Tag Archives: Robert Mundell

Supply Side Reading 5-13-10

Good links today from The Supply Side:

Thursday round up.

Brian Domitrovic provides historical context to point out why critics can’t say supply-side economics failed to eliminate deficits and failed to starve the beast.

Alan Reynolds says “Hello Supply Side” (h/t: Brian Domitrovic).

David P. Goldman provides a fascinating analysis of the current crisis by comparing Robert Mundell’s economic model to the Keynesian framework.

Steve Forbes argues the euro is worth keeping, and would be better fixed to gold.

John Tamny connects supply-side tax cuts to Ayn Rand’s idea of producers “shrugging.”

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Larry Kudlow’s Kemp Obituary

On a personal level, been waiting to see what the great Larry Kudlow would say about Jack Kemp’s passing. This does not disappoint.

By Larry Kudlow

May 5, 2009 for Townhall.com

When I first visited with Jack Kemp in his congressional office in Washington, D.C., in the late 1970s, I couldn’t help but notice the row of books on his desk. There was Friedrich Hayek, Ludwig von Mises, Benjamin Anderson, and Milton Friedman. And of course there was Jude Wanniski’s The Way the World Works.

Jack extracted big ideas from these big books, and he applied them to an American nation that was in big trouble. His detractors called him a jock, just as they called Ronald Reagan a dunce. Yet both men proved their critics wrong.

Working with Wanniski, Arthur Laffer, Robert Mundell, Alan Reynolds, Steve Entin, Norman Ture, and many others, Jack developed an agnostic economic formula that solved the vexing problem of economic stagflation and malaise.

Lower tax rates for everyone, he argued. Make it pay after-tax to work, produce, invest, and take risks, and the country will get more of all of it. Along with lower marginal tax rates to reignite economic growth, stabilize the free-falling dollar to curb inflation. And add free trade to that mix, since tariffs are nothing more than taxes on the purchase and sale of international goods.

Foster policies that will unleash our God-given creativity and imagination, Jack Kemp argued. And let individuals take it from there.

Jack was always talking about a rising tide to lift all boats, borrowing from the JFK phrase of the early 1960s. In fact, in meetings in the mid-1970s, Laffer and Wanniski helped persuade Kemp to follow in JFK’s footsteps and propose reduced tax rates across-the-board to get the economy growing again.

Jack, an unbelievably energetic activist, then helped persuade Reagan of the merits of this new policy approach. The economic dons of Cambridge and New Haven scoffed. They wanted to raise taxes, allegedly to curb inflation, and pump up the money supply to expand the economy. Kemp and his group told the dons they had it exactly backwards. He was right. The Ivy League was wrong.

Kemp actually thought of himself as a bleeding-heart conservative. First and foremost, this son of a truck driver wanted to improve the plight of the non-rich in the inner-city housing projects and those trapped in the dead-end welfarism of the barrios. He worked to expand the economic fortunes and political rights of all minority groups, including all those blue-collar workers who were getting killed by high tax rates and virulent inflation.

A perpetual optimist, Jack told the Republican convention in 1996, “You see, democratic capitalism is not just the hope of wealth, but it’s the hope of justice. When we look into the face of poverty, we see the pain, the despair, and need of human beings. But above all, in every face of every child, we must see the image of God.” He then added, “I believe the ultimate imperative for growth and opportunity is to advance human dignity.”

Nobody talks like that anymore. Politicians should. It’s inspirational stuff.

Another of Jack’s pet projects was the bringing together of capital and labor, workers and investors, and businesses and jobs. His ultimate goal was to make the non-rich rich. And to achieve that, he knew Wall Street had to work with Main Street; investors had to work with unions; and high finance had to work with the hard-hit folks in the inner cities. He had a true post-partisan vision long before that phrase became fashionable.

Over the years Jack often called me to affirm and encourage my simple paradigm: You can’t have a good job without a healthy business to create it, and you can’t have a good healthy business without the investment capital to fund it. It’s a unifying message.

