1^st session. U.S. Government Printing Office.

Joint Economic Committee. 1977. The 1977 Economic Report of the President, part 2, 95^th Congress, 1^st session. U.S. Government Printing Office.

Kennedy, John F. 1962. “Address and Question and Answer Period at the Economic Club of New York.” American Presidency Project (December 14).

Kudlow, Lawrence, and Brian Domitrovic. 2016. JFK and the Reagan Revolution. Penguin Random House.

Naftali, Timothy. 2001. John F. Kennedy: The Great Crises, vol. 1. W.W. Norton.

Nossiter, Bernard D. 1961. “Business Tax Break Urged.” Washington Post (January 28): A2.

Roberts, Paul Craig. 1971a. Alienation and the Soviet Economy. University of New Mexico Press.

Roberts, Paul Craig, 1971b. “Oskar Lange's Theory of Socialist Planning.” Journal of Political Economy (May-June): 562-77.

Roberts, Paul Craig. 1984. The Supply-Side Revolution. Harvard University Press.

Roberts, Paul Craig, and Matthew Stephenson. 1973. Marx’s Theory of Exchange, Alienation and Crisis. Hoover Institution Press.

Silk, Leonard. 1978. “Phillips Curve Back in Business.” New York Times (May 18): D2.

Smith, Hedrick. 1988. The Power Game: How Washington Works. Random House.

Stein, Herbert. 1984. Presidential Economics: The Making of Economic Policy from Roosevelt to Reagan and Beyond. Simon & Schuster.

Wanniski, Jude. 1976. “Taxes and the Kennedy Gamble.” Wall Street Journal (September 23): 18.

Zelizer, Julian E. 1998. Taxing America: Wilbur D. Mills, Congress, and the State, 1945-1975. Cambridge University Press.

Republicans and the “Lofgren Corollary”

The Fiscal Times (October 25, 2013)

Last week I explained that Congress has become an incompetent institution, unable to do its most basic work of passing annual appropriations bills to keep the government running. We usually think of incompetence as being the result of ineptness, stupidity or ignorance. But in the case of Congress, it is often intentional and deliberate, part of a long-term strategy by some Republicans to undermine government itself.

Former Republican congressional staffer Mike Lofgren first alerted me to this phenomenon two years ago in a widely discussed article, “Goodbye to All That: Reflections of a GOP Operative Who Left the Cult.” In it, he discussed the tactic of filibustering all legislation in the Senate and all nominations to administration positions, regardless of merit. In Lofgren’s words:

A couple of years ago, a Republican committee staff director told me candidly (and proudly) what the method was to all this obstruction and disruption. Should Republicans succeed in obstructing the Senate from doing its job, it would further lower Congress’s generic favorability rating among the American people. By sabotaging the reputation of an institution of government, the party that is programmatically against government would come out the relative winner.

A deeply cynical tactic, to be sure, but a psychologically insightful one that plays on the weaknesses both of the voting public and the news media. There are tens of millions of low-information voters who hardly know which party controls which branch of government, let alone which party is pursuing a particular legislative tactic. These voters’ confusion over who did what allows them to form the conclusion that “they are all crooks,” and that “government is no good,” further leading them to think, “a plague on both your houses” and “the parties are like two kids in a school yard.” This ill-informed public cynicism, in its turn, further intensifies the long-term decline in public trust in government that has been taking place since the early 1960s - a distrust that has been stoked by Republican rhetoric at every turn (”Government is the problem,” declared Ronald Reagan in 1980).

An ABC News/Washington Post poll out this week confirms that the strategy is working.

I recalled Lofgren’s statement on Wednesday when I saw that House Ways and Means Committee Chairman Dave Camp (R-MI) blasted the Internal Revenue Service for delaying the 2014 filing season by two weeks. Said Camp, “There is no reason the IRS should not be able to do its job on time.”

The IRS explanation for the delay, however, is both understandable and believable—it is because of the 2-week government shutdown that Camp’s party petulantly undertook in a quixotic effort to repeal the Affordable Care Act, which was enacted 4 years ago and took effect on October 1. As the IRS patiently explained, the government closure came during the peak period for preparing its systems for the new filing year, which begins in just a few weeks.

Thus we see a perfect example of what I will henceforth call the Lofgren Corollary to the definition of chutzpah. Chutzpah, of course, is a wonderful Yiddish word for someone with massive nerve, the classic example being the child who murders his parents and then asks the court for mercy on the grounds of being an orphan. The Lofgren Corollary refers to Republicans who intentionally sabotage government programs by denying them adequate resources and then complain that the programs don’t work, thus justifying further reductions in resources leading to more problems. The goal is to ultimately abolish the program on the grounds of being ineffective.

Of course it always helps if you can also deny the government agency administering a program a permanent leader, as Republicans in the Senate have routinely done during the Obama presidency. This forces agencies to operate on “automatic pilot,” unable to move forward and deal with issues arising within its jurisdiction, thus leading to problems that justify abolition of the agency and the programs it administers.

Another tactic is to make sure that an agency never knows exactly what its budget is. In the last three years, virtually every agency of government has had to deal with wildly fluctuating estimates of how much money it will have to spend, owing to various budget deals, sequestration and Congress’s unwillingness to pass regular appropriations bills, not to mention the constant threat of a government shutdown.

Right now, every agency is operating under a “continuing resolution” that expires on January 15. A “CR,” as it is called, simply allows agencies to spend at the previous year’s rate without any adjustment for inflation or changes necessitated by new laws or changing circumstances. This means that programs that should be cut continue to operate even as those that desperately need funding are deprived of adequate resources.

Once one understands the Lofgren Corollary, it is very easy to implement in a variety of situations—as long as one cares nothing about the proper functioning of government. With the sole exception of national security, with which they are obsessed, Republicans think virtually all government programs are worthless and deserving of abolition or at least massive cuts. They disdain examining programs individually and assessing their effectiveness for fear that they might discover they have value.

One of the big concerns for Republicans is that they agreed to slash all programs equally through a sequester in 2011, including the national security programs they believe are essential. A further cut of $52 billion in defense programs is scheduled for January unless the sequester is changed or abolished.

Democrats hope to use the threat of additional defense cuts to finally get Republicans to negotiate in good faith on the budget. Democrats hope for a deal that will increase both defense and domestic spending above that scheduled under the sequester, raising additional revenues through loophole closings to keep the deficit on a downward path. Treasury Secretary Jacob Lew laid out this strategy in a speech to the liberal Center for American Progress yesterday.

It is too soon to say what will happen in January. Hardliners such as Senator Ted Cruz of Texas openly talk about another government shutdown unless spending is slashed, even though the deficit has fallen 60 percent since 2009. Republicans continually play on the public’s ignorance of this fact. According to a September 26 Bloomberg poll, 59 percent of people incorrectly believe the deficit is rising versus just 10 percent who know that it is actually falling.

Whatever happens, we can be sure that Republicans will continue to operate on the basis of the Lofgren Corollary—at least until there is another Republican president.

This strategy has been at work since the late 1970s. I’m not sure precisely when it was articulated in the minds of Republicans, but it evolved during debate over the Kemp-Roth tax bill in 1978. In those days, there were still some prominent Republicans who really did care about the deficit and were willing to raise taxes or at least oppose tax cuts to get the deficit under control. Keep in mind that inflation was the number one problem in the country and the deficit was widely assumed to be a major cause, if not THE cause, of inflation.

Jack Kemp thought we needed a tax cut even if the deficit grew, but was also convinced there would be significant feedback from faster growth that would finance the tax cuts to some degree. But many OG Republican economists like Alan Greenspan and Herb Stein never bought the feedback idea and thought the Laffer Curve was completely nuts. But they were party loyalists who wanted to support a tax cut because they could see it would be good for the party in the 1978 elections, especially after the enactment of Proposition 13 in California.

So these OG economists came up with a rationalization for cutting taxes even if they raised the deficit – starve the beast. The idea, which Greenspan first articulated at a Senate Finance Committee hearing on July 14, 1978, was that it was just too difficult, politically, to reduce spending unless there was enormous pressure for deficit reduction. Tax cuts, by raising the deficit, would therefore provide pressure to cut spending. Keep in mind that Greenspan, a libertarian follower of Ayn Rand, was primarily interested in reducing the size of government and less concerned about the deficit per se.

I should note also that Milton Friedman – by far the most powerful and respected Republican economist in the United States – was also blasé about the deficit because he thought it had nothing to do with inflation. To him and other members of the Chicago School, inflation was 100% a monetary phenomenon. The Fed could stop inflation whenever it felt like simply by tightening growth of the money supply. Friedman also agreed with Greenspan’s idea of starving the beast to reduce spending and the size of government.

Ronald Reagan basically bought the starve-the-beast idea and also the idea that reducing spending, not just the deficit, was the primary goal of policy. But he was also a realist who saw that it was politically impossible to cut spending when Democrats controlled the House of Representatives, which they did throughout his presidency, without raising taxes at the same time. Every budget deal of the 1980s involved tax increases to some degree. I think Reagan thought that tax increases could be reversed down the road with tax cuts, but spending cuts were more permanent. So the game was to raise taxes temporarily to get spending cuts, reduce spending permanently, and diminish the size of government, thereby increasing personal freedom and economic growth.

One problem with this theory, which became more evident when Republicans got control of Congress in 1994, was the idea that all government spending was equally bad except national security, which is sacrosanct. Republican presidents until Trump never saw it this way. They could see that there was a critical difference between government spending for investment and consumption. Investment spending included public infrastructure such as roads and bridges, research and development, education and other budget categories. Republican presidents supported increases in investment programs even as they tried to cut spending overall. In other words, the composition of spending was as important as the amount of spending.

Under Trump, the distinction between investment spending and consumption spending disappeared. All spending was bad and could be cut willy-nilly. The federal workforce was most vulnerable because government experts were a grave threat to the utterly stupid and ignorant Trump political appointees, especially the idiotic DOGE crowd. If additional labor was ever needed, it could be done through contracting, often through sweetheart deals that made money for Trump supporters. Once oversight by Congress was gone and there were no government experts available to explain what was going on, the Trump insiders had a free hand for self-enrichment.

This idea that all spending was per se waste also fed into what I call the screw-up cycle. During Republican administrations they intentionally make a mess of things because they know that subsequent Democratic administrations will be hamstrung fixing them. Democrats will be so busy just restoring basic government services that had been decimated by Republicans that there will be no time or political capital to enact a Democratic agenda. Every restoration of a vital government service will be labeled by Republicans as “big government” and they will resist them – while later taking credit with their constituents.

Sadly, Democrats get no credit for fixing Republican screw-ups because it is thankless work and only restores the status quo ante. Voters are often not aware that government services have been cut – they are easily misled by Republicans into believing any falloff in services is just the result of lazy bureaucrats or mismanagement rather than deliberate Republican sabotage. Also there is a time-inconsistency problem because the effects of Republican sabotage are often not visible until a Democratic administration is in power, and thus it appears that the problems are caused by Democrats rather than by Republicans.

Thus we have a screw-up cycle where Republicans break the government, Democrats waste years fixing it and get no credit, Democratic voters are discouraged because they see no action on a Democratic agenda and all that has really happened is that some Republican screw-ups have been mended. But no Democratic administration since FDR has been in office long enough to fix all the Republican screw-ups and have the resources to actually expand government programs to deal with new or festering problems. So there is a long-term cycle that looks like stairs – things get worse during Republican administrations, they stabilize during Democratic administrations, neither getting better nor worse, and then get worse again when Republicans are returned to power, as they inevitably are.

I understand this screw-up cycle because I was a Republican for many years and all Republicans before Reagan firmly believed it was the other way around, that Democrats were the screw-ups who threw money willy-nilly at every real or perceived societal problem, and it was the job of Republicans to properly manage government and fix Democratic mistakes. This was very much the view of every Republican through the Ford administration.

It changed under Reagan because he upended the narrative and the strategy. He did not come into office with a view to fixing Democratic screw-ups, he put his own agenda first and that was a big tax cut. He took back 50% of the 1981 tax cut with subsequent tax increases, but still maintained an active Republican agenda. As soon as the tax cut was completed, Reagan began pushing for tax reform. That way he maintained momentum and gave Republican voters a feeling of accomplishment. This allowed Reagan to backslide in many ways that conservatives were unhappy about, but they felt on balance that they were making progress.

I think the next Democratic president absolutely must have a winning strategy that can be accomplished early in his or her administration before launching a program of fixing Republican screw-ups. I think raising the minimum wage should be first on the agenda. But there are many popular Democratic proposals that have wide public support. The important thing is to be aggressive right out of the box in 2029. The next two years of a Democratic House and maybe Senate should be to plow the ground and lay the groundwork for a 100-day blitz that would make FDR dizzy. Speed will be of the essence before the boring everyday work of government occupies 100% of the president’s time.

Since Jimmy Carter, Republicans have had a strategy for keeping Democratic administrations off balance and ensure that they accomplish very little, which dispirits the Democratic base and helps Republicans retake the White House.

The first pillar of the Republican long-term strategy is to predict inflation, even hyperinflation, is right around the corner. It is very easy for Republicans to make this argument because they are perfectly prepared to lie and make up data to buttress their argument. Also, even in a period of zero inflation or even deflation some prices are rising – the CPI is a weighted average of all prices and some are always rising while others are falling.

Fears of inflation are quickly incorporated into interest rates – if the expected rate of inflation suddenly rises by, say, five percent then the interest rate on long-term securities will also rise by five percent so that the real (inflation-adjusted) rate of return is maintained. Higher interest rates cause bond prices to fall sharply. And with the bond market being well into the trillions of dollars, the losses are potentially very, very large.

Republicans have a well-oiled and efficient system for getting their message to Wall Street through the Rupert Murdoch-owned Wall Street Journal and other conservative-leaning media such as Forbes and CNBC, not to mention thousands and thousands of newsletters and market reports published by financial institutions and investment advisors. They know that those who have large portfolios are paranoid about inflation and easily convinced that it is right around the corner.

A key consumer of warnings about inflation is the Federal Reserve. It views inflation-fighting as its primary mission even though it has a legal mandate to maximize employment. If faced with a choice between higher inflation and higher unemployment – a common trade-off embodied in something called the Phillips Curve – the Fed will tend to choose higher unemployment as the lesser evil. As former Fed chairman William McChesney Martin once put it, the Fed is “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

The Fed is easily stampeded by the chorus of chicken-littles into a preemptory strike against inflation by raising short-term interest rates and squeezing the money supply, as well as in its guidance to Wall Street through speeches by Federal Reserve Board members and the summaries of meetings of the Federal Open Market Committee. Many businesses will react to Fed warnings by quickly cutting back on hiring and capital projects. This may be enough to cause a recession, which Democratic presidents often encounter when taking office.

A slowing economy inevitably has the effect of lowering government revenues and raising spending for programs like unemployment insurance, which will raise estimates of the budget deficit. Since the deficit is assumed to be a primary cause of inflation and high interest rates, it is very easy for Republicans to force Democratic presidents into making deficit-reduction a primary goal. Naturally, Republicans will strenuously resist any effort to raise taxes or cut spending for their favored programs, such as national security and farm subsidies. At a minimum, budget deals are very time-consuming and politically unpopular.

Forcing Democratic presidents to engage in deficit reduction inevitably requires them to put their preferred agenda on the back-burner or at least scale-back their ambitions. And if the deficit reduction works and the deficit comes down, they will get no credit because Republicans will take all of it no matter how much they resisted the actual provisions of the budget deal.

A final irony is that Democratic administrations’ success at deficit reduction is like money in the bank for subsequent Republican administrations, providing them with the fiscal space for yet another round of big tax cuts for the wealthy. It was truly insane for Bill Clinton to simply hoard the budget surpluses that accumulated on his watch – the direct result of the 1993 budget deal opposed by virtually every Republican – because George W. Bush could then just piss them away on economically worthless tax cuts. Clinton could have reformed Social Security and made it solvent forever, but instead did absolutely nothing.

Democrats often wonder why Republicans are so committed to tax cuts when they have little or no impact on economic growth. Democrats just assume it is a payoff to Republican donors. While this is true, the main purpose of tax cuts for Republicans is to “starve the beast.” That is, deny government the resources to do its job. This forces cutbacks in programs that aid Democratic constituencies and leads to privatization of those services so that Republicans have more opportunities for corruption and enrichment.

Lastly, I need to remind Democrats that Republicans will still be able to use the debt limit to force their will onto a Democratic president. It’s incredibly stupid policy to even have a debt limit, but it is a fact of life that no politician of either party has the guts to abolish it.

So here we have the Republican plan:

· Make baseless warnings about inflation.

· Force the Fed to tighten and slow the economy.

· Force Democrats to set aside their agenda and make deficit reduction the primary goal.

· Use budget deals and debt limit crises to force Democrats to take politically unpopular positions.

· Watch the Democratic base wither on the vine and hand the White House to another Republican.

I wish there was some way out of this dilemma, but Republicans have essentially baked it in the cake and have 50 years of practice perfecting it. It gives me no pleasure to make this prediction, but perhaps with enough forewarning someone smarter than me can find a way out.

Basically, the House infrastructure should be used to prepare a Project 2029 for the next Democratic president. Say what you want about how evil the Republicans’ Project 2025 was, but it was extremely effective. But it didn’t happen overnight. Republicans first had the idea of preparing an action agenda for a new Republican president back in 1980. I know, I worked on it. It was called Mandate for Leadership and was run out of the Heritage Foundation. Every department and agency had a working group made up primarily of congressional staff, such as myself, who knew the inner workings of government and could suggest regulatory changes, legislative initiatives, agency reorganizations, and personnel appointments so that a new cabinet secretary could hit the ground running and not waste months getting up to speed. The premise of the project was that the traditional 100-day “honeymoon” period that most presidents get was too precious to waste and changes needed to be implemented quickly before the inevitable crises and time-sensitive needs took over the president’s agenda.

Theoretically, a Project 2029 could be done outside government, but there is no Democratic organization with the prestige or the resources to do what Heritage did. Moreover, Democrats are starting from scratch; Heritage had 45 years to revise its effort and learn from past mistakes before developing Project 2025. Therefore, I think the Democratic effort should be done in-house, so to speak, using congressional resources that already exist for exactly this purpose, and just need direction and additional staff.

The congressional committee system has long been organized along departmental and agency lines, with staff that are familiar with the inner workings of government. The main problem is a lack of staff to do the job that needs to be done.

