Memo To: Chris Lydon, Boston PBS radio host
From: Jude Wanniski
Re: Talk show transcript
I finally got around to listening to the tape you sent me of your June 10 show, when I debated Paul Krugman on taxes and economic growth. It was so interesting that I transcribed it and sent it out in the monthly Recommended Readings to my clients. What you will be most interested in is the portion of the tape that follows the conclusion of your show, when you accidentally left on the recorder. Shame on you for using bad language, Christopher! I was especially amused by Barry Bluestoneís recollection -- in the off-the-air portion of the tape -- of a joint appearance we had on a Bill Moyers tv discussion back in 1980. Barry remembers that at the beginning of the show I ďwent off the deep end,Ē in some sort of ďcosmic event,Ē as if I were some sort of madman. Memories play tricks after 16 years. What really happened was that just at the beginning of the taping of the show, some make-up got behind my contact lens and it was both painful and blinding. I had to stop the show, knowing I could not proceed. After I fixed the problem, we began the show all over again. I still have a tape of the show, in which nobody went off the deep end but Barry, who has never had his economic feet on solid ground. The June transcript is worth reviewing now that four months have elapsed. I see Krugman is still running around on public radio and television making his scientific pronouncements that we canít grow faster than he says we can, which is not very much.
* * * * * *
Talk Show EXCERPTS, CAMPAIGN CONNECTION: TAXES
WBUR Radio, Boston
June 10, 1996
Hosted by Christopher Lydon, with Prof. Paul Krugman, Jude Wanniski, and Prof. Barry Bluestone
CHRIS LYDON: Paul Krugman, the suspense in the campaign this year on economic policy is around what Bob Dole might say to jump start a campaign thatís more and more behind. People talk about a 15% across the board tax cut. Steve Forbes hopes Dole will come out for a flat tax, Dole himself has mumbled inconclusively about scrapping the tax codes and starting again. What might he do that would be plausible and a real remedy for this economy?
PAUL KRUGMAN: A lot of economists are in favor of something called the fundamental tax reform. We wonít get into to that. But there are things you can do that would probably push up the growth rate 3/10-4/10 of a percent, which is a lot if it accumulates over time. But there are wrenching things. Peoplesí lives are built around the tax system as it now is. People have mortgage interest deductions on their homes. Fundamental tax reforms take that all away. Anything short of that and that is not going to happen, at least it is not on the map. Anything short of that is not going to make a difference to how we grow the economy, practically no difference to wages. The one thing it can do is turn into a Christmas tree when we start giving stuff to everybody and it increases the deficit out of sight again.
CL: With an alternative view, we have Jude Wanniski on the line from New Jersey. Jude Wanniski coined the phrase Supply-Side Economics in 1975, as a Wall Street Journal editor, and he never stopped believing in it. Jude Wannsiki helped Steve Forbes think up the flat-tax, for the primary campaign this year. Good evening, Jude Wanniski.
JUDE WANNISKI - Hi Chris. And hi to Professor Krugman. Actually Paul Krugman is at Stanford University. Thatís the home of the flat-tax. Alvin Rabushka and Robert Hall are out there. Now that Dr. Krugman has left MIT and is at Stanford maybe Rabushka and Hall will teach him the merits of the flat-tax.
CL: You love the flat-tax. Two points on the table. No.1. Professor Krugman says there is not much that can be done in the way of tax manipulations to stimulate growth in a big way.
Second, I donít think he likes the flat-tax much at all. Is Steve Forbes, starting with a constituency of one in the Republican Party, is he going to be able to talk Bob Dole into something like the flat tax?
JW: I donít know if he will or not. Bob Dole will wind up at some point saying that he believes that the tax system should be scrapped and simplified, although I have my doubts whether Bob Dole is going to be putting that at the top of his agenda. There is a lot of concern among the Dole people that the senator, the candidate, has the intellectual capacity or the passion or the grit to take an idea like that, which is a revolutionary one, which requires scrapping the 83-year old tax system. Paul Krugman is exactly right there that the whole country has been built around the 7.5 million words in the tax system, it has been patched up year after year, 83 years, and we have to get rid of it. We have to start from scratch, and it is a very hard thing to do politically and I donít think Bob Dole is going to do it.
CL: Jude Wanniski, make a case for bold tax change, that you say would make a huge difference in the growth rate.
JW: The difference between Dr. Krugman and Milton Friedman and the supply-siders is that they donít see, in their view of the world, the role that risk-taking plays in changing human behavior, and the reward to the risk-taking is what is at the heart of the problem that Krugman correctly identifies. That is that wages are too low for ordinary workers. People at the top are doing fine; people at the top are getting wealthier because of the increases in the stock market. Theyíre getting wealthier because of the innovations in the telecommunications industry, the new telecosm. But ordinary workers such as the assembly-line worker, carpenters, and plumbers, and firemen, policeman, and school teachers have all been left behind. The answer to their problems lies in cutting or eliminating or indexing the capital gains tax. And this is something that both the Keynesian economists and the monetarists like Milton Friedman have been fighting the supply-siders over for almost a generation.