This week President Obama unleashed yet another attack on international businesses, essentially calling them unpatriotic tax cheats even though they abide by existing laws. Last week, Obama used his clout to undermine investor contract laws in the Chrysler bailout. The president has also blasted banks and Wall Street, and has launched a war against capital.

Jack Kemp knew all this to be wrong. He said we need to stop taxing saving, investment, and business two, three, and four times. Simplify the tax code, he said. Lower tax rates across-the-board for everyone. Understand that Hispanics in the barrio need the very capital that is supplied by investors. Without it there will be no new jobs. And jobs along with economic growth are the best anti-poverty weapons we have.

Jack Kemp never tore people down; he tried to build everyone up. He argued passionately to persuade, not to destroy. He believed in one grand economic coalition that in fact would constitute a rising tide.

So Jack has passed away and we mourn. But his big ideas and dreams will live forever.

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By Jerry Bowyer

May 4, 2009 for Forbes.com

We’re going to need another Jack Kemp. We’re in the same mess now as we were when he rose to prominence in the 1970s: rising taxes, energy rationing, and a misguided belief that we can counter all of that with the printing press. We’re going to need someone who can understand the fundamental truth of the Laffer Curve, and still has the charisma to lead men and women in the political sphere.

I owe Jack Kemp a lot–we all do. His supply-side optimism helped supplant the near-universal conservative pan-gloomism of the ’70s. George Gilder wrote the book, and Reagan won the White House, but before both of them, Kemp cracked the code. Kemp took the groundbreaking and brilliant work of Art Laffer and Robert Mundell and turned it into a real political movement and real-world legislation (and rescued it from becoming a Jude Wanniski cult). Kemp helped Reagan to convert from Goldwater-root-canal-high-tax-low-deficit economics and gave the GOP a new lease on life.

Kemp should have been the successor, but the Bush dynasty pulled their many strings and won the White House, and the party lost something. The Republicans have wandered in the economic wilderness, to some degree, ever since. Bush Sr. governed as a Keynesian. So did Clinton, in his first term. In his second term, Clinton governed as a supply-sider. Bush Jr. never really had it clear in his mind: demand-side tax cuts in 2001, supply-side tax cuts in 2003, Sarbanes-Oxley financial strangulation, car-crushing CAFE standards, mark-to-market, bailouts–a mixed supply-side legacy at best.

Now, as everybody and their brother tells us that the only way for the GOP to get back on top again is to stop all this tax-cutting and supply-side growth stuff, it is worth asking whether the Kemp/Reagan formula is obsolete.

I, for one, do not believe that it is.

The main thing about Kempism is that it actually worked. What the big-government conservatives can’t see from their perches at think tanks and newspapers is reality. Central planning doesn’t work. I don’t care about the emerging voting patterns of bo-bos (David Brooks’ “bohemian bourgeois”). I don’t care if the lawyers and nonprofit executives who live in their planned communities hate Sarah Palin and swoon at Barack Obama. I don’t care about any of that, because politics is not the final word; reality is. That’s what Kemp got, and so many in the party now do not.

The central planning political consensus was at least as strong in the 1970s as it is now. David Frum should know that: He wrote a fine history of that awful decade. I’m sure that if there had been blogs back then, Washington conservatives would have told us how out of touch Kemp (and Reagan) were with the political consensus, and they would have been right. But they would have been wrong, too, because in the end, the political consensus does not rule the land; reality does.

Foreign affairs and terror prevention were incredibly passé in the years leading up to Sept. 11, 2001. No one wanted to talk about that stuff. Books about it did not sell. Then, reality caught up with our Utopian illusion: Indifference didn’t work in defending us against the jihadists. More handcuffs on the CIA and the FBI than on the terrorists in the name of civil liberties didn’t work, either. Reality won again, and the political consensus lost.

This will happen again–in economics. Bushbamanomics, the new Washington consensus, will fail. Just as Nix-Carternomics did. They violate the iron laws of created human nature–and so, they must fail.

Where is the next Kemp to be found? Not from the big government right. Yes, they’ll keep their titles as the holders of the So and So Chair at the D.C. Institute for C-SPAN 2 Appearances, funded by some poor, deceased entrepreneur. They’ll still be The New York Times‘ favorite conservatives. They’ll still appear on PBS regularly; but they won’t lead the party.