Once upon a time, during the long period from 1933 to 1995 when Democrats largely controlled Congress, committees were powerful and committee staffs large and effective. They functioned as a think tank for the party—developing ideas and plowing the ground for policy initiatives, as well as being vital sources for journalists. I remember back when I was a quasi-journalist as a newspaper columnist I would often be stymied in my efforts to get some information out of a department or agency. I learned that I could call the Republican staff on the appropriations committee and they would get what I needed—no department would ever stonewall a staffer from the committee that controlled their budget. This worked even when Republicans were in the minority.

This committee-to-media complex worked very, very well. Sometimes a reporter for, say, “60 Minutes” would have an idea for something that needed investigating. Or perhaps a committee staffer would take the idea to a reporter. Either way, they would agree to pool resources. When the issue was thoroughly investigated, the committee would coordinate hearings and the release of a committee report timed so that the reporter could broadcast or publish it for maximum mutual benefit. The system worked perfectly for decades and helped advance the Democratic agenda immeasurably. Republicans really couldn’t do the same thing because they were philosophically opposed to government activism and hated the mainstream media. Nevertheless, I had quite a few successes when I was on the congressional staff from 1976 to 1984.

One person who understood the committee-media pipeline was Newt Gingrich, who was first elected to Congress in 1978 and became Speaker of the House in 1995. Newt today is generally considered a total fool who blathers incoherently as a MAGA lickspittle. But, like a classic hedgehog, he had one big idea—that Republicans could gain control of the House by getting conservative southern Democrats to switch parties.

To digress, the South has always been the nation’s most politically conservative region for various reasons, especially slavery. But because of the Civil War, this region was long alienated from the more conservative political party, the GOP, because it was the party of Lincoln. This made the South the “Solid South” as far as Democrats were concerned. So the most conservative politicians in the US were forced into an uneasy but longstanding alliance with its most liberal politicians, northern Democrats.

When I first joined the House staff 50 years ago, we Republicans treated southern Democrats as allies. It was very easy to get “bipartisan” legislation that gave us a fighting chance of getting hearings, bills and amendments on the floor, and occasionally even legislative victories.

A further digression: In 1938, FDR tried to purge some southern Democrats who were not sufficiently supportive of the New Deal by campaigning against them in the primaries, the only elections that mattered in the South. (By the way, Blacks could not vote in Democratic primaries in the South until after WWII.) FDR’s purge not only failed spectacularly, but he pushed southern Democrats into a de facto alliance with Republicans that largely controlled the House and Senate until 1974, when Watergate led to a huge influx of northern liberals into the Democratic Party, who then purged all the southern Democrats from their committee chairmanships, thus making them amenable to Republican outreach by Newt.

It had long been assumed by Republicans that because of the Solid South, GOP control of Congress was effectively impossible except very briefly, as in 1946-48 and 1952-54. But Newt, to his credit, recognized that the 1974 election changed the basic equation. He understood that conservative Democrats held precisely those seats, often in the suburbs, that a southern Republican would have the best chance of winning. But Republicans had long given conservative Democrats a pass, viewing them as de facto Republicans. Many such Democrats ran unopposed in the general election for years or faced only token Republican opposition.

Newt helped recruit good candidates and raise money to put up serious opponents to these conservative Democrats long used to doing no fundraising or otherwise campaigning for virtually automatic reelection. They were shocked when they suddenly had to do real work to get reelected and many had no appetite for doing so. They either retired or became Republicans. It took 20 years of work, but New got his dream in 1994 when Republicans took control of both houses of Congress for the first time since 1954, largely due to gains in the South.

Newt was not sure how long his majority would hold, given past history, and so he worked to make institutional changes in the House that would cripple the Democrats when they retook control. He understood that the committees were the heart and soul of the Democratic policy machine, which was so good it forestalled the creation of an external think tank/outreach structure that Republicans had been forced to develop. (Typically, during the period of Democratic congressional control Republicans had a fourth or fewer committee staffers as the majority Democrats had.)

One of Newt’s first actions was to slash committee staffs across the board to deprive Democrats of the resources they needed to make their system work. Total House committee staffers fell from 2,147 in 1993 to 1,266 in 1995. All of the cuts were to Democratic staffs. Further, the committees were deprived of their traditional role as developers of legislation. It had long been the case, as any government textbook from the 1960s will attest, that this is the way a law was made: a bill is introduced, it is referred to a committee for consideration and hence to a subcommittee. The subcommittee would hold hearings and mark-up or amend the legislation, sending it to the full committee for consideration. Then the process would start all over again with new hearings and a new mark-up. Southern Democrats were quite insistent on this process. Should a member try to circumvent the committee system by offering legislation from the floor as an amendment, it would either be blocked by the House Rules Committee or suffer by losing the votes of every southern Democrat even if they supported the legislation in principle. Upholding the regular order was part of the power of southern Democrats in Congress.

Under Newt, the committees became structures without function. All legislation was developed in the Speaker’s office, often written by lobbyists and staffed by young people who were little more than interns. This legislation went straight to the Rules Committee and then to the House floor, bypassing the committee of primary jurisdiction where members and staff with expertise might raise too many questions about whether it was a good idea and whether it would work—two big questions Newt never bothered with. No hearings were held where administration or public witnesses could comment—that would have slowed the process down and possibly exposed flaws in Newt’s brilliant plans.

I cannot now find the data, but I know that the number of hearings in Congress fell sharply after Newt neutered the committees and slashed the staff. Newt understood what powerful vehicles hearings with genuine experts could be to the support of or opposition to a legislative initiative. The committee I worked for, the Joint Economic Committee, could not report legislation and could only hold hearings and issue reports. With just this power we had an enormous impact, so it should not be underestimated.

This brings me to the primary element of a Democratic agenda should they get control of the House—revitalize the committees and hire tons of new staff to develop a Project 2029 for the next Democratic president. Hold hearings to get new ideas, invite the best Democratic policy thinkers to testify. This will have the double benefit of plowing the ground for legislation and shining a light on the party’s best and brightest members and policy thinkers. Revive the subcommittees so almost every Democrat in the House chairs one. Give them free reign to follow their nose and develop symbiotic contacts in the media. It’s a system that worked before and will work again. Get those C-SPAN cameras in the hearing rooms. Issue reports on slow news days for maximum impact.

I fear, however, that this is not what Democrats will do. Democratic Speakers like having all the power Newt conferred them with and have never given it up when Democrats were in control previously. Plus members are too busy taking vacations in their districts and fundraising to have any time for hearings. And when they do hold hearings, members all ask the same dumb questions that witnesses can easily filibuster without answering, since the 5-minute rule usually applies. Moreover, Democrats are easily distracted by a perceived need for administration witnesses who guarantee press coverage and sound-bites but seldom reveal anything useful.

In my opinion, the real work of the committees does not require testimony from imbecilic Trump administration witnesses. It’s really think tank work—learning the issues, developing staff expertise, drafting bills that embody Democratic priorities, getting them costed out by CBO and JCT, having analyses prepared by the CRS etc. Investigative work can be initiated by the GAO, a very powerful but very slow agency that has been underutilized by Democrats.

I expect that House Democratic leaders will instead waste vast amounts of time futilely trying to legislate. This is a bad idea because the Senate will likely remain in Republican hands where all House-passed bills will die. And even if Democrats get control of the Senate, all House-passed bills will still die because of the filibuster. And if, by some miracle, a bill passes the House and Senate, Trump will just veto it or simply refuse to act on it, as was the case with the Epstein files law.

I think it’s better to use the House as a huge policy development and PR operation promoting the Democratic agenda. But it will require tens of millions of additional dollars to hire new committee staff, which is Congress’s heart and soul. I fear Democratic leaders will be reluctant to do so lest they be accused of being big government liberals by Republicans. This would be a tragic wasted opportunity. Because of media and government layoffs there are thousands of highly-skilled, unemployed reporters and former government insiders available to be hired for committee staff positions. They know exactly where the bodies are buried and how to begin the process of fixing our broken government.

Of course there are many other things Democrats could do with control of the House. One is to use C-SPAN to get their message out. Special orders can be arranged with multiple members speaking on the same topic in prime time. Eventually, some will develop expertise on important subjects and become go-experts by the media, thus enhancing their influence. This was one of Newt’s ideas but it was a good one.

People will notice that all my suggestions are about process and procedure, not policy per se. But I think having a policymaking process that works will automatically lead to better policies; it’s the foundation of a broad assault on Trump, to plow salt into the ground of Trumpism and fix everything that he broke starting on January 20, 2029.

September 23, 2005

Thank you for the opportunity to testify before you this morning. As you know, I testify as a Republican—I have served in senior political positions in Ronald Reagan’s White House and George H.W. Bush’s Treasury Department, and as executive director of the Joint Economic Committee, a cosponsor of this hearing. However, I do not represent the Republican Party or any organization with which I may be associated. I am here speaking only for myself.

I testify as someone who is very disenchanted with his party’s fiscal policy since 2001. Unlike the other witnesses, I am less concerned about the deficit per se or about the size of the tax cuts enacted over the last five years. Rather, what really bothers me is the increase in spending and expansion of government that my party has been responsible for.

I used to believe that the Republican Party was the party of small government. That’s why I became a Republican. I don’t believe that the federal government has the right to one penny more than absolutely necessary to fulfill its essential functions as spelled out in the Constitution. I think government is over-intrusive and could do what it has to do far more efficiently and at lower cost, which means with lower taxes.

Therefore, it bothers me a great deal when Republicans initiate new entitlement programs, massively expand pork-barrel spending, and show the most callous disregard for fiscal integrity. Not too many years ago, Ronald Reagan vetoed a politically popular highway bill because it contained 157 pork-barrel projects. The latest bill contained at least 5,000. Yet President Bush signed this $295 billion bill into law, despite having promised repeatedly to veto a bill larger than $256 billion.

For the life of me, I cannot understand why President Bush seems so incapable of using his veto pen. His father knew how to veto bills. He vetoed 29 of them in his four years in office. But in his first four-plus years, this President Bush has vetoed nothing. He is the first president since John Quincy Adams to serve a full term without vetoing anything. Curiously, Adams is also the only other son of a former president to become president—and his father, John Adams, didn’t veto anything, either.

When I complain about this to the White House, they tell me that it is very hard to veto bills when your party controls both Congress and the White House. But this explanation is simply implausible. Franklin D. Roosevelt had huge Democratic majorities, yet vetoed a record 372 bills. John F. Kennedy, Lyndon Johnson and Jimmy Carter also had large majorities of Democrats, yet Kennedy vetoed 12 bills during his short presidency, Johnson vetoed 16, and Carter vetoed 13.

I won’t bore this committee with numbers. You know them as well as I do. Suffice it to say that our fiscal situation is dire and growing worse by the day. My principal concern, however, is not with today’s deficits—even if they are swollen by Katrina- and Rita-related emergency spending. What worries me is the retirement of the baby boom, the first of which turns 62 in 2008. I’m not saying that we are close to driving off a fiscal cliff, but clearly the implications of this event have not impacted on policymakers in any way whatsoever.

I have struggled with a way to illustrate the consequences of an aging population and its effect on the budget. This is the best I have been able to do. Social Security’s unfunded liability comes to 1.2 percent of GDP in perpetuity (1.4 percent without the trust fund)—about what is raised by the corporate income tax—according to that program’s actuaries. The comparable number for Medicare is 7.1 percent of GDP—about what is raised by the individual income tax. And remember that these figures are for the unfunded portion of these programs, so they are over and above payroll taxes.

The chilling conclusion, therefore, is that virtually 100 percent of all federal taxes, on a present value basis, do nothing but pay for Social Security and Medicare. Unless there are plans to abolish the rest of the federal government, large tax increases are inevitable.

Let me be clear that I am no advocate of higher taxes. I’m the one who drafted the Kemp-Roth bill back in the 1970’s and I have spent most of my career looking for ways to cut tax levels and tax rates. But that was predicated on an assumption those supporting tax cuts also wanted to downsize government. I never saw tax cuts as a substitute for spending cuts, but more as sugar to make the medicine go down. My ultimate goal was to reduce both taxes and spending.

Unfortunately, few in my party seem to share this philosophy any longer. For many, tax cuts have become a substitute for spending cuts. It truly amazes me how often I hear people on my side talk about cutting taxes as if this is the only thing necessary to downsize government. They seem genuinely oblivious to the fact that the burden of government is largely determined by the level of spending, not taxes. Nor do they understand that in the long-run, all spending must be paid for one way or another. Increasing spending today, therefore, absolutely guarantees that taxes will have to be raised in the future.

I am often criticized by friends on my side of the aisle for implicitly endorsing tax increases. I do no such thing. I am simply adding two and two and getting four while my friends seem to think there is some way of only getting three.

They also criticize me for implicitly abandoning the fight to cut spending and downside government. Again, I plead innocent. It is not I who has abandoned the fight, but my party. I don’t need to remind anyone here that the biggest spending increases in recent years passed Congresses with Republican majorities largely without Democratic votes. Nor do I need to remind anyone here that during the Clinton years we not only went from budget deficits to budget surpluses, but did so to a large extent by cutting spending—something my conservative friends seldom acknowledge.

Here’s the basic accounting. Defense spending fell by 1.4 percent of GDP between 1993 and 2000, and domestic discretionary spending fell from 3.8 percent to 3.3 percent. Even spending on entitlements fell for temporary demographic reasons, from 10.2 percent of GDP to 9.8 percent. Finally, interest on the debt fell, largely because of falling interest rates, from three percent of GDP to 2.3 percent. The result was an overall decline in spending of three percent of GDP, from 21.4 percent to 18.4 percent, the lowest level since 1966, before the Great Society geared up.

On the revenue side, individual income taxes rose by 2.5 percent of GDP, mainly as the result of rising incomes that pushed people up into higher tax brackets and higher capital gains taxes from the booming stock market. Corporate income taxes and payroll taxes added another 0.8 percent, for a total revenue increase of 3.3 percent of GDP. Thus lower spending and higher revenues constituted a fiscal turnaround of 6.3 percent of GDP, which explains how a deficit of 3.9 percent of GDP in 1993 became a budget surplus of 2.4 percent by 2000.

I don’t give President Clinton full credit for this performance. I think most of the credit goes to gridlock. Mr. Clinton wouldn’t support the Republican Congress’s spending and it wouldn’t support his. So for a blessed six years, government effectively was on automatic pilot. Sadly, unified government has led to an utter lack of restraint by my party that is simply inexcusable. It is extremely dismaying for me to hear House Majority Leader Tom Delay say that there is no fat in the budget and that Republicans have cut it to the bone. This is, quite frankly, ludicrous. My real fear, however, is that he may actually believe it.

I remain convinced that given the total lack of fiscal responsibility demonstrated by the Republican Party that very large tax increases are inevitable. I believe that the fiscal hole is now so large that it is unrealistic to think that we can just tinker with the tax system, as we did so often in the 1980’s, and raise enough revenue to pay for spending commitments that have been made. And under the circumstances, I have no faith whatsoever that spending will be significantly restrained—at least not by my side. They would first have to admit error and beg for forgiveness from people like me, something I don’t expect to be forthcoming any time soon.

Therefore, like it or not, we must travel the same route taken by the Europeans, who long before us made peace with the welfare state and tried to figure out how to pay for it with the least negative impact on economic growth and incentives. They all imposed a broad-based consumption tax called the value-added tax as an add-on tax to all the others. I think it is only a matter of time before we are forced to do the same thing and the longer we wait the more painful it will be when it is finally done. Unfortunately, we are more than likely going to have to be forced into it by a financial crisis of some sort. It would be better to avoid that cost and deal with our fiscal situation rationally. But I see no leadership on either side that would allow that to happen.

I don’t know when, where or how a financial crisis will develop. I only know that trends that can’t continue don’t. Since it is unlikely that the vast fiscal imbalance will be resolved with a whimper, it becomes a certainty that it will end with a bang. Among the areas ripe for triggering a crisis are a popping of the housing bubble, a crash of the dollar, a mistake by some big hedge fund, excessive tightening by the Fed and others too numerous to mention. It will take extraordinary luck and skill to avoid every boulder in the stream and I have little confidence that this administration has the personnel to even give us a fighting chance. There are too many Michael Browns at senior levels of the government today and too few Bob Rubins or Alan Greenspans.

Contrary to popular belief, I don’t think the American people are a bunch of children who only want hand-outs from the government and will only reward the party that promises them something for nothing. Experience and academic research confirm that they are more likely to support the candidate who treats the public purse with prudence and trust and not as a piggy bank to be routinely broken on a whim. In short, I think there is a political market for the party and the candidate who speaks honestly about the nature of the fiscal crisis that is looming. The payoff may not be immediate and the public trust has to be earned by more than just rhetoric. But if, as I believe, some event will eventually change the political landscape, voters will remember who spoke the truth and who mouthed the platitudes.

It’s dirty work, but someone has to do it. Since my party won’t do it, yours is going to have to. If it’s done right, your party will gain at the expense of mine and you will deserve the benefits and my party will deserve the electorate’s disdain.

It’s been an article of faith among conservatives since the beginning of the financial crisis in 2008 that inflation, even hyperinflation, is right around the corner. This follows from a core conservative idea that inflation invariably results from excessive increases in the money supply. As Milton Friedman (1970: 24) put it in an oft-quoted line: “Inflation is always and everywhere a monetary phenomenon.” Thus, when the Federal Reserve vastly expanded the money supply in late 2008, conservatives anticipated a sharp rise in inflation. Bank reserves rose from about $10 billion in late 2008 to well over $1 trillion a year later and continued rising to almost $3 trillion by the middle of 2014.

The fear of inflation was not an unreasonable idea at the time. There is little doubt that the inflation of the 1970s had its roots in an excessive expansion of the money supply primarily engineered by Federal Reserve Board chairman Arthur Burns to goose the economy to aid Richard Nixon’s reelection in 1972 (Abrams 2006; Pierce 1979; Poole 1979). It took a decade and several recessions to tame this inflation. Therefore, conservatives believe that the cost of not nipping inflation before it becomes embedded in the economy is far higher than whatever temporary benefits might result from easy money, even in recessionary conditions.

In 2009, right after Obama took office, many conservative economists suddenly predicted an imminent rise in inflation after being silent while George W. Bush was in office.

· John Taylor, Stanford: “There is no question that this enormous increase from $8 billion to $3,365 billion will lead to higher inflation.”

· Martin Feldstein, Harvard: “The unprecedented explosion of the US fiscal deficit raises the specter of higher future inflation.”

· Arthur Laffer, economic consultant: “To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s.”

· Alan Greenspan, former Federal Reserve Board chairman: “Statistical analysis suggests the emergence of inflation by 2012.”

Indeed, many Republicans predicted not just inflation, but hyperinflation. (Economists define hyperinflation as an inflation rate exceeding 50 percent per month; see Cagan 1956: 25.)

· Rep. Dan Burton of Indiana: “We are heading toward hyperinflation again.”