CL: Paul Krugman do you want to respond to any of that?
PK: I think when you listen to supply-side economists like Jude Wanniski, who are very articulate and enthusiastic, you should think about an infomercial on late night tv ok. There are some very articulate and enthusiastic people telling you if only you buy this gadget of theirs then you can have a washboard stomach with no dieting. Now, there are couple of reasons, even before you get the specifics, to be suspicious. Someone who promises you gain without pain, you wonder a little bit. He might be right but you should be a little suspicious and then you should also ask, well isnít this an advertisement? Iíd like to hear some disinterested medical professional, sports experts be in favor of this. And thatís what you wonít find in supply-side economics. If I could find somebody who wasnít basically a professional advocate of a political position, who was in favor of this view I would feel more comfortable. I know the technical stuff.
JW: Chris, you have to understand what it is you have with a political economy in a democracy. The American people are sitting out there and being told by one group of political economists, like Paul Krugman or Milton Friedman, that nothing you can do can help them, that they have to sit back and wait, and the only thing that can help ordinary people is, as Paul Krugman says, to take money away from Chris Lydon, and me and Paul Krugman and give it to ordinary people, and just redistribute it. Economics, though, is supposed to be a science in which you make things easier. You make less work and more production. Thatís what supply-side economics is all about. Where you can look at the barriers to productivity in the economy, in monetary policy, in fiscal policy, in tax policy, in regulatory policy and say, these are the things that are holding back our country. As we move these things, they will get better immediately. This is not snake oil. Itís not due to economics. Itís just economics .
CL: What is the growth requirement of the 21st century economy? Paul Krugman has his doubts that you can grow faster than 2.5%.
JW: You can only grow at 2.5% to 3.0% when youíre at full productive employment. When all of the workers you have in the country who are able to work as pastry chefs, gourmet chefs and who are now working flipping hamburgers, are there. Once people have reached their full potential of their intellectual capacities then you canít grow any faster. Warren Buffet, one of the great investors out in Omaha, says it best. He says if you go into to a rain forest and see a man chopping down a tree with an ax and you give him a power saw you can dramatically increase the growth rate of all those people cutting down those trees. There is no question about productivity being the answer to the problems of slow growth and thatís what we are talking about. We can grow the U.S. economy at 5-6-7% a year for several years and then we would be at full potential and then we couldnít grow it faster than 2.5%. The problem in the U.S. economy now is that the work force is under-employed, not unemployed. The bigger problem is that human potential of the American people, the potential to produce a lot more is dragging because the tax code is so complex -- and the monetary policies are so confusing with a greenback currency -- that capital canít form as fast as it would under normal conditions.
CL: LETíS GO TO THE PHONES:
PAM: The Federal Reserves believes 2.5% is the fastest the economy can grow. Any time the economy starts going beyond that, the Federal Reserves starts increasing interest rates. Iím not sure how you blame the president for the economy not growing faster than the Fed, an independent entity, will allow it to grow.
PK: I actually am largely in agreement with what Pam said, in the sense that I donít think Pres. Clinton deserves any particular credit for what is happening with the economy. But then I donít think any president in these last 30 years has deserved much credit for what did or didnít happen in terms of the growth rate of the economy.
CL: Jude Wanniski, did you want to make a case for President Reaganís imagination and vision?
JW: I want to give President Clinton credit. I want to give President Clinton credit for being smarter than President Carter and in being smarter than President Bush. All during the Bush years, President Bush and his Secretary of the Treasury Nick Brady harassed Alan Greenspan, constantly complaining that he wasnít printing money fast enough, and therefore interest rates were much higher than they had to be because the creditors of the United States were nervous about the Bush Team always beating up on the Federal Reserve. When President Clinton came in -- you remember that picture of Hillary Clinton sitting next to Alan Greenspan at the State of the Union? -- from day one President Clinton made the argument that he was going to trust the Federal Reserve to Alan Greenspan. And as a result the bond market is much stronger than it was at the beginning. Capital is able to form faster because there is less risk. Monetary inflation has been taken out. Now when Pam says the Federal Reserve threatens to shut off economic growth if it runs faster than 2.5%, that is not exactly Greenspanís position. Itís the position of other governors and some Fed presidents who believe in what is called the Phillips Curve -- that you canít grow faster. Now Greenspan understands that you can grow faster than 2.5%.
MARK: What happened between 1980-1988 if indeed the supply-side does work? I have heard of the Laffer Curve in, I think, í78,í79, í80. Why did we run up such a phenomenal debt?
JW: It really goes further back. The debt that we ran up was largely illusion really. The debt was caused by President Johnson and President Nixon going off the gold standard between 1967-1971 . An enormous amount of inflation was built into the system as the gold price shot up by a factor of 10. And all of the national debt had to be refinanced in the Reagan years and so the cost of debt service shot up enormously, like from 25 billion dollars a year to now, 150 billion dollars a year, compounding year after year. So itís a very confusing picture when you try to mix in monetary policy and fiscal policy. The most important thing that happened though was that the U.S. economy in real terms grew by one-third in those years.