He (or she) won’t come from the gloomy right, who love to drone in Spenglerian tones about the inevitable decline of the Republic. I didn’t sign on to Reagan/Kemp to “stand athwart history yelling stop.” That’s the left’s job. They were the ones who tried to stop history, to push it back into the bottle, to stifle the whirlwind of creative destruction. I signed up for the Reagan/Kemp program to stand behind history and kick it hard in the butt, yelling “get moving again.” “Create microchips and miracle drugs. Get the Soviets into the ash bin of history, quickly. Bring the slums of Calcutta and Soweto into the modern world.”

Our recent crop of GOP pretenders has been most un-Kempian. Kemp understood that reality has the power to bring people with very different agendas and concerns together. I remember one of the big media liberal pundits speaking about the GOP convention in 1984, I think, after Kemp spoke. It might have been Sam Donaldson. He said “These Republicans think they can take born-again Christians and combine them with high-tech entrepreneurs. It won’t work.”

But it did work. It worked because high-tech entrepreneurs needed lower taxes, and Reagan gave it to them. Born-again Christians were right, the sexual revolution didn’t liberate the culture; it degraded it. These two groups didn’t have a lot of personal chemistry between them, nor either with the foreign policy hawks who were the real “realists” of the cold war. Personal chemistry didn’t bring these people together–reality did. All reality needed was a guy who was willing to search for the truth about the way the world works, to disconnect his flinch reactions about how the political culture would react to the truth, and then explain the basic truths of things over and over again with joy. Jack Kemp was that guy.

Now, of course, smaller men divide up the coalition that Kemp conceived and Reagan created. Some of them talk at length about the sanctity of life but then lash out at the “Club for Greed.” Some will cut taxes to the bone, but are bored by dead babies. They believe in “divide and conquer,” but of their friends, not their opponents.

Let me offer some thoughts on where the next Kemp will (and will not) come from: probably not from the establishment. Washington doesn’t grow problem-solvers, it grows power-accumulators. I’m talking about the rightand the left. I’m talking about those in the network of think tanks, lobbying firms and advocacy groups, which constitute the government in exile. The first group crowds around the president; the second group crowds around the money. Neither actually face anything like economic reality. The next Kemp will really get economics, but will be an outsider to the profession. Economics is often best learned outside of a graduate school of economics. Kemp learned it while cooking breakfast for Art Laffer and peppering Art with questions. Of course, Kemp really learned his economics by growing up in an entrepreneurial household.

Laffer is still with us, and still a generous teacher. So are Kudlow and Forbes. My guess is that the next Kemp will be a reader of Laffer, a watcher of Kudlow and a subscriber of Forbes. This person will not have to try to remarry faith and entrepreneurship, because the two were never properly divorced. The conservative establishment will say, “who is that? I’ve never met them at any of our gatherings.” But he (or she) will have energy, and enthusiasm, and problem-solving ability, and more ambition for ideas than for power.

History is about to enter another ditch. Someone will need to stand behind it and give it a hard kick in the butt and yell “get moving again.” I can hardly wait.

Jerry Bowyer is chairman of Bowyer Media and a CNBC contributor.

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Kemp: The 25-year bull market

By Jack Kemp

August 14, 2007 Townhall.com

The great “existentialist philosopher” Yogi Berra once famously said, “history is just one damn thing after another.” Of course the antithesis of Yogi was George Santayana, an equally famous philosopher who said wisely, “those who neglect the mistakes of the past, are doomed to repeat them.” As I write these words in the dog days of August, with all the bad news of the subprime mortgage market, liquidity crunch and a fluctuating stock market, it’s important to keep things in perspective and heed the words of Santayana, not Berra.

In other words, we should turn to history and its empirical evidence, and not give in to irrational decisions based on fatalism and the neglect of real history.

