Wall Street Journal - July 30, 1999
THE PARTY OF REAGAN--OR OF HOOVER?
By Jack Kemp, the Republican vice presidential nominee in 1996.
Two decades ago, some congressional Republicans colluded with liberal Democrats on at least 13 different votes to defeat the Kemp-Roth bill calling for 30% tax-rate cuts over three years. Conservatives were so obsessed with balanced budgets, and liberals so ideologically opposed to tax-rate cuts, that they were prepared to sacrifice the well-being of the nation--then experiencing zero real growth and oppressive inflation--in order to satisfy their biases. But when Ronald Reagan came to Washington, Congress finally enacted our plan, helping to unleash a 17-year economic expansion that, except for three quarters in 1990-91, continues to this day without inflation.
Almost two decades earlier, Republican "debt hawks" like Sen. Barry Goldwater were opposing the tax-rate reduction plan of President Kennedy, who in 1962 declared that "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 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."
Now, in the late 1990s, there has again developed a broad center of economic thinking infatuated with meaningless 50-year debt projections and 15-year surplus numbers; attached to the arcane, zero-sum budgeting process; jealously possessive of workers' surplus tax payments and universally devoid of any creative vision for American enterprise and innovation.
This debt-reduction cabal is comprised of large majorities of both political parties, led by President Clinton and buttressed by Federal Reserve Chairman Alan Greenspan. Piling bad advice on top of bad economic theory, the Fed chairman admonishes Congress to concentrate on paying down debt and to delay any significant tax rate reductions until we "really need them"--that is, in the event of recession. Forgetting that inflation is a monetary, not a fiscal, phenomenon, the Fed persists in a deflationary monetary policy that may, especially in combination with Congress's austere fiscal policy, set off a recession.
The debt cabal has abandoned Reaganonomics for Hooverism. It asserts that our highest fiscal priority should be to retire the federal debt within 15 years. Last week the House leadership made implementation of the GOP's timid 10% tax rate reduction contingent on debt retirement. This kind of thinking doesn't put the surplus in a "lock box," it puts the whole Republican Party in a lock box of debt reduction over economic growth--at the likely expense of both.
The single most likely reason interest payments might increase, thus blocking the tax rate cut, would be a sudden collapse in revenues caused by a recession. In other words, House Republicans have just committed to jettisoning a pro-growth tax rate reduction precisely when the economy and the American people would need it most.
The preoccupation with debt reduction is unhealthy and inexplicable. The national debt now stands at only 42% of gross domestic product and falling, down from more than 50% earlier this decade. Since 1982 an expanding economy and growing asset values have rendered debt a non factor in America's economic outlook. Still, hyperbole fills the airwaves: Debt is stealing the future from our children. The record proves otherwise. Who would exchange the past 18 years of job growth and wealth creation for the miserable stagflation of the low-deficit, low-debt 1970s? Some members of my party in the House, it would appear.
Republicans have repudiated President Reagan's profound insight, summarized by George Gilder: "In an expanding economy, money available now for investment is many times more valuable than money paid later in interest." Would today's GOP trade all the investments in high technology since the early 1980s, made possible by the Reagan tax cuts and the 1997 capital gains tax reduction, for slightly lower federal interest payments?
Not that such a trade-off is even possible. For the premise, repeated by Bill Clinton and Al Gore, that tax-cuts "blow a huge hole in the deficit" is nonsense. Over the long term, higher revenues resulting from lower tax rates make such worries about debt irrelevant. Without the across-the-board tax rate reductions of the 1980s and the Roth Individual Retirement Account and capital gains tax rate cuts of the '90s, the economy would be smaller, the budget would not be in surplus, and the federal debt would be larger.
The moral objection to debt is unpersuasive as well. If we applied it to households, we would advise them against ever using a mortgage to buy a house or taking out a loan to buy a car or pay for college. Without debt as a financing tool, only the wealthiest Americans would be able to afford to buy even an average-sized home.
Instead of competing with the president over who can inflict more austerity on the American people, Republicans should denounce debt retirement as an ill-conceived, counterproductive strategy. If Republicans are really interested in helping families and want to maintain a growing economy without inflation, they should package Rep. Bill Archer's capital gains and estate tax cuts, his reforms in the alternative minimum tax and Bill Roth's expansion of IRAs, along with a provision cutting marginal income tax rates back at least to where they were when Mr. Reagan left office. Better yet, send Mr. Clinton a bill cutting the top marginal income tax rate to 25%, which John Maynard Keynes once said is the most anyone should have to pay during peacetime.
The GOP should also stop participating in Mr. Clinton's Social Security charade that spending the payroll tax surplus on debt retirement is more productive and protective of Social Security than devoting these surpluses to tax-rate reduction. The only real way to protect the Social Security surplus is to provide payroll-tax relief and let workers set up personal retirement savings accounts.
This is the only way to ensure that noninflationary economic expansion continues and the Fed does not feel compelled to shut off growth with an interest-rate hike. If Mr. Clinton refuses to sign such provisions into law, let him explain to the American people why they are undertaxed.
Human ingenuity alone--free from onerous taxes, regulations and inflation--leads to prosperity and economic growth. No balanced budget, and surely no reduction of an already-shrinking national debt, ever produced prosperity. Ask those countries that have been forced to try this austerity elixir by the International Monetary Fund. A 10% tax rate cut phased in over 10 years and tied to annual reductions in interest payments is unworthy of our nation and our party. American conservatism has not come to terms with the meaning of debt, and until it does, it will remain a movement adrift.