· Senator John McCain of Arizona: “My great worry is that if we do not account for this debt in some way, if we continue trillions of dollars of unnecessary and wasteful spending, then obviously we will find ourselves back in the situation we were in the 1970s, when we had hyperinflation and had to debase the currency.”

· Rep. Paul Broun of Georgia: “I think we’re fixing to head for hyperinflation.”

Few conservatives seem to have understood that standard conservative macroeconomic policy, as articulated by Milton Friedman, is that the Fed should do exactly what it did – massively expand the money supply to keep nominal incomes from crashing, which was the central cause of the Great Depression, according to Friedman (Friedman & Schwartz 1963: 299-419). In discussing Japan in 2000, which had economic problems very similar to those of the United States after 2008, Friedman offered this commentary and advice:

During the 1970s, you had the bubble period. Monetary growth was very high. There was the so-called speculative bubble in the stock market.

In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi-recession ever since. Monetary growth has been too low. Now the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy (Friedman 2000: 421).

Economist Anna Schwartz, Friedman’s longtime collaborator, confirmed that his advice for Japan is exactly what the U.S. needed in 2009. Said Schwartz at a Council on Foreign Relations conference on March 30, “Instead of fiscal stimulus we should have monetary stimulus. Monetary stimulus historically has ended recessions…. Monetary stimulus means that the central bank is increasing the supply of money” (CFR 2009a).

Friedman was also highly critical of a do-nothing policy toward economic downturns, as preached by the so-called Austrian school of economists, who are highly influential in the Republican Party. Friedman said the Austrian policy “has done the world a great deal of harm” (quoted in Epstein 1998).

The problem is that year after year, inflation was low and showed no sign of rising. The Consumer Price Index has been below two percent since 2011. Inflation consistently came in well below the Federal Reserve’s own inflation target and indicators of future inflation, such as long-term interest rates and Treasury Inflation-Protected Securities (TIPS), showed that low inflation was well-anchored in financial market expectations (Torres 2014). (Economists generally believe that long-term interest rates will rise as soon as expectations of inflation rise.)

Yet, year after year, conservatives continue to say that high inflation is right around the corner. No amount of empirical data seems to shake their deeply-held belief that the Fed made a dreadful mistake that would, eventually, make the inflation of the 1970s look tame by comparison.

On November 15, 2010, a group of conservatives – including reputable economists such as Michael Boskin, Ronald McKinnon and John Taylor, all of Stanford, as well as some Wall Street analysts and journalists – published an open letter to Fed Chairman Ben Bernanke, a Republican originally appointed by George W. Bush who had previously served as his Council of Economic Advisers chairman. The letter (WSJ 2010) said:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

One can argue that two years into its policy of quantitative easing, there should have been signs of inflation stirring if the conservative view is correct. But the facts increasingly supported the view, often articulated by Paul Krugman in his New York Times blog, that the zero-bound on interest rates was binding and that there was no reason to expect a sharp increase in inflation anytime soon. The zero bound means that market interest rates can never go below zero or people will simply hoard cash, but sometimes economic conditions call for negative interest rates to force money into circulation (Yates 2004).

Even before the conservative letter was released, Ben Bernanke and the Fed itself acknowledged that low interest rates constrained its ability to stimulate the economy (Chan 2010). It was evident that velocity (the rate of turnover of money as measured by the gross domestic product divided by the M2 money supply) was falling sharply, offsetting the potential inflationary effect of a higher money supply (Wen & Arias 2014). A fall in velocity has exactly the same economic effect as a shrinkage of the money supply.

Few conservatives ever noted the significance of the Fed’s policy of paying interest on bank reserves, which are like deposits banks keep at the Fed itself. Just as with individuals, higher interest rates will encourage banks to keep more money on deposit and therefore out of circulation in the economy, where it might be inflationary. (The policy of paying interest on reserves, which the Fed began in 2008, originated with Friedman 1960: 71-75.) In effect, money held in bank reserves was sterilized and unable to cause inflation. Although the rate was low, it was risk-free and better than banks could get from buying Treasury bills. A libertarian economist, Lawrence White of George Mason University, finally admitted this fact, which people like Krugman had pointed to for years as a reason not to expect inflation from the Fed’s monetary policy. In congressional testimony in 2012, White said:

The Fed can reduce the incentive of banks not to lend by scaling back the interest they pay on reserves. Banks are sitting on more than a trillion dollars in excess reserves, in large part because the interest rate the Fed is paying on those reserves is about the same as the interest rates the banks can earn on T-bills (Committee on Financial Services 2012: 21).

White reiterated his point in congressional testimony in 2014 as well:

If you just look at the monetary base and see it double and triple the Fed’s balance sheet…then you think high inflation is coming, but you have to recognize that the Fed has sterilized those injections it is paying on those reserves (Committee on Financial Services 2014: 16).

Another libertarian economist, Gary North, even noted that the Fed policy of paying interest on reserves is deflationary and he advocated negative interest rates on reserves to get the money moving – a position historically associated with liberals like Princeton economist Alan Blinder, a former vice chairman of the Federal Reserve Board (Blinder 2012). Said North on August 3, 2012:

There can be monetary deflation as a result of excess reserves held at the Fed by commercial banks. But this is Fed policy. The Fed pays banks interest on the deposits. Even if it didn’t, there would still be excess reserves. But by imposing a fee on excess reserves, the Fed could eliminate excess reserves overnight. Then the money multiplier would go positive, price inflation would reappear, and the Fed would get blamed. So, it maintains a policy of restricting the M1 multiplier.

So if conservative economists knew that a big increase in the money supply was exactly what the economy needed to forestall another Great Depression and understood perfectly well why the money supply increase was not inflationary, why did they keep saying hyperinflation was right around the corner? Rep. Bill Foster of Illinois asked Larry White, “So you would attribute the failure of those on the right to that there wasn’t runaway inflation to a lack of economic sophistication, roughly speaking?” White said yes.

I don’t buy it. I think it suited the conservative political agenda to pretend that hyperinflation was imminent. I suspect that at least a few conservative economists may well have known that adoption of a tight monetary policy would have tanked the economy and improved the odds of Republicans retaking the White House. Moreover, there were many conservatives who made a considerable amount of money promoting the sale of gold coins and other inflation hedges. Radio talkers Glenn Beck and Sean Hannity were particularly aggressive in promoting gold to their unsophisticated listeners (Carter 2009; Seitz-Wald 2012).

Nevertheless, the concerns of conservatives were not absurd – up to a point. It was possible that the time lag between rises in the money supply and inflation had simply been lengthened by the recession. Unless the fundamental relationship between the money supply and inflation that every conservative learned in the 1970s was completely wrong, higher inflation was still in the pipeline.

The real problem is that six years after the beginning of quantitative easing and four years after the letter was published, there were still no signs of inflation in any commonly used index, interest rates remained low and even the price of gold, which many conservatives view as the most accurate measure of future inflation, had fallen sharply from its peak, from close to $2,000 per ounce in late 2011 to about $1,200 per ounce in 2014.

At this point, a reasonable person would be forced to admit that a prediction of high inflation made in 2010 was based on faulty theory. Yet, few of those who signed the letter to Bernanke admitted to doubts when queried by Bloomberg News in October 2014 (Melby, Marcinek & Burger 2014). It is worth quoting them at length.

Jim Grant, publisher of Grant’s Interest Rate Observer, in a phone interview:

“People say, you guys are all wrong because you predicted inflation and it hasn’t happened. I think there’s plenty of inflation -- not at the checkout counter, necessarily, but on Wall Street.”

“The S&P 500 might be covering its fixed charges better, it might be earning more Ebitda [earnings before interest, taxes, depreciation and amortization], but that’s at the expense of other things, including the people who saved all their lives and are now earning nothing on their savings.”

“That to me is the principal distortion, is the distortion of the credit markets. The central bankers have in deeds, if not exactly in words -- although I think there have been some words as well -- have prodded people into riskier assets than they would have had to purchase in the absence of these great gusts of credit creation from the central banks. It’s the question of suitability.”

John Taylor, professor of economics at Stanford University, in a phone interview:

“The letter mentioned several things – the risk of inflation, employment, it would destroy financial markets, complicate the Fed’s effort to normalize monetary police – and all have happened.”

“This is the slowest recovery we’ve ever had. Working-age employment is lower now than at the end of the recession.”

“Where is the evidence that it worked? It’s just not there.”

Douglas Holtz-Eakin, a former director of the Congressional Budget Office, in a phone interview:

“The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will.”

Niall Ferguson, Harvard University historian and author of The Ascent of Money: A Financial History of the World, referred Bloomberg News to a blog post he wrote in December 2013, saying his thoughts haven’t changed:

“Though generally regarded by a cause for celebration (even by those commentators who otherwise lament increasing inequality), this bull market has been accompanied by significant financial market distortions, just as we foresaw.”

“Note that word ‘risk.’ And note the absence of a date. There is in fact still a risk of currency debasement and inflation.”

David Malpass, former deputy assistant Treasury secretary, in a phone interview:

“The letter was correct as stated.”

“I’ve observed that credit is flowing heavily to well-established borrowers. This has worsened income inequality and asset inequality going on in the economy. You’re looking at the companies that got credit. The problem is the new businesses that didn’t get credit. The facts are that private sector credit growth has been slow. It is a zero sum process where each corporate bond issue was money that otherwise might have gone to a new business or a small business.”

Amity Shlaes, chairman of the Calvin Coolidge Memorial Foundation, wrote in an e-mail:

“Inflation could come, and many of us are concerned that the nation is not prepared.”

“The rule with inflation is ‘first do no harm.’ So you always want to be careful.”

Peter Wallison, senior fellow at the American Enterprise Institute, in a phone interview:

“All of us, I think, who signed the letter have never seen anything like what’s happened here.”

“This recovery we’ve had since the end of 2009 has been by far the slowest we’ve had in the last 50 years.”

Geoffrey Wood, a professor emeritus at City University London’s Cass School of Business, in a phone interview:

“I think everything has panned out. We should probably be more cautious about the timing. Economists should always be cautious about the timing. Timing is close to totally unpredictable.”

“The economy is growing. If the Fed doesn’t ease money growth into it, inflation could arrive.”

Richard Bove, an analyst at Rafferty Capital Markets LLC, in a phone interview:

“If interest rates are low, it means a large portion of the population was made poor because passive income declined.”

“If you take a look at the economy, I think that the economy has grown in line with the growth in population and the growth in income. I would argue that the bulk of this QE money never reached the economy.”

“Someone’s got to prove to me that inflation did not increase in the areas where the Fed put the money. We know where they put the money. And we know where they put the money prices went up dramatically. And we also know the consumer price index does not pick up either of those price increases. Housing prices are not in the CPI and fixed income prices are not in the CPI. So how do you know that QE benefited the economy?”

Amity Shlaes (2014) discussed her thoughts at greater length in a column for National Review, a conservative magazine. Basically, she said that even if she was wrong, factually, it wasn’t important and a good idea to warn about imminent inflation anyway:

Well, inflation hasn’t come on a big scale, apparently. Or not yet. Still, a lot of us remain comfortable with that letter, since we figure someone in the world ought always to warn about the possibility of inflation. Even if what the Fed is doing is not inflationary, the arbitrary fashion in which our central bank responds to markets betrays a lack of concern about inflation. And that behavior by monetary authorities is enough to make markets expect inflation in future.

Shlaes also repeated her belief, expressed in a column two years earlier, that inflation can start suddenly, without any notice at all; her prime example being the German hyperinflation of 1923 (Shlaes 2012). In point of fact, Shlaes is wrong. The German hyperinflation did not start suddenly or unexpectedly. There was plenty of advance warning in the foreign exchange market. Prices began rising in 1919 and began rising at a faster rate in 1921, well before the hyperinflation hit in 1923 (Hetzel 2002; Webb 1986). The New York Times published dozens of reports of impending hyperinflation in 1921 and 1922 (for example, New York Times 1921, 1922).

The conservatives who signed the Bernanke letter were not alone in sticking to their guns with their belief that higher inflation was inevitable, despite the continuing evidence to the contrary. For example, Carnegie Mellon University economist Allan Meltzer said on May 6, 2014, “Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the ‘stagflation’ of the 1970s. Other prices will follow.”

While it is true that food prices were rising slightly more rapidly in mid-2014, others were flat or falling. In particular, the price of oil virtually collapsed from over $100 per barrel to less than $50 over the course of a few months in late summer and fall 2014.

To my knowledge, the only conservative economist who admitted error is Arthur Laffer. In an interview with Business Insider on January 13, 2014, he conceded that there was something fundamentally wrong with the conservative model of inflation. Said Laffer, “Usually when you find the model is this far off, you’ve probably got something wrong with the model, not that the world has changed. Inflation does not appear to be monetary base driven” (quoted in Wile 2014).

One explanation for the failure of the conservative monetarist model to work is that increases in the money supply need to be continuous or expected to continue for some time before they affect prices. One-off increases, even very large ones, may not have inflationary effects if markets are convinced that they will be reversed in the near future.

In late 2014, another early inflation-monger, University of Chicago economist John Cochrane (CFR 2009b; Cochran 2010, 2011) simply switched gears and started warning about deflation, without ever explaining why the inflation he long predicted never happened or how deflation can be explained by the monetarist model (Cochran 2014).

Although conservatives are obsessed with inflation, studies show that people are less bothered by it than they are by high unemployment (Blanchflower et al. 2014; Di Tella, MacCulloch & Oswald 2001). This is important because there tends to be a trade-off between one and the other – the higher inflation is, the lower unemployment and vice versa. This is often called the Phillips Curve.

References

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Blanchflower, David, et al., “The Happiness Trade-Off between Unemployment and Inflation.” Journal of Money, Credit and Banking (October): 117-41

Blinder, Alan. 2012. “How Bernanke Can Get Banks Lending Again.” Wall Street Journal (July 22).

Cagan, Phillip. 1956. “The Monetary Dynamics of Hyperinflation.” In Studies in the Quantity Theory of Money, ed. Milton Friedman, pp. 25-120. University of Chicago Press.

Carter, Bill. 2009. “Glenn Beck’s Gold Deal Raising Questions at Fox.” New York Times (December 14).

CFR. 2009a. “Infrastructure Spending to Grow.” Council on Foreign Relations (March 30).

CFR. 2009b. “The New Financial Deal.” Council on Foreign Relations (March 30).

Chan, Sewell. 2010. “Bernanke to Offer Outlook as Fed Weighs Bolder Steps.” New York Times (August 26): B1.

Cochrane, John H. 2010. “Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic.” NBER Working Paper No. 16087 (June).

Cochrane, John H. 2011. “Inflation and Debt.” National Affairs (Fall): 56-78.

Cochrane, John H. 2014. “Who’s Afraid of a Little Deflation?” Wall Street Journal (November 13).

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Committee on Financial Services. 2014. Federal Reserve Oversight: Examining the Central Bank’s Role in Credit Allocation, U.S. House of Representatives, Subcommittee on Monetary Policy and Trade, 113^th Cong., 2^nd sess., Serial 113-70 (March 12). U.S. Government Printing Office.

Di Tella, Rafael, Robert J. MacCulloch and Andrew J. Oswald. 2001. “Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness.” American Economic Review (March): 335-41.

Epstein, Gene. 1998. “Mr. Market.” Barron’s (August 24): 32.

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Friedman, Milton. 1960. A Program for Monetary Stability. Fordham University Press.

Friedman, Milton, 1970. The Counter-Revolution in Monetary Theory. Institute of Economic Affairs.

Friedman, Milton. 2000. “Canada and Fixed Exchange Rates.” Bank of Canada (November 19): 413-16.

Friedman, Milton, and Anna Jacobson Schwartz. 1963. A Monetary History of the United States, 1867-1960. Princeton University Press.

Greenspan, Alan. “Inflation – the Real Threat to Sustained Recovery.” Financial Times (June 26).

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Krugman, Paul. 2010. “Nobody Understand the Liquidity Trap (Wonkish).” New York Times (July 14).

Laffer, Arthur B. 2009. “Get Ready for Inflation and Higher Interest Rates.” Wall Street Journal (June 10).

Melby, Caleb, Laura Marcinek and Danielle Burger. 2014. “Fed Critics Say ’10 Letter Warning Inflation Still Right.” Bloomberg News (October 2).

Meltzer, Allan H. 2014. “How the Fed Fuels the Coming Inflation.” Wall Street Journal (May 6).

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Yates, Tony. 2004. “Monetary Policy and the Zero Bound to Interest Rates: A Review.” Journal of Economic Surveys (July): 427-81.

To conservatives, the corporation is often treated as the pinnacle of capitalist development. This justifies their deferential treatment of corporations in terms of taxation and government regulation, which, they claim threaten to kill the goose that lays golden eggs.

In reality, the corporation wouldn’t exist in a pure free market. It is and always has been a creature of the state. For many years, corporate status was only granted to businesses deemed to be in the public interest, such as companies that built turnpikes and canals. But as time has gone by, the idea that corporations exist at the pleasure of the state and in the public interest has been forgotten.

Today, it is widely believed that corporations exist for the sole purpose of making a profit. Corporate executives who believe corporations have a social responsibility are considered old fashioned. But the costs of this new view of the corporation have been very high in terms of lost jobs and investment, and minuscule wage growth for more than a generation. Shareholders, the owners of the corporation, haven’t even benefitted that much from the laser-like focus on profit above all else because much of it has been siphoned off by corporate executives, who have enriched themselves at the expense of shareholders, and financial institutions that have encouraged companies to become highly leveraged.

Corporations have existed since Roman times. Until the Industrial Revolution, they tended to take the form of guilds, organizations of skilled laborers. The essential feature of these early corporations and guilds was their monopoly status. One had to belong to a guild or work for the corporation to engage in particular businesses. Well into the modern era, corporate charters were often granted by kings or parliaments to confer monopoly status on trade with particular countries.

Until the early part of the 19^th century, the corporate form of business organization was rare. Most businesses were partnerships or sole proprietorships. Since most businesses were small, they did not need one of the corporation’s greatest benefits: the ability to raise capital through stock offerings, which was facilitated by the corporation’s longevity. The rise of the railroads, which required more private capital than had ever before been raised, was a key factor in the development of the modern corporation.

But the corporation remained a privileged institution that could only be obtained by legislative charter. Furthermore, corporations of the early 19^th century, in both the United States and Britain, lacked an important characteristic of today’s corporations: limited liability. Because of that, a corporation’s liabilities may only be paid out of corporate assets; creditors and others with claims against a corporation may not go after the assets of shareholders, whose losses are limited to the value of their shares.