One such historical fact to remember is that the past 25 years have been the best stock market for investors in U.S. history. As the widely respected New York Times financial journalist Floyd Norris wrote, (and blogged) recently, the Dow Jones industrial average hit bottom on Aug. 12, 1982, at 776.9, while interest rates were at 15 percent.

Since that date, the compounded rate of return from the last quarter of 1982 until this summer, circa 2007, has been 11.8 percent. Taking into account inflation, the rate of return has been 8.5 percent. Norris pointed out this quarter of a century is the best ever in U.S. history.

This remarkable achievement didn’t just happen, it was the result of policy decisions in the 1980s, 90s and more recently – confirming the fact that lower tax rates on capital and labor, sound monetary policies, with open market initiatives and liberalized trade leads to stronger economic growth and rising values in equities.

We neglect these lessons at our peril.

As economist Art Laffer pointed out recently, “if these pro-growth policies that have led to our 25-year bull market are reversed, don’t be surprised if our financial gains and competitive edge quickly disappear.”

Make no mistake dear readers, listening and watching the presidential candidates in the Democratic Party debate over the economy, I believe they are all headed in the direction of higher tax rates, and protectionist trade policies. Have they all forgotten John F. Kennedy in the early 1960s and indeed Bill Clinton in the 1990s? Where, oh where is the pro-growth, pro-trade, pro-internationalist wing of the Democratic Party? Except for Joe Lieberman, they apparently no longer exist.

Some history for all of us, 25 years ago, there was a mighty revival of classical economics led by two young economists named Robert Mundell of Columbia University and the aforementioned Art Laffer then a professor at USC.

They posited that the only answer to the Keynesian dilemma of simultaneous inflation coupled with recession was to restore sound money and sharply reduced marginal tax rates on both capital and labor. In other words, a hardened dollar, combined with lower taxes, reduced regulation and liberal trade policies would spur economic growth and jobs while combating inflation.

Theses two economists, took me, a GOP Congressional backbencher from Buffalo, N.Y., and turned me from a rather orthodox conservative in the Eisenhower wing of the Party, into a radical tax rate cutter and classical liberal on trade and globalization.

Candidate for President Ronald Reagan in 1980 turned out to be the one (and only) candidate among Republicans who fully (and firmly) bought into this neo-classical school of supply side economics because he’d been educated at Eureka College in the late 1920s at the height of the teachings of the 18th century Adam Smith and David Ricardo.

Most people forget that when Ronald Reagan took office the top tax rate was 70 percent and the capital gains rate was near 50 percent. The soft money policies of the Carter administration had left us with rising unemployment and inflation rate of 16 percent, (i.e. stagflation.) Trade was virtually shut down because of the mercantilist trade policies of “the left” in the U.S. and those of “the right” in Japan and “old Europe”.

Despite several exogenous events from Y2K to 9/11, from Hurricane Katrina and the rising defense spending in the war on terror, the U.S. economy is the model for the world as more and more nations from Brazil and India to Russia, China, and Eastern Europe begin to emulate our entrepreneurial pro-growth economic ideas.

As I’ve said, August 1982 was the real beginning of the lower tax rate, lower interest rate and lower tariff policies that turned out 25 years later to have been the policy prescriptions that brought us this remarkable record. As I write this on Monday, the Dow is at 13,335 – not bad!

So to summarize Santayana, yes, we must learn from our mistakes, but equally important we must remember those decisions that from Reagan to Clinton to Bush have given the world a road map to prosperity.

We’ve come a long way and we’ve still got a long way to go in lifting more people out of poverty, creating more minority business owners and to further democratize our capitalistic system. So to both Democratic and Republican candidates for the presidency: let’s hear a real debate about growth and prosperity and not redistribution of wealth and soaking the rich.

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Kemp: Cheney opens door to supply side of Bush administration

By Jack Kemp

August 2, 2000 for Townhall.com

Richard Cheney, George W. Bush’s choice for his vice presidential running mate, understands that this marvelous “new” economy we enjoy today began with the across-the-board tax-rate reductions in 1981 and the return to sound money ushered in by Paul Volcker and sustained by Alan Greenspan at the Federal Reserve Board. Vice President Al Gore, on the other hand, just doesn’t get it.