PK: I just wanted to say that Iím learning something. Iíve never heard that one before. I never heard anybody say that Reaganís debts were due to the absence of the gold standard. Thatís a brand new explanation. Iíd like to congratulate Jude, but I donít believe it for a second. Thatís bizarre.
JW: Chris, you see when itís the first time, when you do a show like this and you have Paul Krugman on it, then Paul Krugman has to pay attention now that I am making an argument that I have been making for ten to twelve years. But now heís heard it and heís learned something and says itís a brand new one. If he would like to meet with me, to communicate privately with me I will be happy to do it.
CL: He may have meant that it was the biggest whopper heís heard in a long time. Paul Krugman?
PK: Itís beyond a whopper. Itís one of those new adult taste things that McDonaldís is serving. Never mind...
CL: Are you saying, Jude, that the debt left over from the Reagan years, and projecting those policies forward, that the debt is less important than the growth rates.
JW: Much less important, in fact, we had to have the debt grow as fast as it did practically speaking. Michael Boskin, of Stanford University, was George Bushís chief economic advisor, and I think Paul Krugman may remember him making the argument way back at the beginning of the Bush administration, when you have a 3 trillion dollar national debt at 5% inflation, 5% of 3 trillion is a 150 billion dollars, when youíre taking that much debt off the economy you have to be adding it back in with the fiscal deficit otherwise youíll be paying your debt off too fast. Thatís the argument I made a few minutes ago.
PK: Can anyone credibly promise us enough acceleration in the growth rate that we donít have to worry about the debt? The fact is that the underlying growth rate of the U.S. economy -- smoothly, but it wiggles -- basically is remarkably insensitive to political interference. It is determined by the actions of 125 million workers and I donít know how many millions of corporations that make it go. And itís just irresponsible to say oh, donít worry about that debt, donít worry about that deficit because I can make the economy grow and you wonít have to worry about whether the government is going to pay the bills. The fact is, that is not a responsible position.
CL: Jude Wanniski, whether it is a responsible positive or not, we thank you for joining this discussion and charging it up.
CL: Paul Krugman, how do you explain this stock market?
PK: I donít quite understand what is happening on the stock market. There is a slight whiff of the 1920s to it. I think people have gotten to the notion that stocks can only go up and sooner or later they are going to be unpleasantly surprised. But I donít think the stock market matters that much. When all is said and done itís pretty disconnected from the real economy. In both ways. It can go up when most people are feeling lousy and a rising stock market is no guarantee of prosperity. For that matter a falling stock market doesnít do what it used to. We had a huge stock market crash in 1987 and the economy grew faster in that year after than it did in the year before. So I just donít worry about it that much.
CL: Barry Bluestone joins us by phone from Cape Cod. He teaches political economics at the University of Massachusetts in Boston. He has been known to advise Democratic House Minority Leader, Dick Gephardt.
BB: The fact is that there is one thing I agree with, in what otherwise most of what I donít agree with, Jude Wanniski. I think we can grow faster....But most of the nostrums we hear from the supply-siders merely drive up the deficit and get us deeper into debt rather than solving the fundamental problem that our productivity rate is too low....Such things that would contribute to growth are strategic investments in education, infrastructure, etc.
At this point the show had ended, but Professor Barry Bluestone and Chris Lydon continued informally to chat unaware that their remarks were being taped.
BB: Beautiful show. You brought a tremendous amount of stuff out in that one hour....
CL: Hey, itís all Greek to me....Jude Wanniski is a rascal. He could sell, or heíd try to sell, ice to the Eskimoes but heís fun, I think.
BB: Heís actually gotten a lot cooler. You know one of the most wonderful times I ever had was when Bill Moyers, the week before the 1980 election, had Jude Wanniski and myself debate. Just before the show, Moyers raised some issue -- I canít remember what it was -- and Wanniski went off the deep end. The show had just started and it was live just like this one and it was of most amazing, cosmic events in television coverage of politics. Heís obviously a much cooler cookie today than he was back then.
CL: Yeah, but he is still -- the fanaticism, the gold standard stuff comes out. And then Iíve heard him tell that thing about give the guy in Borneo a back hoe. Thatís fine. (But donít give the f***ing guy in the rain forest a power saw.) The symbolism there becomes -- he got that screwed up tonight. The idea of the same number of people -- you put away the shovel, the shovel is better than bare hands and backhoes are better than shovels. And the same number of people with less back pains can dig the same number of holes and build a bigger economy. All that makes sense, that sort of productivity....
BB: There is nothing wrong with supply-side. The problem is people like Jude Wanniski take it over the edge. Cut taxes by 15% and the growth rate will hit 5% and in ten years we will all be driving Cadillacs. Thatís where it goes nuts....