Limited liability became another privilege granted by the state to corporations, which greatly hastened their development. States also eased the requirements for obtaining corporate status. Instead of requiring a legislative charter, the creation of a corporation was simply rubber stamped by state officials (Handlin & Handlin 1945; Ireland 2010; Letwin 1965: 62-67; Livermore 1935; Seavoy 1978; Shannon 1954).

Well into the 20^th century, the idea persisted that corporations were only permitted to exist and enjoy benefits unavailable to other forms of business, such as unlimited life and limited liability, because they served some sort of public purpose. Corporations commonly deferred to the interests of the communities in which they operated and other stakeholders, which was widely viewed as necessary to their legitimacy. In 1957, this was the common view of a corporation’s diverse constituencies and priorities:

No longer the agent of proprietorship seeking to maximize return on investment, management sees itself as responsible to stockholders, employees, customers, the general public, and, perhaps most important, the firm itself as an institution. To the customers, management owes an improving product, good service, and fair dealing….To the employees, management owes high wages, pensions and insurance systems, medical care programs, stable employment, agreeable working conditions, a humane personnel policy. Its responsibilities to the general public are widespread: leadership in local charitable enterprises, concern with factory architecture and landscaping, provision of support for higher education, and even research in pure science, to name a few (Kaysen 1957: 313).

This all began to change in the 1970s. University of Chicago economist Milton Friedman fired the first salvo against the traditional view of corporate responsibility as being divided among various stakeholders. He said this is wrong; the corporation has only one responsibility: to the shareholder, who is the owner of the business. In Friedman’s view, “ownership” confers an almost absolute right to use whatever property is owned in whatever way the owner chooses, subject only to the constraints of law. Since the shareholder is the owner, he is entitled to 100 percent of the profit less taxes. Any benefits the corporation confers upon non-shareholders that aren’t for the ultimate purpose of profitability are, in essence, theft of money that belongs to the shareholder. Friedman believed that narrowing the focus of the corporation to the single goal of maximum profitability would improve productivity and efficiency, and thereby raise economic growth and improve wellbeing to the greatest extent that corporations in general could do so.

In an extraordinarily influential article in 1976, University of Rochester economists Michael Jensen and William Meckling argued that shifting the focus of management solely toward the maximization of shareholder value offered a solution to the longstanding problem of ownership and control of the corporation (Jensen & Meckling 1976). It has been argued that the popularity of the shareholder primacy approach owed much to the unique economic conditions of the early 1970s because the stock market was widely viewed as under-valued (Stout 2013).

Since at least the 1930s, economists and legal scholars had been concerned about the fact that, in modern large corporations, the owners (i.e., the shareholders) had little control over the assets that they owned. As a practical matter, they were controlled by corporate management (Berle & Means 1935). In theory, mangers were simply employees working for the shareholders, who were represented by the corporation’s board of directors to look out for their interests. But in practice, boards did a poor job of representing shareholders. Being a board member was not a full-time job; boards might only meet a couple of times a year. Boards lacked the information necessary to really understand what the company was doing on a day-to-day basis and often merely ratified whatever the CEO was doing as long as he was doing reasonably well. And board members tended to be hand-picked by the CEO, making them effectively subservient to management.

The problem of ownership and control in a corporation has existed since the beginning. In 1776, Adam Smith defined it:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it (Smith 1937: 700).

Elimination of managerial discretion, as Friedman, Jensen and Meckling advocated, and forcing management to concentrate only on profitability would, they argued, align management’s objectives with the interests of shareholders in a way that could be measured by share prices and rates of return. To further align their interests, boards needed to adjust managerial compensation to be more dependent on profitability. Instead of simply paying them a salary like all the other employees, boards began granting stock options to senior management so that higher profits and share prices would translate directly into higher compensation.

As with many ideas that look good on paper, encouraging management to put profits first and tying its compensation to near-term stock prices had serious downsides. It made management very short-term focused, often causing it to put the corporation’s long-term interest at risk, a point made as early as 1980 by Harvard Business School professors Robert Hayes and William Abernathy. It also encouraged stock price manipulation through share buybacks. By 1986, management guru Peter Drucker was warning about the negative consequences of the profits-centric approach:

Corporate capitalism promised that large corporations would be run in the interests of a number of “stakeholders.” Instead, corporate managements are being pushed into subordinating everything (even such long-range considerations as a company’s market standing, its technology, indeed its basic wealth-producing capacity) to immediate earnings and next week’s stock price. A Marxist might well say that corporate capitalism has turned into “speculator’s capitalism” (Drucker 1986).

The problem was exacerbated by 1993 legislation limiting the tax deductibility of managerial pay to $1 million per year; the idea being to put limits on managerial compensation. But, importantly, incentive pay, such as stock options, was exempted. This led corporate boards to make stock options an even larger component of executive compensation, making executives far richer in the process – a classic example of the law of unintended consequences (Ferris & Wallace 2009).

Nevertheless, by the mid-1990s, the idea that corporations should concern themselves solely with making as much profit as possible was so much the conventional wisdom that Bill Clinton could say in a radio address, “The most fundamental responsibility for any business is to make a profit.” This view is shared by the public according to various surveys.

Source: General Social Survey

In a 2014 poll from Marist, 75 percent of people said the top priority of a corporation is to its shareholders. Only 22 percent said it is to the corporation’s employees. In fact, according to an international survey, the Friedman idea is even more popular in socialist Sweden than it is in the U.S.

Source: 2011 Edelman Trust Barometer

On the other hand, while the profit motive is supported, most people still rank other corporate objectives much more highly.

Source: Shell Oil Company/Peter D. Hart (March 1999)

Some former supporters of the shareholder value movement are now having second thoughts. Jack Welch, CEO of General Electric between 1981 and 2001, has called it a dumb idea. As he told the Financial Times in 2009, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy….Your main constituencies are your employees, your customers and your products” (Quoted in Guerrera 2009).

There is now a growing movement for reinstating the idea of corporate social responsibility and encouraging managers to get away from their single-minded pursuit of short-term profits (Aquinis & Glavas 2012; Carroll & Shabana 2010; Siegel & Vitaliano 2007). But the Friedman approach is now deeply embedded in the psychology of markets and ingrained in a generation of managers. It also powerfully supports the political conservative view that concerns about the environment, diversity, inequality and others have no place in corporate or government policy. It may be impossible to put the toothpaste back in the tube. Ironically, there is a developing strain of libertarian theory that views the Friedman thesis skeptically (Arnold 2003; Mulligan 1986; Nunan 1988).

It used to be that the main reason people bought corporate stock was for the dividend yield; the hope for a rising share price was a secondary consideration. But as corporations focused more on generating profits to the exclusion of all else, and managerial compensation increasingly took the form of stock options, the share price became the primary focus, with dividends falling in importance (Fama & French 2001). Share repurchases became a substitute for dividends (Grullon & Michaely 2002).

Managers rationalized that they were doing shareholders a favor. Dividends were taxed as ordinary income, whereas capital gains were taxed much more lightly. Moreover, capital gains taxes weren’t payable until shares were sold, while taxes on dividends had to be paid annually. Assuming a share repurchase raised share prices by the same amount as would be the case if the money was paid out as a cash dividend, taxable shareholders would prefer share buybacks. (The bulk of shares are owned by nontaxable pension funds.)

But there are problems. One is that managers can control the timing of share buybacks, which they use to pump up stock prices around the time their stock options are vested. Following is the summary of a recent study:

We show that CEOs strategically time corporate news releases to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5 percent more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news. These news releases lead to favorable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, potentially resulting from increased investor attention or reduced information asymmetry. The CEO takes advantage of these effects by cashing out shortly after the news releases (Edmans et al. 2018).

In effect, corporate executives manipulate stock prices for their own benefit. Indeed, for many years, corporations were restricted by the Securities and Exchange Commission from using profits to buy back shares precisely because it could too easily be done to manipulate stock prices. But the SEC changed its policy in 1982 (Dayen 2015). Federal Reserve Board chairman Alan Greenspan explained the significance in a 2002 speech.

Prior to the past several decades, earnings forecasts were not nearly so important a factor in assessing the value of corporations. In fact, I do not recall price-to-earnings ratios as a prominent statistic in the 1950s. Instead, investors tended to value stocks on the basis of their dividend yields. Since the early 1980s, however, corporations increasingly have been paying out cash to shareholders in the form of share repurchases rather than dividends. The marginal individual tax rate on dividends, with rare exceptions, has always been higher than the marginal tax rate on capital gains that repurchases create by raising per share earnings through share reduction. But, until the early 1980s, share repurchases were frowned upon by the Securities and Exchange Commission, and companies that repurchased shares took the risk of being investigated for price manipulation.

In 1982, the SEC gave companies a safe harbor to conduct share repurchases without risk of investigation. This action prompted a marked shift toward repurchases in lieu of dividends to avail shareholders of a lower tax rate on their cash receipts. More recently, a desire to manage shareholder dilution from the rising incidence of employee stock options has also spurred repurchases.

As a consequence, dividend payout ratios, which in decades past averaged about 55 percent, have in recent years fallen on average to about 35 percent. But because share prices have risen so much more than earnings in recent years, dividend yields — the ratio of dividends per share to a company’s share price – have fallen appreciably more than the payout ratio. A half-century ago, for example, dividend yields on stocks typically averaged 6 percent. Today such yields are barely above 1 percent.

The sharp fall in dividend payout ratios and yields has dramatically shifted the focus of stock price evaluation toward earnings. Unlike cash dividends, whose value is unambiguous, there is no unambiguously “correct” value of earnings.

In 2014, 95 percent of the profits of the S&P 500 companies went into share buybacks (Wang & Bost 2014). The dividend yield remains very low by historical standards. In the early 1950s, it was over 6 percent; lately it’s been under 2 percent.

But shareholders don’t benefit as much as it might appear because shares are constantly being diluted by stock options granted to corporate executives, which were given a tax preference in 1981 (Melton 1983). The net benefit to shareholders is much less since much of the share buybacks simply offsets the dilution. Financial analyst Will Becker explains another problem:

Buybacks are typically initiated in good times when stock prices are high…. Corporations end up purchasing their own stock at inflated prices, only to have many of these same shares then redeemed by management as compensation committees increasingly hand out these perks in good times (Quoted in Matthews 2015).

When an employee exercises her stock options, the company issues new stock to cover them. Thus stock options inherently dilute the shares of existing shareholders, making them worth less. When corporate profits are used for stock buybacks, shares are taken out of the market and held by the corporation; thus the number of shares outstanding falls and makes each remaining share worth more. If a company issues $100 million in stock options and buys back $100 million worth of shares, it is a wash; existing shareholders have not benefitted. If the company buys back $150 million in shares, only $50 million of the buyback really benefits shareholders.

Because stock options don’t involve a direct cash outlay, as is the case with wages, shareholders tend to view them as cheaper than salaries, when in fact they are extremely costly from the point of view of the shareholder, coming directly at their expense Hall & Murphy 2003). For this reason, many economists believe it would be better from the shareholder’s point of view if companies abandoned buybacks and went back to issuing dividends. The need to pay dividends and avoid reducing the yield tends to discipline corporate executives to manage for the long term.

Disturbingly, there is growing evidence that share buybacks come at the expense of long-term profitability and the economy as a whole, because they lead managers to reduce or postpone investment spending for new projects, research and development, advertising and maintenance in order to meet near-term earnings targets. In other words, managers are literally destroying shareholder value as a routine way of doing business (Graham, Harvey & Rajgopal 2006; Lazonick 2014; Roychowdhury 2006). This helps explain why nonresidential fixed investment has fallen as profitability has risen.

The demand for profitability has also undoubtedly contributed to job losses in the United States as companies turned to outsourcing to reduce costs and raise profits. Moreover, it has also caused them to take a much harder line against unions and to squeeze worker pay relentlessly, again to cut costs and raise profits, regardless of the human or social consequences. This is one reason why the percentage of employed workers who are members of labor unions has fallen from 18.8 percent in 1984 to just 11.3 percent in 2013. And worker pay, which rose with productivity for generations, has been flat since 2007 despite rising productivity. Output gains that once went largely to workers now pad corporate profits instead (Catts, Robison & Kolet 2013). Labor compensation’s share of GDP, which was about two-thirds for decades, has fallen to less than 60 percent (Elsby, Hobijn & Şahin 2013).

Consequently, even a solid majority of Republicans now believe that corporate executives are overpaid and that their gains have come at the expense of ordinary workers.

Source: Harris Poll

It has also been argued that the excessive short-term focus of corporate strategy blinded managers to signs of economic imbalances that ultimately led to the longest and deepest recession in postwar history. For instance, in July 2007, the CEO of Citigroup defended his bank’s generous lending policy despite signs of a housing bubble, saying, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing” (Quoted in Nakamoto & Wighton 2007). This attitude is evidence that the focus on near-term profitability blinded corporate executives to actions they were taking that proved extremely costly to their companies and the economy in the longer run.

Some of the long-term effects of the profit-centric approach to corporate management are not yet apparent, but could be problems down the road. One is that as a result of share buybacks, corporate takeovers and mergers, and the effects of the financial crisis, the number of publicly-traded corporations listed on U.S. stock exchanges has fallen dramatically (Doidge, Karolyi & Stulz 2017; Grullon, Larkin & Michaely 2019).

Source: World Bank

Concomitantly, fewer Americans own shares of corporate stock, either outright or through a mutual fund. According to Gallup, the percentage of adults (personally or with a spouse) having money invested in the stock market – either in individual stocks, an Individual Retirement Account, mutual fund or 401(k) account – fell from 65 percent in 2007 to 52 percent in 2013.

While we don’t yet know the consequences of this profound change in business ownership, its narrowing may tend to insulate corporate management further from market forces, the opposite of what Friedman intended (Davis 2011). As George W. Bush once put it, “If you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country.” But if fewer Americans own corporate stock and there are fewer corporations with stock to own, then a vital link between the public and the corporate community may be lost, with potential implications for corporate legitimacy, tax policy and government regulation.

The obsession with corporate profits was, arguably, a major cause of the economic crisis. Both investors and professional analysts were deluded into ignoring any indicator of corporate performance other than the share price, which was assumed to simply equal the discounted value of future earnings, whether paid out as dividends or share buybacks. It was also assumed that all information affecting share prices was instantly incorporated into those prices via something called the efficient market hypothesis (Malkiel 2003).

In the 1990s, political conservatives such as James Glassman, Kevin Hassett and Charles Kadlec were quick to embrace the profit-centric focus of the corporation as a way that the average person could get rich quick. Glassman and Hassett wrote an infamous book called Dow 36,000 in late 1999, just before the stock market peaked in early 2000. Kadlec was even more optimistic in a book that appeared almost simultaneously, Dow 100,000, which the author predicted would be reached by the year 2020. The latter book even carried the imprimatur of the New York Institute of Finance. Tellingly, the dust jacket for Dow 100,000 carried the endorsements of leading conservatives:

· Steve Forbes: “I think Dow 100,000 may be prophetic.”

· Art Laffer: “This book is a must-read. I wish I had written it.”

· Jack Kemp: “Every policymaker, investor, and entrepreneur should read Dow 100,000 to see the vital link between good economic policy, long-term growth, and prosperity.”

Glassman and Hassett were associated with the right-wing American Enterprise Institute in Washington. Their book, too, received high praise from political conservatives. The dust jacket quotes economist Allan Meltzer saying, “Every stock owner should read this book.” David Malpass, then chief economist for Bear Stearns, said:

Either we are in a bubble with inefficient financial markets, or else past theories on stock prices and price-earnings multiples have to be revised. In every one of my meetings with mutual funds these days, I have to address the issue of whether stocks are overvalued. Glassman and Hassett’s theories make the solid case that, on average, they are not.

Reputable stock analysts, however, immediately threw cold water on the Glassman-Hassett theory as soon as their basic analysis was published in a Wall Street Journal op-ed article in 1998 (Glassman & Hassett 1998). Wharton School economist Jeremy Siegel (1998), whose research underlay the book, said “their analysis contains a serious flaw which vastly overstates the value of stocks.” In effect, they double-counted corporate profits and corporate investment, he said (See also Clements 1999). When the book was published, economist Burton Malkiel (1999) of Princeton reviewed it and said the authors had conflated earnings and cash flow. Said Malkiel, “I believe ‘Dow 36,000’ is a dangerous book that may lead some investors who can ill afford the significant risks of equity investments to throw caution to the wind.”

The month Dow 36,000 was published, in September 1999, the Dow Jones Industrial average was about 11,000. It didn’t go much higher before beginning a steep fall in early 2000 that took it down to just over 7,000. Even with the sharp run-up in the stock market in 2010s, the DJIA is still less than half of 36,000. But neither Glassman nor Hassett suffered for their gross incompetence. The former went on to become an under secretary of State and was the founding executive director of the George W. Bush Institute, while the latter is director of economic policy studies at AEI. Glassman continues to assert that he was right, despite all the evidence to the contrary. He was even ridiculed in the same paper where he previously wrote a column (Irwin 2013).

One reason conservatives were so quick to endorse a theory that, in hindsight, was complete nonsense is that it justified corporate actions that led to mass layoffs, outsourcing, deunionization, unrelenting downward pressure on wages, downsizing of benefits, automation and other actions corporations have taken in recent years to raise earnings. In effect, what Glassman, Hassett and Kadlec were saying to the average guy is that he can easily compensate for the loss of jobs and income simply by getting on the bandwagon of share ownership. If she bought stocks, her capital income would replace the lost wages and benefits.

It has long been a conservative goal to turn workers into capitalists. While seemingly unobjectionable – indeed, worker ownership of the means of production originated as a policy of the far left called syndicalism – the clear political goal of the right has been to align the interests of workers with those of investors and managers, and in the process encourage them to support free market policies, tax cuts for capital, maximum profits and, of course, the Republican Party. (On the theory and history of worker control of businesses, see Dow 2003.)

As a study by the libertarian Cato Institute concluded: “Broadly stated, our findings show that as wage earners become owners of capital, they favor policies that reduce taxes on savings, investment, and capital gains” (Nadler 1999: 24). Republican operative Grover Norquist was even more explicit:

When a wage worker enters the investor class through a work-based 401(k), his opinions on vouchers, free trade, and entitlement privatization are no likelier to change overnight than his party affiliation. But as his plan assets grow, so do his expectations for their performance. He may at first study nothing more than the plan materials his employer provides. But over time, he actively seeks sources of information that will maximize his efficiency in his new vocation: that of a capitalist. It is this pursuit that changes his opinions on a variety of partisan and policy questions to favor market-based solutions and their political advocates. (Quoted in Nadler 2000.)