The Gore presidential campaign is based on a two-part, “happy days/sad days” myth. The sad-days part consists of a fallacy long promoted by the Democratic Party that Reaganomics was a failure that resulted in huge budget deficits, a painful economic recession in 1990 and economic hard times for many Americans. The happy-days part of the myth is that the economic recovery from the 1990 recession, America’s current economic prosperity and federal budget surpluses have been a direct result of Clinton-Gore policies that reversed Reaganomics.

The fact is, Reaganomics, that so-called “risky” supply-side “scheme,” was a spectacular success, and the budget deficits of the 1980s were a product almost entirely of excessive congressional spending far exceeding the spending required to retool America’s national defense forces. The vast majority of Americans prospered mightily during the 1980s as their inflation-adjusted, disposable personal income rose at an average annual rate of 3.5 percent, as compared to only 2.9 percent during the Clinton years.

As for the 1990 recession, it was a short downturn, which ended before Bill Clinton took office and was brought on not by Reaganomics but rather by an accumulation of policy deviations away from supply-side principles, specifically a badly flawed tax-reform measure enacted in 1986 that penalized saving and investment, a tax increase and regulatory binge in the early 1990s, and unduly tight monetary policy by the Federal Reserve Board.

Cheney understands all of this, and by choosing Cheney as his vice-presidential running mate, Bush demonstrates that he, too, understands it. It was, after all, Cheney in 1974, then President Gerald Ford’s deputy chief of staff, for whom supply-side economist Art Laffer scribbled the famous Laffer curve on a napkin to demonstrate how, when tax rates are too high, lowering them can actually increase revenues. Cheney, then, not Ronald Reagan or Jack Kemp, actually was the first modern-day Republican to put supply-side economic theory into practice when he helped dissuade Ford from raising taxes and helped convince him instead that lower taxes were called for.

Then, while serving as the congressman from Wyoming, Cheney perceived the many flaws in the Tax Reform Act of 1986 and courageously broke with his own party and voted against the bill. Arguing against the bill on the floor of the House of Representatives he said presciently, “I believe the bill will result in lower levels of economic activity, slower growth, less investment and fewer jobs.”

He explained his reasoning by warning that the tax-rate reductions contained in the bill, as desirable as they were, nevertheless were insufficient to offset the “significant rise in the cost of capital” that the bill would bring about through an increase in the capital-gains tax, a restriction on the availability of IRAs and a change in the write-off periods for capital equipment and real property. It turns out he was right; it was the anti-supply-side aspects of tax reform that helped bring on the recession.

So, what about the claim that Clinton-Gore policies are responsible for the economic recovery and today’s prosperity? They are vacuous, for the Clinton administration has been merely a caretaker presidency in the transition from the old to the new economy.

In the June issue of the American Economic Review, Nobel Prize-winning economist Robert Mundell places recent economic events into the larger historic context of the history of the 20th century and by doing so nullifies any notion that Clinton’s policies – beyond those that perpetuated the supply-side policy mix, such as free trade and the reappointment of Greenspan at the Fed – have had anything to do with today’s prosperity: “The third part of the century, 1972-1999, starts with the collapse into flexible exchange rates (i.e., the world goes off gold) and continues with the subsequent outbreak of massive inflation and stagnation in the 1970s, the blossoming of supply-side economics in the 1980s and the return to monetary stability and the birth of the euro in the 1990s.”

Mundell goes on to credit Reagan with the successful implementation of supply-side economics, which he characterizes as “a policy system alternative to short-run Keynesian and monetarist demand-side models.” He then puts the Clinton years in context: “Growth continued until the nine-month downsizing recession of 1990-1991, which probably cost President George H.W. Bush re-election. Expansion resumed in the spring of 1991 and continued at least until the end of the decade, making the combined period 1982-2000 the greatest expansion in the history of any country.”

Cheney opens the door to the supply side of a Bush administration. Now Bush has a perfect opportunity to walk through that door by announcing he will choose Steve Forbes to serve as his Treasury secretary.

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