This was certainly Ronald Reagan’s goal in establishing a task force chaired by ultra-conservative investor J. William Middendorf to study worker-controlled companies in developing countries to fend off communism. When workers have a stake in the place where they work, Reagan said, they have “a stake in the freedom of their country.” In the U.S., employee ownership is “a path that benefits a free people.”

In the 1970s, the conservative chairman of the Senate Finance Committee, Senator Russell Long of Louisiana, became enamored with Employee Stock Ownership Plans (ESOPs) and he created and expanded tax incentives for them (Snyder 2003). But rather than making rich capitalists of workers, ESOPs found their greatest success as a managerial technique for fending off corporate raiders, often at the expense of shareholders (Chaplinsky & Niehaus 1994). Sometimes workers lost their life savings when the companies their ESOPs were invested in, such as Enron, collapsed (Millon 2002). On balance, it is doubtful that workers have benefitted much from ESOPs. One problem is that they are required to be invested only in company stock, thus preventing workers from receiving the benefits of diversification (Anderson 2009).

Under George W. Bush, Republicans were aggressive in pushing share ownership, believing that those who owned corporate stock would be more likely to vote Republican. During the 2000 campaign, Bush endorsed private accounts for Social Security, saying, “Ownership in our society should not be an exclusive club. Independence should not be a gated community. Everyone should be a part-owner in the American Dream.” (Quoted in Kadlec, Roston & Thottam 2004.) Polls show that Republicans are more likely to invest in stocks.

Source: CBS News/New York Times poll (June 10-15, 2005)

A recent sociological study confirmed the relationship:

Our findings suggest that stock ownership may have a causal relation with perceptions of political interest. Even our very crude measure of stockholding shows consistent positive effects on Republicanism in cross-sectional models, and the size of the effect increased substantially as Republican policy initiatives came to follow the prescriptions of the investor class theorists (cutting taxes on capital gains and dividends; proposing to privatize Social Security) (Davis & Cotton 2007).

An economic study also found a correlation: “We use mutual fund cost data to proxy for stock ownership and find evidence supporting the hypothesis that an investor class effect has increased the Republican share of the House popular vote” Duca & Saving 2008: 474).

George W. Bush pushed hard for Social Security privatization, which would have been a boon to Wall Street money managers, and big tax breaks for owners of corporate stock. Both were premised on a desire to bolster the investor class in order to increase the ranks of Republican voters.

The 2003 tax cut was especially aimed at investors. Its principal provision was a sharp reduction in the tax rate on dividends to the same low rate that applied to capital gains. Bush defended this action as designed to increase dividend payments:

This will encourage more companies to pay dividends, which in itself will not only be good for investors but will be a corporate reform measure. It’s hard to pay dividends unless you’ve actually got cash flow. The days when people could say, “Invest with me because the sky’s the limit,” will be changed by dividend policy. It’s hard to promote the sky being the limit and pay dividends unless you’re actually profitable and have cash flow. Getting – reducing the tax rate on dividends will also increase the wealth effect around America and will help our markets.

The “wealth effect” refers to the idea that if household wealth increases, then people will spend 5 percent to 10 percent of the increase annually on goods and services. However, research has consistently shown that increases in financial wealth have a modest effect on aggregate spending because few average people own stock directly and most of that is in retirement accounts such as 401(k)s. The rich, who are much more likely to own stock, tend not to increase their spending much in response to a wealth increase (Case, Quigley & Shiller 2013).

The impact on economic growth was always dubious. Former Nixon aide Kevin Phillips was incredulous. The Bush tax cut is “not aimed at the little investor. It’s aimed at the big investor and shrouded by a fog of phoniness. This isn’t even trickle-down economics. It’s mist-down economics” he said. (Quoted in Stevenson 2003.)

In the end, the Bush tax cuts neither stimulated the economy nor raised dividend payments, as it was expressly designed to do. A number of academic studies document this fact.

· A survey of financial executives found a modest increase in dividend payments that was mainly driven by improved cash flow, rather than tax effects. There was, in fact, a much larger increase in share repurchases even though their tax treatment was unchanged Brav et al. 2008a, 2008b).

· A 2008 study found no impact of the Bush tax cuts on the aggregate stock market. U.S. stocks didn’t outperform foreign stocks or those unaffected by the dividend tax cuts, such as Real Estate Investment Trusts (REITs). Stocks paying no dividends enjoyed excess returns during the study period, suggesting that non-tax forces were driving the stock market.

· A 2011 study found that because the dividend tax cut was temporary – all the Bush tax cuts were scheduled to expire at the end of 2010 because of the budget rules necessary to get them enacted – they actually caused aggregate investment to fall (Gouria & Miao 2011). A more recent study found zero change in investment.

· A 2013 study found that the payout ratio did not rise after the 2003 tax cut, share repurchases rose more rapidly than dividend payouts, dividend payouts by REITs increased even though they did not qualify for lower taxes, and what increase in dividends did take place was consistent with estimates made in 2002, before the tax cut was even contemplated (Edgerton 2013).

In 2010 and 2012, the Congressional Research Service studied the potential effect of allowing all the Bush tax cuts to expire on schedule. (They were extended for two years in late 2010.) It found that there was unlikely to be any major negative impact on the economy because the tax cuts had no positive effect in the first place. In fact, the economy performed more poorly following the Bush tax cuts than it did in the higher-tax era of the 1990s following the 1993 tax increase (Hungerford 2012; Labonte 2010). The CRS produced the following table as evidence.

Source: Congressional Research Service

Even though the stock market began crashing on Bush’s watch, Republican mouthpieces like economist Michael Boskin nevertheless blamed its weakness in early 2009 entirely on Obama’s policies (Boskin 2009). But the stock market performed far better under Obama than it did under Bush.

When the Dow Jones Industrial average was far lower than it is today, right-wing economist Larry Kudlow (2007) said, “I have long believed that stock markets are the best barometer of the health, wealth and security of a nation. And today’s stock market message is an unmistakable vote of confidence for the president.” I have never heard him praise President Obama similarly as the stock market hit new high after new high – even after the Bush tax cuts expired. At least one analyst accurately foresaw the positive impact of higher taxes on the stock market, writing on January 8, 2013: “I’m not prepared to predict that the great bull market of the 2010s began on Jan. 2. But I do know that anyone who thinks tax increases never precede a bull market is wrong. History proves that” (Bartlett 2013). Those who bought gold didn’t do as well.

Once Bush was gone from office, Republican economists who either supported his tax cuts or kept silent about their defects suddenly saw nothing good in them. Douglas Holtz-Eakin, a former CBO director who now runs a Republican think tank, said, “There was very little of the kind of saving and export-led growth that would be more sustainable. For a group that claims it wants to be judged by history, there is no evidence on the economic policy front that that was the view. It was all Band-Aids.” (Quoted in Irwin & Eggen 2009.)

Harvard economist Dale Jorgenson, a Republican, was asked what positive features he saw in the Bush tax cuts. He replied, “I don’t see any redeeming features, unfortunately.” (Quoted in Leonhardt 2009.)

American Enterprise Institute economist Alan Viard said, “The effects of the Bush tax cuts on growth were ambiguous at best. They were not much of a poster child for pro-growth tax policy.” (Quoted in Lynch 2011.)

Even the Columbia University economist Glenn Hubbard, who essentially designed the tax cuts as chairman of the Council of Economic Advisers for Bush, saw little value in them by 2013. He told the New York Times that many provisions were no longer needed. The 2001 and 2003 tax cuts “are not the best anchoring point” for debate on the future of tax policy, he said. “We need a tax system that can promote economic growth and raise the revenue the American people want to devote to government,” Hubbard added, suggesting the need for higher revenues. (Quoted in Weisman 2013.)

So obvious was the failure of the Bush tax cuts by 2012 that the Mercatus Center, a right-wing think tank on whose board the billionaire Charles Koch sits, published a study trying to explain what went wrong. It claimed that the tax cuts did not in fact represent free market policy – they were phased-in slowly, were enacted with a 10-year expiration date, and were designed more to stimulate consumption than investment (Mitchell & O’Sullivan 2012; see also House & Shapiro 2006). The study also complained that Bush was a big-spender. When I made exactly the same arguments in a 2006 book, I was fired from a conservative think tank and excommunicated from the conservative movement (Stevenson 2005).

In the end, the main effects of the Bush tax cuts were to massively increase the national debt and worsen the distribution of income (Burke & McCouch 2008; Hungerford 2010).

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Back when I used to appear on Larry Kudlow’s cable show, he would always accuse me of wanting to Europeanize the U.S. economy whenever I said anything nice about the value-added tax. The term “Europeanize” is a relatively recent addition to the conservative rhetorical dictionary. It is commonly used as an epithet for any policy that would aid the poor, raise taxes or regulate industry. The underlying assumption, shared by all American conservatives, is that European welfare states are socialist hellholes, smothered by big government and mired in poverty and stagnation. The last thing any American conservative wants is for the U.S. to be remotely like Europe. As Samuel Gregg of the conservative Acton Institute wrote in 2012:

There’s a great deal of evidence suggesting America is slouching down the path to Western Europe. In practical terms, that means social-democratic economic policies: the same policies that have turned many Western European nations into a byword for persistently high unemployment, rigid labor markets, low-to-zero economic growth, out-of-control debt and welfare states, absurdly high tax levels, growing numbers of well-paid government workers, a near-obsession with economic equality at any cost and, above all, a stubborn refusal to accept that things simply can’t go on like this (Gregg 2012; see also Bergstrom & Gidehag 2004).

I’m not sure when Europeanization became a thing conservatives wanted to avoid at all cost. According to Google trends, the term came into common usage in February 2006 and referred to a process going on in Europe itself relating to union, defense policy and integration of the Eastern Bloc into Europe proper. The term crossed the Atlantic with the rise of Obama’s presidential campaign. One of the first to link the two together was former Delaware Gov. Pierre “Pete” Du Pont (2008), writing on the Wall Street Journal editorial page, which often establishes Republican talking points.

After detailing a laundry list of socialist policies Barack Obama was going to implement – protectionism, new taxes on the middle class, higher spending, more regulation, increased power for labor unions, and curtailment of free speech by reinstatement of the Fairness Doctrine – Du Pont said, “These policy changes will be the beginning of the Europeanization of America.” This meant that Americans would lose “their money, their jobs and the market freedom of our country.”

With Obama’s election, many Republicans glommed onto Europeanization as an all-purpose term for his policies, suggesting that they were alien and un-American. On February 13, 2009, Senator John Ensign of Nevada said he was appalled that federal spending was going to rise to 30 percent of GDP under Obama from 21 percent under Bush. “This amounts to the Europeanization of the United States,” Ensign charged. Such high levels of spending, he said, would give us a “socialist-type” economy.

It’s worth noting that federal spending fell sharply during Obama’s presidency, contrary to Ensign’s hyperbole, which was nothing but a figment of his imagination.

In July 2009, Senator Orrin Hatch of Utah gave a long Senate speech on “Obamanomics.” He concluded, “It is time to pull the reins on this headlong rush toward the Europeanization of America.”

“He [Obama] believes in government,” Senator Charles Grassley of Iowa said in 2010. “It’s the Europeanization of America and that’s not what Americans want.” (Quoted in Weisman 2010.)

During the 2012 election, Mitt Romney claimed that Obama wanted to “turn us into a European-style welfare state, an entitlement nation, where the role of government isn’t to provide our freedom and opportunity, but instead the role of government is to take from some to give to others in the name of equality. I don’t want to become a European welfare state. Europe doesn’t work there – it’ll never work here,” Romney said. (Quoted in New York Times 2012.) Europeans mostly thought Romney had no idea what he was talking about (Cody 2012).

Europeanization is one of Senate Republican Leader Mitch McConnell’s favorite terms for describing what is wrong with the Affordable Care Act. It is the “single biggest step in the direction of Europeanizing America,” he told viewers of CBS’s “This Morning” program in June 2012 (Quoted in Mak 2012). He used almost the same identical words in an interview with the Wall Street Journal in November (Moore 2012). “It’s the single worse piece of legislation that’s been passed in modern times,” McConnell said of ACA, “and the single biggest step in the direction of Europeanizing the country.”

Of course, Americans have been differentiating themselves from Europeans at least since the Revolution. But the singular focus on the welfare state dates from publication of F.A. Hayek’s 1944 book, The Road to Serfdom. Hayek, a British economist of Austrian birth, was alarmed by the similarities he saw in growing support for left-socialism in Britain and the policies of the fascists in Germany and Italy. His book, written primarily for a British audience, became a surprise best-seller in the United States. The book’s conclusion, that the welfare state inevitably leads to socialism, which inevitably leads to totalitarianism, continues to be echoed throughout the right as if it is so obvious it requires no proof. As Ronald Reagan put it in one of his last White House speeches:

We all know that what has been at stake during our time in Washington is the course of an ancient and enduring struggle, a struggle in which we Americans have a special place. At its edges, this struggle is not so much between good and evil, between absolute freedom and immediate slavery; but between hope and despair, between those who shoulder the promise and the burden of freedom and those who would – in the name of a false determinism – take us a mile or two more down what Friedrich Hayek called the road to serfdom.

In 1991, George H.W. Bush awarded Hayek the Medal of Freedom, saying, “At a time when many saw socialism as ordained by history, he foresaw freedom’s triumph.” In 2010, right-wing talker Glenn Beck even made The Road to Serfdom a best-seller all over again when he praised it on his Fox News program (Lahart 2010). As Beck said:

This book [The Road to Serfdom] was like a Mike Tyson (in his prime) right hook to socialism in Western Europe and in the United States. But its influence didn’t stop there. It has inspired political and economic leaders for decades since — most famously Ronald Reagan. Reagan often praised Hayek when he talked about people waking up to the dangers of big government.

While Hayek’s concerns were not unreasonable in 1944, all of the evidence since then totally disproves his thesis. Not only is there no evidence of totalitarianism in European social democracies, but their economies have done far better than Hayek imaged they would. His theory also does nothing to explain the collapse of the Soviet Union or the worldwide movement to privatize state-owned enterprises. As the conservative philosopher Francis Fukuyama acknowledged in 2011:

Hayek made the slipperiest of slippery slope arguments: the smallest move toward the expansion of government would lead to a cascade of bad consequences that would result in full-blown authoritarian socialism. If anything, however, the history of the past 50 years shows us that the slippery slope has all sorts of ledges and handholds by which we can brake our descent into serfdom and indeed climb back up.

Ironically, Hayek himself conceded that many welfare state policies American conservatives rail against, such as national health insurance, are in fact completely compatible with a free society. As he wrote in The Road to Serfdom itself (pp. 120-21):

Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong.

Hayek also supported government regulation of private businesses to control pollution and other “externalities,” as economists now call them. Again from The Road to Serfdom (p. 39):

Nor can certain harmful effects of deforestation, some methods of farming, or of the smoke and noise of factories be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism.

In a 1947 paper, Hayek endorsed welfare state measures for sanitation and health:

We must, of course, not forget that there are in a modern community a considerable number of services which are needed, such as sanitary and health measures, and which would not possibly be provided by the market for the obvious reason that no price can be charged to the beneficiaries or, rather, that it is not possible to confine the benefits to those who are willing to pay for them (Hayek 1949: 111).

Even late in life, Hayek endorsed welfare state measures that would be anathema to people like Glenn Beck today, such as a universal basic income. As Hayek said in 1979:

The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be a wholly legitimate protection against a risk common to all, but a necessary part of the great society in which the individual no longer has specific claims on the members of the particular small group into which he was born (Hayek 1979: 55; see also Bergh 2015).

The modern history of the welfare state dates from the reforms of Otto von Bismarck, chancellor of Germany in the 1870s and 1880s. He was very conservative, in the European sense of opposing radicalism and favoring social stability. When socialist movements first arose in Germany, Bismarck tried to suppress them and his efforts proved unsuccessful. But he observed that the equally conservative Emperor Napoleon III of France had used social welfare policies to undercut support for socialism, and Bismarck tried this tack as well (Mitchell 1977). The Harvard historian Sydney B. Fay describes the conservative origins and rationale for Bismarck’s welfare initiatives, including old-age, sickness and disability insurance:

Bismarck soon recognized that the anti-socialist law was not a wholly satisfactory solution of the socialist menace. The law was merely negative, repressive. Something positive must be done to make the industrial workers better off, and especially to make them feel that the German state was their friend and not their enemy. This was Bismarck’s main motive in pushing the social insurance legislation of the early 1880’s…. With less cause for anxiety and with the state as their friend, the workers, Bismarck hoped, would be more contented, and less likely to listen to socialist agitators. In this way, Bismarck hoped, the power of the Social Democratic Party would be undermined (Fay 1950: 3).

To be sure, American conservatism has always been more individualistic than European conservatism, more akin to continental liberalism, which we call libertarianism or classical liberalism. But many American conservatives and even libertarians have expressed sympathy for the welfare state for good Bismarckian reasons. The writer Irving Kristol, who was extremely influential in the intellectual development of Republican and conservative ideas in the 1970s, wrote this in defense of the welfare state in 1976:

The idea of a welfare state is in itself perfectly consistent with a conservative political philosophy – as Bismarck knew, a hundred years ago. In our urbanized, industrialized, highly mobile society, people need governmental of some kind if they are to cope with many of their problems: old age, illness, unemployment, etc. They need such assistance; they demand it; they will get it. The only interesting political question is: How will they get it? (Kristol 1976b)

In another 1976 article, Kristol (1976a) said Republicans were stupid for engaging in a “futile protest against the principles of the welfare state, instead of trying to construct a conservative welfare state.”

In 1983, the conservative columnist George Will admonished fellow conservatives for opposing the welfare state, rather than endorsing it and molding it to their philosophy. Said Will:

If conservatism is to engage itself with the way we live now, it must address government’s graver purposes with an affirmative doctrine of the welfare state. The idea of such an affirmation may, but should not, seem paradoxical. Two conservatives (Disraeli and Bismarck) pioneered the welfare state, and did so for impeccably conservative reasons: to reconcile the masses to the vicissitudes and hazards of a dynamic and hierarchical industrial economy. They acted on the principle of “economy of exertion,” using government power judiciously to prevent less discriminating, more disruptive uses of power….Conservatives need ways to make the welfare state more compatible with conservative values.

For another defense of the welfare state on conservative grounds, see also Goodwin 1985.

In 1987, the libertarian economist Richard McKenzie argued that welfare benefits were essential to the operation of a free market. Without them, society’s net losers would put up roadblocks that would undermine the market, such as protectionism, that ultimately would cost more in terms of growth than the cost of welfare. In McKenzie’s words, “The welfare state is not only desirable but most likely necessary for the continued collective acceptance of the market system. Welfare, albeit limited in scope and amount, meets goals of efficiency (as economists define efficiency) as well as equity and fairness” (McKenzie 1987: 166).

Another point worth making is that conservatives often suggest that the American welfare state is alien to the American experience, imposed on the nation during a particularly vulnerable time in its history by a quasi-dictatorial Franklin D. Roosevelt (Flynn 1948: 415; Friedman 1980: 93; Shlaes 2007: 6-7). Nothing could be further from the truth. One of the earliest advocates of social insurance was the Revolutionary War hero Thomas Paine, whose book advocating it, Agrarian Justice, was published in 1797. Another Founding Father, James Madison, said that welfare is a core government function:

To provide employment for the poor, and support for the indigent, is among the primary, and, at the same time, not least difficult cares of the public authority. In very populous countries, the task is particularly arduous. In our favored country, where employment and food are much less subject to failures or deficiencies, the interposition of the public guardianship is required in a far more limited degree. Some degree of interposition, nevertheless, is all times and everywhere called for.

The University of Wisconsin historian Walter Trattner (1976, 1988) has documented the considerable growth of American welfare state policies at both the federal and state level in the 19^th century (Garfinkel, Rainwater & Smeeding 2010: 102-27; Nicols 2011; Quigley 2002). In the 20^th century, conservatives such as Theodore Roosevelt advocated studying the German model and developing new policies to “protect the crushable elements at the base of our present industrial structure.” Indeed, the liberal historian Arthur Schlesinger Jr. (1995) once called Roosevelt “the father of ‘big government.’”

In Britain, conservatives such as Benjamin Disraeli and Winston Churchill were instrumental in creating the welfare state (Churchill 1909; Gottfried 1990; Lowe 1990; Roberts 1958; Viereck 1956: 44-47; Watson 2011). In America, the welfare state was supported well into the 1960s by key members of the business community (Annunziata 1974; Berkowitz & McQuaid 1978; Castrovinci 1976). As late as 1970, Republican Richard Nixon advocated a national welfare program called the Family Assistance Plan that failed, ironically, due to liberal opposition that it wasn’t liberal enough (Waddan 1998). Even in the 1980s, a few Republicans such as Jack Kemp openly supported government welfare. As he said in 1985:

If you are going to broaden the base of the Republican Party, you’ve got to realize that millions of Americans look to government as a lifeline. I have never felt personally that the idea of beating up on government was good politics. It’s true that government is best which governs least. But it’s equally true that government is best which does the most for people and you need a balance between what government does for people and what people should be able to do for themselves. (Quoted in Shogan 1985)

Nevertheless, conservatives now admonish the whole concept of the welfare state in the strongest possible terms, and Republicans are proud that they abolished a key welfare program, Aid for Families with Dependent Children (AFDC), in 1996. I am not sure precisely where this extreme hostility to the concept of welfare comes from. Part of it is that conservatives have always opposed programs such as Social Security and Medicare, but until they took control of Congress in 1994 lacked the wherewithal to do anything about it. Another factor is the southern hostility to welfare, because it aided African Americans and undermined their work ethic. This infused the Republican Party after so many of its members in Congress came from the South.

At least insofar as Europe is concerned, many of the claims made by American conservatives about its welfare state are simply wrong, and they fail to understand why such states have totally failed to follow Hayek’s predicted course into socialism and totalitarianism (Sachs 2006). It would be useful for them to know why because the American welfare state is inevitably going to grow larger as the Baby Boom generation retires and increases spending for age-related entitlements such as Medicare and Social Security. According to the Congressional Budget Office’s 2014 projections, spending for Social Security will rise from 4.9 percent of GDP in 2014 to 6.3 percent in 2039, and spending for Medicare will go up to 4.6 percent of GDP from 3 percent over the same period.

First, it is important to understand that European welfare states are not as much larger as that in America as they appear to be at first glance (Baldwin 2009: 60-73; Garfinkel & Smeeding 2015). A key reason is that Europeans get a lot of government benefits that Americans are forced to pay for out-of-pocket, notably health insurance. If an American worker loses 9 percent of his pay to cover the cost of employer-provided health insurance, is he really so much better off than a European worker who pays 9 percent of his wages in the form of a tax that provides him with the same health benefits?

Additionally, the American welfare state insofar as the elderly are concerned is roughly comparable to European welfare states. The big difference is that Europeans treat the non-elderly poor and working class far more generously than the U.S. does (Collado & Iturbe-Ormaetxe 2010; Fishback 2010).

Another important factor is that much of the American welfare state is buried in “tax expenditures.” These are tax deductions, exclusions and credits that often have identical effects to government spending (Howard 2007). But, superficially, they appear to make government smaller even though the same economic resources are commanded (Clarke & Fox 2015).

Consider this example from the late economist David Bradford. Suppose the Department of Defense wants to buy a new ship for $1 billion. It could simply ask Congress to appropriate $1 billion for it and $1 billion of men and material will be diverted from private use to public use, whether the outlay is financed by taxes or deficits. Government will be $1 billion larger. But suppose instead that DOD asked Congress to enact a $1 billion refundable tax credit for the same purpose. Spending would not rise, taxes would fall by $1 billion and it would appear that government is $1 billion smaller than it otherwise would be. But the same $1 billion of manpower and other resources will still be diverted from private to public use. Economically, the two methods are identical.

The political scientist Suzanne Mettler has documented that a great many Americans who believe they receive no welfare benefits from government are in fact the beneficiaries of numerous tax subsidies for housing, health, education and other purposes (Mettler 2010, 2011; see also Faricy & Ellis 2014).

The Organization for Economic Cooperation and Development has constructed internationally-comparable data that take into account forced private spending that compensates for public outlays in other countries, and tax expenditures that co-opt private resources just as spending does. The data also take into account that some countries tax government benefits, which explains why the net figure is lower than the gross figure in many cases. When these adjustments are made, the U.S. rises from close to the bottom to near the top of countries in terms of the size of its welfare state, from 23^rd place to 5^th place.

Some conservatives would, nevertheless, argue that Europeans pay a heavy price in terms of freedom for their welfare states. But this is belied by their own research. Both the Heritage Foundation in the U.S. and the Fraser Institute in Canada regularly produce rankings of nations in terms of economic freedom. In the 2014 rankings, the U.S. was number 12 on each list. On the Heritage list, such welfare states as Australia, Denmark, Ireland and Singapore ranked higher. And on the Fraser list, such welfare states as Australia, Canada, Finland, New Zealand and Switzerland ranked higher; the U.S. was tied with the U.K. And in the view of the libertarian philosopher Jason Brennan of Georgetown University, such indexes overstate freedom in the U.S. and understate it elsewhere:

After all, the index tends to rank countries lower if governments spend large amounts on social insurance. Yet many classical liberals and neoclassical liberals are not in principle opposed to government social insurance….On the [Heritage] Index of Economic Freedom, many countries that rank lower than the U.S. have far less extensive administrative states than the United States. For instance, Denmark ranks much higher than the United States on property rights, freedom from corruption, business freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. Luxembourg, the Netherlands, the United Kingdom, and many other countries beat the United States on these measures as well. Thus many European countries might reasonably be considered more economically libertarian than the United States. (Brennan 2012: 176)

Several welfare states did better than the U.S. on all six of these measures: Canada, Denmark, Finland, the Netherlands and Sweden. What dragged them down below the U.S. on the overall score was, in every case, high taxes and spending, which the conservative Heritage Foundation ranks highly and is easily quantifiable. Recent research, however, shows that while higher spending may decrease freedom, higher taxes do not. It is theorized that spending financed with taxes is more highly prized by voters than that financed with deficits or non-tax revenues (Mahon 2014).

Numerous studies now show that particular types of freedom are more significant than others for economic growth, and those on which many welfare states surpass the U.S. are among them (Carlsson & Lundström 2002; Dawson 2003; De Haan, Lundström & Sturm 2006; Doucouliagos & Ulubasoglu 2006; Justesen 2008; Rode & Coll 2012). An annual index of the countries best for business routinely puts such welfare states as Denmark, Sweden, Canada, Norway, Finland, the Netherlands, Belgium and the U.K. above the U.S. (Forbes 2014). Studies also show that some policies may raise aggregate growth and benefit the bulk of the population while others don’t. Free market policies can compensate for high taxes and spending (Bergh & Henreckson 2011; Causa, de Serres & Ruiz 2014; Sanandau 2012).

Of course, economic freedom is only one aspect of freedom. Important things such as freedom of speech, freedom of assembly and other political freedoms may not be measured. Moreover, freedom from racial and sexual discrimination or the right of gays to marry and other personal and social freedoms generally don’t figure into conservative measures of freedom. But casual observation shows that those living in at least the major countries of Europe appear to have no less freedom than Americans in terms of political and personal freedom. And depending on how one looks at the question, they may have considerably more. How much is it worth to be free of fear that one will die because one lacks health insurance? For many Americans this is a real fear, but not for almost all Europeans. How free is an American who can’t make ends meet by working full-time, while a comparable European has her wages supplemented by government benefits that make it much easier to get by and live decently? Studies show that the more comprehensive national health insurance is in Europe, the more popular it is (Wendt et al. 2010).

The table shows the gross earnings of a two-earner couple making the minimum wage as a share of the median household income. For an American couple, their gross earnings would be just 24 percent of the median and 50 percent is generally considered the poverty level. Benefit programs such as the Earned Income Tax Credit raise their net income to 45 percent of the median, but they are still in poverty. As one can see, only in the Czech Republic does a two-earner couple at the minimum wage make a lower percentage of the median income without benefits. And keep in mind that these figures don’t account for health insurance, because they consider only cash supplements, which most Europeans get automatically; few minimum wage workers in America get health benefits from their employers.

This may explain why many of those living in welfare states consider themselves to be much more free than Americans do, according to a 2014 Gallup poll. The United States came in at number 36, with only 79 percent of people saying they were satisfied with their freedom.

Some conservatives will respond that European welfare states have high unemployment and do poorly at creating jobs, a point Ronald Reagan often made in the 1980s. For example, in one of his last presidential speeches he bragged, “Twice as many new jobs have been created here in the United States as in the other six industrialized nations combined.”

But that was then and this is now. In recent years, European countries have done a much better job than we have of preserving and creating jobs. This fact is best illustrated by the employment/population ratio – the percentage of people with jobs in the population. As the table shows, in 2013, most European welfare states had ratios of more than 80 percent for those in their prime working years, while the U.S. ratio was barely above 75 percent.

One reason for this is that European companies are not burdened with the enormous cost of providing health insurance for their workers, as American employers are. That cost is financed by broad-based consumption taxes that do not fall on businesses. Moreover, the VAT is rebated at the border on exports, so that the tax does not raise the price of exports. These two factors make European exporters very competitive relative to those in the U.S., where many taxes such as the corporate tax cannot be rebated and therefore reduce competitiveness.

Not having to provide health insurance also makes it much easier to start and grow businesses in many welfare states. The fact that entrepreneurs receive valuable services for their taxes makes them much less sensitive to them than Americans are. According to the OECD, many welfare states exceed the U.S. on various measures of entrepreneurship (OECD 2014b). A recent article in Inc. magazine about booming entrepreneurship in heavily-taxed Norway made this point:

The first thing I learned is that Norwegians don’t think about taxes the way we do. Whereas most Americans see taxes as a burden, Norwegian entrepreneurs tend to see them as a purchase, an exchange of cash for services. “I look at it as a lifelong investment,” says Davor Sutija, CEO of Thinfilm, a Norwegian start-up that is developing a low-cost version of the electronic tags retailers use to track merchandise. (Chafkin 2011)

In the United States, workers are forced to bear all of the burden of economic adjustment through layoffs and unemployment when there is a recession, even as conservatives contend that all recessions are caused by the Federal Reserve or government screw-ups. European countries, by contrast, have been highly successful with short-time schemes that allow workers to reduce work hours while subsidizing their pay. These allow businesses to hold on to valuable workers and prevent their skills from deteriorating, and also makes it much easier to ramp-up production when growth is restored (Burda et al. 2011; Contessi & Li 2013; Faia, Lechthaler & Merkl 2013; Hijsen & Venn 2011; Krause & Uhlig 2012; Rinne & Zimmerman 2013; Schwartz 2010; Wiessner & Bellmann 2010). And wage subsidies are a powerful means of fiscal stimulus. Many analysts have testified to the efficiency of this system and urged its adoption in the U.S. even though it would involve “big government” (Whittaker 2016).

In addition to wage subsidies, the European welfare state facilitates labor adjustment when necessary. And an important part of the welfare state in Europe involves strong support for education. Germany, for example, recently abolished college tuition. By contrast, American college students must often go deeply into debt just to get an education. High education and skill levels plus wage compression that is augmented by government benefits combine to offset the negative economic effects of the welfare state in Europe to a large extent (Barth, Moene & Willumson 2014; Gill & Raiser 2012: 353-415; Lindert 2004; Mares 2007).

In any event, what really matters at the end of the day is happiness. While wealth and freedom contribute significantly to it, many people rank other considerations much more highly, such as culture, equality, safety, fulfilment or even the weather in determining where to live (Di Tella & MacCulloch 2008; Kenny 1999). Not surprisingly, health is a primary contributor to happiness, which gives an edge to countries with national health insurance because they raise the general level of health. Therefore, a measurement of overall happiness may be the best way to compare nations (OECD 2012, 2013).

According to a 2014 OECD measure, overall happiness was greater than in the United States in Australia, Canada, Denmark, Norway, Sweden and Switzerland when the various components of the index are ranked equally. A 2012 OECD study looked at 8 different indexes of life satisfaction and the U.S. ranked only as high as seven on just one index; it ranked as low as 22 on two of them and in between on the rest. In nearly every case, those ranking higher would be considered welfare states (Fleche, Smith & Sorsa 2012). Studies show that government intervention in the economy tends to raise happiness (Deeming & Hayes 2012; Easterlin 2013; Flavin, Pacek & Radcliff 2011, 2014; Pacek & Radcliff 2008).

A 2013 study by the United Nations ranked all the nations in the world on a happiness scale. The U.S. came in only number 17. The top 10 countries were all welfare states (in order): Denmark, Norway, Switzerland, Netherlands, Sweden, Canada, Finland, Austria, Iceland and Australia. Commenting on an earlier edition of this report, Columbia University economist Jeffrey Sachs said:

The leading countries tax heavily to provide social outlays, for pre-school, health care, education, family support, school-to-work programs, elderly care, and more. They end up with economic prosperity that is broadly shared, very low poverty, low unemployment, social fairness, lower health care costs than in the United States, longer vacation times, guaranteed maternity and paternity leave, better pre-school and many more benefits that make people happy, and help them to raise happier and healthier children. In short, happier places are happier because they combine economic prosperity with social trust, a sense of equality, leisure as well as work, and good and honest governance.

Public opinion polls have also examined happiness and wellbeing simply by asking people how happy they are. A 2014 survey by Gallup asked people about their satisfaction in 5 different areas that contribute to happiness: purpose wellbeing, social wellbeing, financial wellbeing, community wellbeing and physical wellbeing. The U.S. did not rank in the top 10 by any measure. Those countries thriving in three or more areas included such welfare states as Austria, Canada, Denmark, Sweden and Uruguay.

Conservatives, obsessed as they are with the nominal size of government measured exclusively by taxes and spending, may wonder why high European taxes don’t suffocate their economies as they assume would be the case here. The reasons are that Europeans believe they get value for their taxes, have greater trust in their governments, a greater preference for equality and view those receiving benefits as not dissimilar to themselves (Alesina, Glaeser & Sacerdote 2001; Alesina, Di Tella & MacCulloch 2004; Bergh & Bjørnskov 2014; Bjørnskov & Svendsen 2013). It actually appears that Europeans enjoy paying taxes – nations with higher taxes and more progressivity rank higher on happiness measures (Akay et al. 2012; Djanali & Sheehan-Connor 2012; Doerrenberg & Peichi 2011; Oishi, Schimmack & Diener 2012; Williams & Martinez 2014). Americans view much government spending as pure waste, have little trust in government and tend to view welfare recipients as moochers and minorities (Fox 2004; Quadagno 1994; Soss, Fording & Schram 2008; Twenge, Campbell & Carter 2014).

Studies show that Americans are happier in years when income inequality is falling than in years when it is rising (Oishi, Kesebir & Diener 2011). A key reason why Americans do not demand more equality is that they tend to exaggerate the degree of income mobility, which translates to fairness and mitigates inequality (Bjørnskov et al. 2013; Corak 2013). Conservatives emphasize absolute mobility, which shows that children are generally better off than their parents due to economic growth, but ignore the rigidity of relative mobility, which shows that the children of the poor tend to stay poor and the children of the rich tend to stay rich (Pew 2012). A recent study found that intergenerational economic mobility is higher than in the United States in a number of welfare states, including Denmark, Norway, Finland, Canada, Sweden, Germany and France; only the U.K was lower (Corak 2006: 42; Levine 2012: 16-18).

Studies also show that Americans grossly underestimate the degree of income and wealth inequality in the U.S. When asked what their preferred distribution is, they generally favor European levels that are more egalitarian (Norton & Ariely 2011). They also tend to overestimate their position in the distribution of income; when informed that their position is worse than they imagined, support for redistribution rises (Cruces, Perez-Truglia & Tetaz 2013).

European taxes are structured differently than those in the U.S. While they may have high statutory rates on incomes, they tend to kick-in at higher income levels, making them economically less relevant than they appear at first glance. In addition, there are often separate tax schedules for different forms of income that tax capital income much more lightly than wage income (Ganghof 2007; Genser & Reutter 2007; Keuschnigg & Dietz 2007; Kleinbard 2010; Kleven 2014; Lindhe, Södersten & Öberg 2004). Overall, Europeans tax consumption more heavily and income more lightly than we do.

The emphasis on taxing consumption stems in part from a very conservative idea called the “benefit principle,” which says that people ought to pay taxes roughly in proportion to the benefits they receive (Cooper 1994; Krauss 1933; Levmore 1990; Musgrave 1959: 61-89). Thus highway construction is largely financed with taxes on gasoline; the motorists who use the highways and use them the most pay the most taxes because they are the primary beneficiaries.

Although a broad-based consumption tax was once the foundation of conservative tax policy – the late Republican economists Norman Ture and Murray Weidenbaum were two of its principal advocates, as were George Will and Newt Gingrich at one time (Bartlett 2011). But since the 1980s, conservatives and Republicans turned against it because it is too good a tax; that is, it is highly efficient with a low deadweight cost – the economic output discouraged by the tax over and above the tax itself. They feared that a VAT would too easily become a “money machine” that would cause the tax/GDP ratio to rise and decided that it was better to raise taxes badly and inefficiently as a way of preventing tax increases. Ronald Reagan cemented this view in place at a 1985 press conference when he rejected a VAT as a tax reform option, saying, “a value-added tax actually gives a government a chance to blindfold the people and grow in stature and size.” Republican tax guru Grover Norquist now makes unyielding opposition to the VAT a litmus test for all Republicans (Hohmann 2010).

Liberals have their own problems with the VAT’s regressivity – it takes more from pockets of the poor than the rich, proportionally. With both liberals and conservatives opposed to a VAT, its political prospects have been nil. However, as the Harvard economist Larry Summers once quipped, we will get a VAT when liberals realize it is money machine and conservatives understand that it taxes the poor (Rosen 1988).

What happened in Europe after the war is that liberals and conservatives essentially made a deal – conservatives would support expansion of the welfare state as long as it was financed conservatively (Beramendi & Rueda 2007; Kato 2003; Martin & Prasad 2014; Wilensky 2002: 384-85). This was the same basic deal that led to the creation of Social Security in the U.S. with a very conservative payroll tax, rather than the progressive income tax. FDR understood that as long as there was a tight linkage between taxes paid and benefits received – a prime example of the benefit principle – then the system was unassailable, politically (Schlesinger 1959: 308-9; Derthick 1979: 228-51). Recent research suggests that a key reason why the U.S. provides such modest benefits to the poor is because they aren’t taxed enough (Timmons 2005).

Taken together, the conservatism of the revenue side and the generosity of the benefit side offset each other in European welfare states. If you add in that many have more free market policies in the regulatory area that foster innovation (Stiglitz 2015; Maliranta, Vihriälä & Määttänen 2012), and citizens have greater trust in their employers and governments to facilitate economic adjustment, you have a combination of policies that not only promote growth, but equity and wellbeing (Irwin 2014; Jones & Klenow 2016). The dog-eat-dog capitalism of the U.S., which lavishes tax benefits on the ultra-wealthy while throwing society’s laggards under the bus, may deliver slightly better growth, but it does so in a harsh, inequitable and unfair way that, historically, has not proven sustainable (Wilensky 2006). Eventually, the masses rise up and revolt. Thus welfare state policies may in fact be optimum for the production of wealth in the long-run, as Bismarck, Disraeli, Churchill and FDR well understood. Moreover, recent evidence suggests that policies to reduce income inequality raise growth (Cingano 2014; Ostry, Berg & Tsangarides 2014).

Parties of the right in Europe still support the welfare state, but only for the native born. Increasingly, they are trying to exclude all immigrants from welfare state benefits (Lefkofridi & Michel 2014). It should be noted that few European countries have birthright citizenship. Descendants of non-European immigrants can live in some countries for generations without ever becoming citizens.

Despite their hatred of the welfare state, a few Republicans and conservatives will, from time to time, say that they need their own version. But these are not modern day Bismarckians concerned about social unrest or those following in the steps of Pope Francis and bringing Christian compassion to bear on the problems of poverty and the poor. No, today’s conservative welfare state sympathizers are really only concerned about politics. They fear that, at some point, they will pay a political price for the harshness and callousness with which the Republican Party treats those in need. Therefore, the party needs some talking points they can use to claim that they are, in fact, concerned about the downtrodden. The insincerity of the new conservative welfare advocates is exposed, however, when one looks at their substantive proposals. There isn’t much there there; lots of rhetoric, no money. And to the extent there is substance, it is just the same-old/same-old tax cuts, spending cuts and deregulation that will help the poor by increasing growth. So they say.

A prime example is Yuval Levin, editor of National Affairs magazine and allegedly the deepest thinker among the rising generation of conservatives. In a 2011 article, he attempted to put forward a conservative vision of the welfare state. Its purpose, though, was mainly to give Republicans “a vocabulary of alternatives,” which meant dressing up the same stale GOP proposals in moderate rhetoric. This is what Levin thinks will make the poor flock to the GOP banner: a flat tax system that would be a huge give-away to the rich (no mention of the rate structure); slashing entitlement programs by making them all means-tested, thus making Social Security a welfare program; abolition of the tax-exclusion for employer-provided health insurance and substituting it with something better (no details); slash domestic discretionary spending with no explanation for how this helps the poor; slash government regulation so that all Americans will be at the mercy of big corporations, which is obviously better than being at the mercy of big government, according to all conservatives.

Conservative journalist Matthew Continetti was even more transparent about the need for a Republican vision of the welfare state – purely to win votes. The problem, he said, isn’t only finding rhetoric that will fool the dependent class into voting against their interest, it is to trick the ultra-right wing Republican base into thinking that conservative welfare state policies are really laissez-faire. As he wrote in the right-wing Weekly Standard magazine:

Here’s the problem. The domestic proposals that have the greatest chance of making the Republican party attractive to the “coalition of the ascendant”​ – ​immigrants, members of the millennial generation, single white women​ – ​involve far more government intervention in the economy than the GOP coalition​ – ​married white people, Wall Street, the Tea Party​ – ​will allow.

Arthur Brooks, president of the right-wing American Enterprise Institute will occasionally say soft-sounding words about the welfare state. At an October 18, 2013 event he said:

One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something, it’s nuts to want to be doing something like that. We have to declare peace on the safety net. (Quoted in Covert 2013)

But when talking to his organization’s funders, Brooks, writing on the Wall Street Journal editorial page, sounds just like every other Tea Party extremist. “I’m often asked if I think America is trending toward becoming a European-style social Democracy,” he wrote in one op-ed. “My answer is: ‘No, because we already are a European-style social democracy’” (Brooks 2012a). A few months later, Brooks said the U.S. is “an entitlement state.” And like every good conservative, he believes it must be slashed (Brooks 2012b). It seems he wants nothing to do with any welfare state that deserves the characterization.

It should be mentioned that AEI fellow Nicholas Eberstadt is one of the prime sources for the widely-used Republican talking point that half of Americans are moochers (Eberstadt 2012). Republican columnist David Brooks, a much more Burkean sort of conservative, was highly critical of such rhetoric, substantively and politically. As he wrote after Romney’s foot-in-mouth comments were made public:

The Republican Party, and apparently Mitt Romney, too, has shifted over toward a much more hyperindividualistic and atomistic social view — from the Reaganesque language of common citizenship to the libertarian language of makers and takers. There’s no way the country will trust the Republican Party to reform the welfare state if that party doesn’t have a basic commitment to provide a safety net for those who suffer for no fault of their own.

There are only a few Republicans who seem to be genuinely concerned about their party’s Scrooge-like attitude toward the poor. Ohio Gov. John Kasich is one. Back in 2013 he said:

I’m concerned about the fact there seems to be a war on the poor. That if you’re poor, somehow you’re shiftless and lazy. You know what? The very people who complain ought to ask their grandparents if they worked at the W.P.A. [Works Progress Administration, a New Deal jobs program]. (Quoted in Gabriel 2013)

Putting money where his mouth is, Kasich used an executive order to expand Medicaid in his state, while other Republican governors rejected federal money to aid the poor in their states in order to burnish their bona fides with the ultra-right-wing Tea Party crowd. Predictably, Kasich was blasted by the Wall Street Journal editorial page as a turncoat for doing so, mocking his statement that his action was based on Christian charity (Wall Street Journal 2013).

But Kasich is in good company. Conservatives have even blasted the Pope when he dared to use the words of Jesus to urge compassion toward the poor. Rush Limbaugh said, “This is just pure Marxism.” A Fox News columnist said that Pope Francis is the Catholic Church’s Obama – and he meant it as an insult.

It should be noted that all of this conservative outreach to the welfare state occurred in 2013, following a big victory by Barack Obama. Many on the right thought it was because of his liberal views, rather than the awfulness of the Romney campaign, and thought some accommodation to the welfare state might be necessary for victory. But as Republicans saw Obama struggle and sink in the polls in 2014, they decided to double-down on their anti-welfare state dogma. Their smashing victory in the 2014 congressional elections ensures the end of any effort, cosmetic or otherwise, to develop conservative welfare state policies.

My personal view is that the Republican war on the welfare state is misguided and futile. I agree with Dwight Eisenhower, who once said, “Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history.” He said that those who support such views “are stupid.”

I think that the principal problem with the American welfare state, such as it is, is that it is poorly and badly financed (Bartlett 2009). The Europeans have the right idea about that.

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In chronological order

Joint Committee on Taxation, General Explanation of the Revenue Act of 1978, JCS-7-79 (March 12, 1979), p. 252.

“In addition, the Congress believed that an increased capital gains deduction would tend to offset the effect of inflation by reducing the amount of gain which is subject to tax. However, since the deduction is constant, unlike the adjustments generally provided for in various indexation proposals, it is much simpler and should not tend to exacerbate inflation.”

Commentary: It has long been the view among tax policymakers that a tax preference for capital gains is partially justified by the effect of inflation in creating illusory gains. Having a preferential rate plus indexing in effect confers an unjustified double benefit on capital gains.

Congressional Budget Office, Indexing Capital Gains (August 1990).

New York State Bar Association, Memorandum in Opposition to Proposal to Index Capital Gains for Inflation by Regulation (February 13, 1992).

“We believe that adoption of inflation indexation by regulation is a terrible idea. Whether or not inflation indexation is desirable, it raises complex policy, technical and revenue issues that are much too important to be decided unilaterally by a single branch of the government. Further, we believe such a regulation would be an invalid usurpation of the exclusive power of Congress to legislate a sweeping change in a basic income tax principle that has remained unaltered since the earliest days of the federal income tax.”

Department of Justice, Office of Legal Counsel, Legal Authority of the Department of the Treasury to Issue Regulations Indexing Capital Gains for Inflation (September 1992).

“The Department of the Treasury does not have legal authority to index capital gains for inflation by means of regulation.”.

Lawrence Zelenak, “Does Treasury Have Authority To Index Basis for Inflation?” Tax Notes (May 11, 1992), pp. 841-45.

“Abstract: In this article he examines the claim, which has been publicized in recent months, that the Treasury Department could unilaterally index the capital gains tax for inflation by new regulation interpreting code section 1012. He concludes, in light of more than seven decades of administrative, judicial and legislative history, that such unilateral action would be invalid.”

Note: Zelenak is professor of law at Duke University.

Charles J. Cooper, Michael A. Carvin, and Vincent J. Colatriano, “The Legal Authority of the Department of the Treasury To Promulgate a Regulation Providing for Indexation of Capital Gains,” Virginia Tax Review, vol. 12, no. 4 (Spring 1993), pp. 633-34.

“For the reasons discussed at length in this Article, we believe that the Treasury has administrative discretion to reinterpret ‘cost’ to take account of the economic reality that a ‘gain’ attributable solely to inflation adds nothing to the taxpayer’s real wealth or purchasing power. The term ‘cost’ is subject to more than one reasonable interpretation and is readily amenable to a construction that takes account of inflation.”

Note: This article is adapted from a 1992 study commissioned by the National Taxpayers Union Foundation and the National Chamber Foundation, both of which strongly supported indexation of capital gains by executive fiat.

Reed Shuldiner, “Indexing the Tax Code,” Tax Law Review, vol. 48, no. 3 (Spring 1993), pp. 537-659.

Discusses technical problems with indexing capital gains—treatment of capital losses, appropriate index, holding period etc. Shuldiner is professor of law at the University of Pennsylvania.

William P. Barr, “Attorney General’s Remarks, Benjamin N. Cardozo School of Law, November 15, 1992,” Cardozo Law Review, vol. 15, nos. 1&2 (October 1993), pp. 35-36. Footnotes converted to links.

“Another more recent example is the question of indexing capital gains. There was a great deal of pressure—not from the administration but from writers and from Republicans on the Hill—to conclude that the President could index capital gains. There again, I paid close attention to the question that was being asked. Robert Novak wrote that the problem was that I was not sent sufficient signals as to what answer was wanted. While I agree with Novak on many things, here he was mistaken. On the contrary, I was clearly told what the question was, which was, is indexing lawful. Also, I understood the policy preferences of the administration. The question was: Can we, simply through administrative action, index capital gains. And not only did I not think we could, I did not think that a reasonable argument could be made to support that position.

“The reason that I had no hesitation in rejecting the legal bases for a line-item veto and capital gains indexing is rooted in my view that the President has a responsibility to his office to advance responsible positions of law. I believe that President Bush fully shares this position. Ultimately, if you attempt to push too hard—even as a matter of litigation risks—and take legal positions that clearly will not be sustained, or that are not responsible and reasonable legal positions, you will lose ground. That certainly was the consequence of the Steel Seizure Case. And so in this administration, that is why the question has been, what is the right legal answer—not whether we can provide a veneer of justification for a given action. Our view has been that if we go into court with untenable positions and lose, we ultimately weaken the office of the President.”

Note: Barr was Attorney General in 1992 when this issue first arose.

Senate Finance Committee, Indexation of Assets (February 1995).

Hearing

Shimon B. Edelstein, “Indexing Capital Gains for Inflation: The Impact of Recent Inflation Trends, Mutual Fund Financial Intermediation, and Information Technology,” Brooklyn Law Review, vol. 65, no. 3 (1999), pp.824-25.

“In the past few years, because of low inflation, the equity arguments against inflation indexing have been strengthened, since investors can now more easily compensate for inflation via deferral. The uneven distribution of inflation over the economy, caused by technological advances, also strengthens the argument that inflation indexing is not an entirely accurate remedy. Likewise, the recent controversy over the CPI makes the argument that inflation indexing is not accurate more compelling. Thus, considering its lack of accuracy, inflation indexing may, in fact, be inappropriate.

“In addition, the mutual fund revolution has undermined the lock in argument, that the unindexed code creates an inefficient allocation of the nation’s economic resources. As explained earlier, mutual funds are largely immune from lock in, hence the astonishing growth of funds would likely minimize any putative effect that lock in may have on the economy. In addition, mutual funds weaken any indexing argument based on utility lock in. 33 As the merit of these arguments has increased substantially over the past few years, it follows that the current economic trends militate against inflation indexing, both from an equity and an efficiency point of view.”

Charles J. Cooper and Vincent Colatriano, “The Regulatory Authority of the Treasury Department to Index Capital Gains for Inflation: A Sequel,” Harvard Journal of Law & Public Policy, vol. 35, no. 2 (Spring 2012), pp. 487-524.

“This Article is a sequel to our VTR article; its purpose is to identify any relevant legislative and jurisprudential developments that have taken place over the last twenty years and to assess their impact, if any, on the conclusions we reached in 1992. As discussed in Part II below, although the question remains a close one, it is not as close as it was in 1992. Post‐1992 developments have substantially strengthened our original 1992 conclusions that the Code’s capital gains provisions do not foreclose the Treasury from providing by regulation for the indexation of capital gains and that any such regulation would be entitled to deference under Chevron and analogous legal principles as a valid exercise of the Treasury’s interpretative discretion. Moreover, although over the past twenty years Congress failed to enact bills providing for indexation and successfully enacted other types of capital gains ‘preferences,’ these legislative developments are no different in kind from similar pre‐1992 developments and thus do not repeal or otherwise eliminate Treasury’s discretion under the Code to provide for indexation by regulation.”

Bruce Bartlett, “Indexing Capital Gains by Fiat,” Tax Notes (May 15, 2012).

History of the effort to index capital gains administratively.

Leonard E. Burman, “Should Treasury Index Capital Gains?” Tax Policy Center (May 10, 2018)

• Indexing could be very complex.

• Capital gains are affected less by inflation than other kinds of capital income.

• Indexing capital gains without indexing interest expense and depreciation creates opportunities for tax sheltering.

• Indexing capital gains would add to our burgeoning debt unless accompanied by offsetting tax increases or spending cuts.

• Indexing capital gains alone would be an extremely regressive tax cut.

Burman was deputy assistant secretary of the Treasury for Tax Analysis, 1998-2000.

Jane G. Gravelle, “Indexing Capital Gains for Inflation,” Congressional Research Service Report R45229 (July 24, 2018).

“Depending on the design, estimates suggest a range of $10 billion to $30 billion per year in revenue costs. Economic growth effects would be relatively small, with even the largest revenue estimate pointing to a decrease in the cost of capital of 6 to 7 basis points (lower required returns of 0.06% to 0.07%). Evidence also suggests that the savings effect would be small and likely to be offset by crowding out of private investment by government borrowing if debt-financed. The change would favor high-income individuals with about 60% benefiting the top 0.1% and around 90% benefiting the top 1% in the income distribution.

“Favorable treatment for capital gains on stocks has been advanced due to the double taxation of dividends, but the 2017 tax changes have made that justification less persuasive. Capital gains indexing would reduce the distortion between debt and equity but increase the favoritism of retaining earnings over paying dividends. It would reduce the lock-in effect that causes Indexing Capital Gains Taxes for Inflation Congressional Research Service individuals to retain current assets because of the tax, although not as much as an exclusion equivalent. Administrative and compliance costs would increase because each vintage of assets would require a different exclusion, but improved computing facilities make that issue less burdensome.”

Letter from Senator Angus King (I-Maine) to Treasury Secretary Steve Mnuchin (August 1, 2018).

“The legal case supporting unilateral action by the Department to execute this change to the tax code is weak. A similar action was considered and ultimately rejected in 1992 by President George H.W. Bush’s administration. The Department of Justice concluded that the Treasury does not have the regulatory authority to index capital gains for inflation – not then, and not now.

“I urge you to adhere and respect the 1992 opinion. Indexing capital gains to inflations would blow an even an even larger hole through the deficit, and for no need or benefit to the vast majority of the American people. I look forward to hearing from you on this issue.”

Kyle Pomerleau, “Economic and Budgetary Impact of Indexing Capital Gains to Inflation,” Tax Foundation (September 4, 2018).

• According to the Tax Foundation General Equilibrium Model, indexing capital gains to inflation would increase the long-run size of the economy by 0.11 percent. Wages would be 0.08 percent higher, the capital stock would be 0.26 percent larger, and there would be an additional 21,800 full-time equivalent jobs.

• Indexing capital gains to inflation would reduce federal revenue by $178 billion over the next decade on a conventional basis. Additional economic growth will offset some of that cost, leading to a net dynamic revenue loss of $148 billion over the next decade.

Daniel Hemel and David Kamin, “The False Promise of Presidential Indexation.” Yale Journal on Regulation, vol. 36, no. 2 (Summer 2019), pp. 693-733.

“The Trump administration faces mounting pressure from conservative thinkers and activists—including calls from its own National Economic Council director—to promulgate a Treasury regulation that indexes capital gains for inflation. Proponents of such a move—which is sometimes called “presidential indexation”—make three principal arguments in favor of the proposal: (1) that inflation indexing would be an economic boon; (2) that the President and his Treasury Department have legal authority to implement inflation indexing without further congressional authorization; and (3) that in any event, it is unlikely that anyone would have standing to challenge such an action in court. This article evaluates the proponents’ three arguments and concludes that all are faulty. First, whatever the merits of comprehensive legislation that adjusts the taxation of capital gains and various other elements of the Internal Revenue Code for inflation, rifle-shot regulatory action that targets only the capital gains tax would be costly and regressive, and would open a number of large loopholes that allow for rampant tax arbitrage. Second, the legal authority for presidential indexation simply does not exist. The Justice Department under the first President Bush reached the conclusion in 1992 that the Executive Branch cannot implement inflation indexing unilaterally, and doctrinal developments in the last quarter century have—if anything—strengthened that conclusion. Third, a number of potential plaintiffs—including states, charitable organizations, and brokers subject to statutory basis reporting requirements—would likely have standing to challenge presidential indexation in federal court. In sum, the promise of presidential indexation turns out to be hollow, and calls for unilateral action should be spurned.”

Note: Hemel and Kamin are professors of law at New York University.

Letter from Republican Senators to Treasury Secretary Steve Mnuchin, Americans for Tax Reform (July 29, 2019).

Supports tax indexing by executive order.

Letter from conservative tax organizations to President Trump, Americans for Tax Reform (February 19, 2026).

Supports tax indexing by executive order.

A convenient starting point is the British election campaign of 1945 in the immediate wake of Hayek’s book, which was published in Britain in 1944, largely based on economic and political trends in that country. Prime Minister Winston Churchill, leader of the Conservative Party, took Hayek’s warning very much to heart and made the slippery slope from socialism to totalitarianism the foundation of his campaign against the Labour Party, which was led by Clement Atlee.

Churchill made his opposition to socialism the foundation of his campaign, and this opposition rested squarely on Hayek’s theory that socialism was the first step on the road to totalitarianism of the sort Britain had just fought the greatest war in its history. Churchill must have thought that tainting his political enemies with the stench of Nazism was a clever political strategy, because he laid it on really thick in a nationwide radio address on June 4, 1945, the night before Britons went to the polls. After berating his wartime allies for abandoning the coalition government, Churchill attacked socialism with all the rhetorical power at his command. (Transcript here, audio here.)

My friends, I must tell you that a Socialist policy is abhorrent to British ideas of freedom. Although it is now put forward in the main by people who have a good grounding in the Liberalism and Radicalism of the early part of this century, there can be no doubt that Socialism is inseparably interwoven with Totalitarianism and the abject worship of the State. It is not alone that property, in all its forms, is struck at, but that liberty, in all its forms is challenged by the fundamental conceptions of Socialism.

Look how even today they hunger for controls of every kind, as if these were delectable foods instead of wartime inflictions and monstrosities. There is to be one State to which all are to be obedient in every act of their lives. This State is to be the arch-employer, the arch-planner, the arch-administrator and ruler, and the arch-caucus-boss.

How is an ordinary citizen or subject of the King to stand up against this formidable machine, which, once it is in power, will prescribe for every one of them where they are to work; what they are to work at; where they may go and what they may say; what views they are to hold and within what limits they may express them; where their wives are to go to queue up for the State ration; and what education their children are to receive to mould their views of human liberty and conduct in the future?

A Socialist State once thoroughly completed in all its details and its aspects - and that is what I am speaking of - could not afford to suffer opposition. Here in old England, in Great Britain, of which old England forms no inconspicuous part, in this glorious Island, the cradle and citadel of free democracy throughout the world, we do not like to be regimented and ordered about and have every action of our lives prescribed for us. In fact we punish criminals by sending them to Wormwood Scrubs and Dartmoor, where they get full employment, and whatever board and lodging is appointed by the Home Secretary.

Socialism is, in its essence, an attack not only upon British enterprise, but upon the right of the ordinary man or woman to breathe freely without having a harsh, clumsy, tyrannical hand clapped across their mouths and nostrils. A Free Parliament - look at that - a Free Parliament is odious to the Socialist doctrinaire. Have we not heard Mr Herbert Morrison descant upon his plans to curtail Parliamentary procedure and pass laws simply by resolutions of broad principle in the House of Commons, afterwards to be left by Parliament to the executive and to the bureaucrats to elaborate and enforce by departmental regulations? As for Sir Stafford Cripps on ‘Parliament in the Socialist State’, I have not time to read you what he said, but perhaps it will meet the public eye during the election campaign.

But I will go farther. I declare to you, from the bottom of my heart, that no Socialist system can be established without a political police. Many of those who are advocating Socialism or voting Socialist today will be horrified at this idea. That is because they are short-sighted, that is because they do not see where their theories are leading them.

No Socialist Government conducting the entire life and industry of the country could afford to allow free, sharp, or violently worded expressions of public discontent. They would have to fall back on some form of Gestapo, no doubt very humanely directed in the first instance. And this would nip opinion in the bud; it would stop criticism as it reared its head, and it would gather all the power to the supreme party and the party leaders, rising like stately pinnacles above their vast bureaucracies of Civil servants, no longer servants and on longer civil. And where would the ordinary simple folk - the common people, as they like to call them in America - where would they be, once this mighty organism had got them in its grip?

I stand for the sovereign freedom of the individual within the laws which freely elected Parliaments have freely passed. I stand for the rights of the ordinary man to say what he thinks of the Government of the day, however powerful, and to turn them out, neck and crop, if he thinks he can better his temper or his home thereby, and if he can persuade enough others to vote with him.

Reaction to the speech was very negative (Daniel 1945). But it probably didn’t cost Churchill the election, since Labour was well ahead even before the speech (Addison 2011). Moreover, Labour ran a good campaign at a time when the electorate was trending left, while the Conservative campaign rested mainly on returning Churchill to office (Larres 2020; Pelling 1980). Nevertheless, the magnitude of the Conservative loss was shocking, with the party losing 219 seats and carrying just 39.6 percent of the vote compared with 48 percent for Labour. (Election data here.)

It’s not entirely clear how much Churchill relied upon Hayek’s thinking in drafting his speech, but there’s no question that The Road to Serfdom was well known among Conservative leaders, many of whom thought it provided a useful electoral roadmap. For example, in April 1945, Ralph Assheton, chairman of the Conservative Party, gave a speech that anticipated Churchill’s. As Assheton said:

But there are even more fundamental reasons which should make us hesitate to adopt Socialist doctrines. We in this country have been fighting against totalitarianism in Germany and we do not wish to adopt as our creed the German-made doctrines of Karl Marx. I do not think that most of those who toy with Socialist theories and doctrines in this country realize sufficiently that Socialism, which means the ownership of the means of production, distribution and exchange, inevitably leads to a totalitarian State. When the State owns everything, the State is the only master and every man must work for the State or starve. In such a condition of affairs, we should indeed be slaves, for what is a slave but a man who has only the opportunity of working one master? (Quoted in Cockett 1994: 93.)

There’s no evidence that Churchill ever read The Road to Serfdom, although Hayek made a strenuous effort to put a copy in his hands. The book was certainly known in Conservative circles. Hayek himself later admitted, “I am afraid there can be little doubt that Winston Churchill’s somewhat unfortunately phrased Gestapo speech was written under the influence of The Road to Serfdom.” (Quoted in Toye 2010: 665.)

Subsequently, the victorious Labour Party implemented widespread nationalization of industry in Britain (Kelf-Cohen 1958; Lewis 1952; Millward & Singelton 1995). However, contrary to Hayek’s and Churchill’s warnings, there is no evidence that Britain ever drifted into totalitarianism, although by the 1970s it was widely believed that state-owned enterprises were a drag on economic growth and productivity. This led to a vast privatization program under Prime Minister Margaret Thatcher (Gamble 1989; Bishop & Kay 1989).

Tellingly, the Conservative Party was subsequently quite restrained in its criticism of the welfare state’s expansion under Labour. For example, in its 1947 “Industrial Charter,” the party simply stated general opposition to nationalization, but did not promise to privatize nationalized industries. In the case of the strategic coal industry, it said, “Rather than proposing complete denationalization of the coal industry we would examine and modify the methods by which the Socialists will have tried to run it.” Regarding the nationalized Bank of England, the Conservatives said, “We would not repeal the whole Bank of England Act, but we should re-examine the powers of the Bank to give directives to the commercial banks.” The overall approach to nationalized industries was simply to manage them better and improve their performance:

We shall overhaul the organisation of those industries which remain nationalized. We shall submit them to the test of the highest standards of commercial efficiency. We stated during the passage of the Coal Bill through Parliament that the Coal Board was not satisfactorily constituted and was over-centralised.

We shall review the scope of the nationalized industries. The Coal Board, besides being a large landowner and farmer, can open shops and run places of entertainment. The British Transport Authority will be in the hotel business. In all such cases we shall push back the area of monopoly to the narrowest limits consistent with its main undertakings. Where competition between a State monopoly and free enterprise is inevitable we shall ensure that such competition is fair and unsubsidized.

This is pretty thin gruel for a party that recently condemned state ownership of the means of production as leading inevitably to a police state. Yet now, it promises merely to run them better than the socialists. The New York Times reporter covering the Conservative Party conference in 1947 thought that it had not provided a “desirable alternative” to Labour (Matthews 1947).

By 1949, the Conservatives were simply promising not to engage in further nationalizations, while Labour promised to slow the nationalization program. Both the left and the right saw the two major parties narrowing their differences. A New York Times report on the party platforms going into the 1950 general election (Daniel 1949) painted a bland picture of substantive differences:

In brief the Labor party program proposes to carry the nation still farther along the road to socialism, but at a reduced speed during the next five years. The Conservative program proposes to recoil somewhat from socialism but not the whole distance…. To most non-Socialists abroad, The Guardian [a left-wing paper] said, the Conservative policy would seem “hardly distinguishable from the program of the Socialist Government except that there is to be no more avowed nationalization.”

The conservative Daily Express lamented, “Plainly, the Tory chiefs see the problem very much as the Socialists do.”

In the February 1950 election, Labour lost ground and Conservatives gained, but Labour remained in power (Jenkin 1950). According to a BBC summary of the campaign, “However critical the Tories were of Labour’s nationalisation policies they left the welfare state alone. The Conservative manifesto, This is the Road, accepted the implementation of the welfare state but criticised the Government’s reliance on bureaucracy and the over regulation of the economy.”

The fragility of the Labour government led to a new election in 1951. Churchill and the Conservatives were returned to office, but they didn’t propose much to change Labour’s economic policies (Jenkin 1952; Nicholas 1952). As the BBC put it, “The Conservatives were back in power once more, but they did little to alter the welfare state created by the previous Labour government.”

In the end, despite their dire warnings about how the welfare state leads to the police state, the Conservative Party essentially did nothing to shrink it even with Churchill back in power. Both parties accepted the idea of a middle way between socialism and the free market until the election of Margaret Thatcher in 1979 (Toye 2013). Churchill’s 1945 warning against totalitarianism if socialist policies were implemented now looks ridiculous.

References

Addison, Paul. 2011. “Why Churchill Lost in 1945.” BBC (February 17).

Bishop, Matthew R., and John A. Kay. 1989. “Privatization in the United Kingdom: Lessons from Experience.” World Development (May): 643-57.

Churchill, Winston. 1989. “Electioneering Once More: ‘Some form of Gestapo’. BBC, London, 4 June 1945.” In Blood, Toil, Tears and Sweat: The Speeches of Winston Churchill, ed. David Cannadine, pp. 269-77. Houghton Mifflin.

Cockett, Richard. 1994. Thinking the Unthinkable: Think Tanks and the Counter Revolution, 1931-1983. HarperCollins.

Conservative Party. 1947. The Industrial Charter: A Statement of Conservative Industrial Policy. Conservative and Unionist Central Office.

Daniel, Clifton. 1945. “Churchill ‘Bogey’ Speech Causes British Tempest.” New York Times (June 10): E 4.

Daniel, Clifton. 1949. “Thin Line is Drawn By British Parties.” New York Times (July 25): 4.

Gamble, Andrew. 1989. “Privatization, Thatcherism, and the British State.” Journal of Law and Society (Spring): 1-20.

Jenkin, Thomas P. 1950. “The British General Election of 1950.” Western Political Quarterly (June): 179-89.

Jenkin, Thomas P. 1952. “The British General Election of 1951.” Western Political Quarterly (March): 51-65.

Kelf-Cohen, R. 1958. Nationalisation in Britain. Macmillan.

Larres, Klaus W. 2020. “When a Winner Becomes a Loser: Winston Churchill Was Kicked Out of Office in the British Election of 1945.” The Conversation (July 27).

Lewis, Ben W. 1952. British Planning and Nationalization. George Allen & Unwin.

Matthews, Herbert L. 1947. “British Opposition to Convene Today; Conservative Party to Train Fire on Labor Regime, Battle on ‘Industrial Charter.’” New York Times (October 2): 17.

Millward, Robert, and John Singleton. 1995. The Political Economy of Nationalisation in Britain, 1920-1950. Cambridge University Press.

Nicholas, H.G. 1952. “The British General Election of 1951.” American Political Science Review (June): 398-406.

Pelling, Henry. 1980. “The 1945 General Election Reconsidered.” The Historical Journal (June): 399-414.

Toye, Richard. 2010. “Winston Churchill’s ‘Crazy Broadcast’: Party, Nation, and the 1945 Gestapo Speech.” Journal of British Studies (July): 655-80.

Toye, Richard. 2013. “From ‘Consensus’ to ‘Common Ground’: The Rhetoric of the Postwar Settlement and Its Collapse.” Journal of Contemporary History (January): 3-23.

Key points:

· Critical thinking is the best defense against fake news.

· Technology may help, as may new school curriculums

· The same tools that create fake news can help fight it.

At this stage of the debate, people recognize that fake news is a problem, but the solution is elusive. Many in the tech community believe it is a problem technology can easily fix. Various efforts are underway to automatically identify fake news stories before they go viral and either delete them from social media platforms or append some sort of warning that the story is unverifiable and possibly fake.

This is all to the good and perhaps these automated methods will help. But I am disinclined to think they are the answer. The core problem is that people like fake news when it is interesting or titillating, or when it confirms a core belief—especially one that is under challenge—or scores points against a political or ideological opponent.

Even when someone is well aware of the fake news problem, the ease and simplicity with which one can repost or forward something interesting one comes across on the internet or in an email can overwhelm one’s common sense for a moment and suddenly you find that you have added to the fake news problem. I myself am guilty of tweeting of such items after reading only the headline of a story that looked interesting—perhaps too interesting.

The fact is that there are great financial rewards to writing just the right headline to attract clicks and eyeballs. Clicks equal advertising dollars. They may also attract sponsors who pay people to generate vast numbers of posts on Twitter, Facebook and other social media. Such methods can be nefarious, but often are simply a marketing strategy not inherently different from any other advertising or marketing effort.

Other than forcing myself to calm down, wait a moment before posting a comment and reading a story all the way through before acting, I have found that my best defense is the old adage: If something is too good to be true, it probably is. That is, try to resist gullibility and credulousness; be skeptical and agnostic until one can determine the truthfulness or validity of some news item especially if it confirms something you want to believe.

Educators believe that it is up to them to teach critical thinking and drum into students certain habits that will offer some protection against being scammed by fake news themselves. They were alarmed by a Stanford University study in 2016 which found that even bright, well-educated, tech-savvy students had great difficulty separating news from advertising or figuring out where a piece of information came from.

Fortunately, the same methods that allow fake news to proliferate provide the tools to fight it. One very simple method is to check a too-good story to see if others are reporting it. If your source is absolutely the only one with a particular news item and a search through Google News or similar source finds no confirmation, it may be the case that you are being scammed.

Of course, everyone likes to be the first to report some hot item to one’s friends and disciplining yourself to double check an item before posting it is hard. Sometimes you may rationalize that whether an item is true or not, it is undeniably entertaining. Thus you justify your failure to do due diligence by saying to yourself, it’s just entertainment.

If it’s a matter of no importance, you are doing no harm. Unfortunately, some very important people—anchors on cable news channels, widely-syndicated talk radio hosts and the like—use entertainment as an excuse to peddle lies. When caught, they say they are not professional journalists and are essentially entertainers. Anyway, the ultimate burden is on the reader, viewer or listener, they say, to verify the veracity of facts. The talker’s only real job is to deliver the largest possible audience to his advertisers.

Some economists argue that competition will weed out the liars, fabulists and propagandists. But this is rank nonsense. Competition doesn’t reward the media with the best, most accurate reporting. Since the dawn of modern newspapers, they have attracted readers with a wide variety of pure entertainment—comics, gossip columns, and the like. It hardly needs mentioning that the most popular TV news journalists all tend to be very good looking, some exceptionally so, with pleasing voices and demeanors. Obviously, this is not coincidental.

Ethics and professional standards are one defense against declining standards, but the intensity of competition has diminished their value. Indeed, there is now a sort of race to the bottom, where unambiguously disreputable media organizations have achieved goals unimaginable just a few years ago, such as being credentialed to the White House press corps.

This means that the burden on citizens to sift the wheat from the chaff is getting harder; they can no longer just assume that the gatekeepers of credible news have the power any longer to punish the disreputable and reward accuracy and truthfulness with things like Pulitzer Prizes. It took many years for the old days of “yellow journalism” to be suppressed in favor of professional journalistic standards that were widely accepted.

The Center for News Literacy at Stony Brook University is in the forefront of educational efforts to fight fake news by teaching people to be discerning in their news consumption—to tell the difference between news and rumor, news and advertising, news and opinion, bias and fairness. The Center is developing a curriculum to achieve these goals that can be offered either as stand-alone courses or integrated into existing social studies. The problem, of course, is that any time new material is introduced into a school curriculum, something else has to be dropped or cut back.

Ideally, critical thinking is a core educational function that is embedded into virtually every course to some extent from kindergarten all the way up. My wife Nancy taught 8^th grade English at an urban middle school for 17 years. She always thought that critical thinking, proper evaluation of source materials and other elements of news literacy were a key part of her job long before the fake news problem arose.

As noted earlier, it is not enough to have separate sections of a newspaper devoted to factchecking when to my mind factchecking is the core journalistic function. Having a separate section suggests that the rest of the paper doesn’t engage in factchecking. Similarly, critical thinking is the core function of a proper educational system, teaching it in a separate course to fight the scourge of fake news should be superfluous.

It’s possible that as time goes by the problem of fake news will take care of itself. It’s the problem that it is now only because social networks are still relatively new and those who learned how to promote fake news in service of an agenda have a head start. As time goes by, people may learn to be more discriminating on their own or the various technological fixes will be successful.

In the end, the best defense against fake news is critical thinking, taking in news from a variety of sources including those that don’t confirm your own biases, being skeptical about information that sounds too good to be true and other self-defenses.