Column of the Day: Don Luskin — Ford Successfully Field-Tested Supply-Side Econ
Bullseye, as usual for Mr. Luskin. In 1975, Ford uncorked an idea that ultimately led to previously unseen levels of prosperity, for which we owe him our undying gratitude:
(In October 1974, it appeared that Ford would) deal with the recession by cutting spending and raising taxes with a 5% surtax on personal income.
Yes, tax hikes and spending cuts in a recession make about as much sense as putting a starving man on a diet, especially considering the astronomical tax rates that were already in effect then — the top personal tax rate on earned income was 50% (and it was a ridiculous 70% on “unearned” income — Ed.). And inflation was pushing more and more Americans into higher and higher brackets.
But that’s what America’s best economic minds were recommending — and the stock market knew it would only worsen the recession.
Then in December 1974, everything changed. In a restaurant in Washington, D.C., a young economist named Arthur Laffer was having dinner with a young White House aide named Richard Cheney. Laffer explained to Cheney that if you raise taxes, you diminish the incentives to work, and the economy slows down (and tax revenues for the government fall, despite the higher tax rate). If you lower taxes, the opposite happens. Incentives to work are increased. The economy grows faster (and tax revenues increase, despite the lower tax rate).
Laffer illustrated this principle by sketching a diagram on a cocktail napkin. His diagram has since been immortalized as “The Laffer Curve.” Cheney told his boss, White House Chief of Staff Donald Rumsfeld, about the Laffer Curve. And the rest, as they say, is history.
Soon Ford stopped talking about raising taxes, and instead started talking about lowering them. That’s when the stock market stopped going down.
In March 1975, it was official: Ford signed the tax cuts into law. That month marked the bottom of the recession.
And armed with the logic of the Laffer Curve, Ford decided not to veto a federal spending bill designed by the Democratic Congress to stimulate the economy. Ford made the bet that lower taxes would generate enough new growth to create the revenues necessary to pay for the spending.
….. a powerful new economic principle was abroad in the land — the idea that you could grow the economy by reducing the tax rates that hold back economic incentives.
Jimmy Carter, who followed Ford as president, did nothing with the new idea that Ford had fostered. (And, when Carter left office, the Dow was lower than when he arrived.) The next president, Ronald Reagan, grabbed that idea with both hands in the 1980s, with massive tax cuts that kicked Ford’s bull market into high orbit. The Dow blasted through 1000 and never looked back.
Similarly, the massive growth spurt of the late 1990s began when President Bill Clinton reduced the tax rate on capital gains. And the economic expansion we’re in right now kicked into gear in earnest in 2003 when President Bush cut tax rates on income, dividends and capital gains.
….. Take a look at the Dow Jones Industrial Average, now more than 20 times higher than what it was in that bleak December in 1974 when Ford made the right decision, and changed the course of economic history.
Thank you, President Ford.
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UPDATE, 11:45 PM: Commenter Michael Q and I are at loggerheads over whether Don Luskin is giving Ford too much credit, whether Ford deserves any credit at all, or whether the tax cuts involved were supply-side in nature.
Kudlow apparently gave Luskin a hard time about these matters too on his CNBC show, as Michael Q noted (I didn’t watch, though I am told a YouTube will be up shortly).
I believe he was in the process of doing this anyway (either that or he’s the fastest typist in the West), but I asked Don if he could resolve the situation. His new post does just that. I suggest everyone not only read all of Don’t post, but also read the Washington Post article he links to that recounts the progress of the economy once Ford moved in the tax-cut direction. The combination of those two linked items gets the history right. Perhaps Michael Q will accept a blogger and an Old Media paper actually agreeing on something as evidence of historical accuracy. Luskin’s bottom line:
It seems clear to me that while we can fault Ford for not doing more or for not doing better with his tax cut, he deserves a great deal of credit for (a) having an organization that was capable of getting outside-the-box inputs from a then-unknown Arthur Laffer, and (b) having the wisdom to take that advice and stand away from doing something really terrible – raising taxes – even though it was firmly embraced by the conventional wisdom of the time.
UPDATE 2, Jan. 6 — I wish I’d had Andy Vance’s succinctness a couple of days ago when I was blasting out windy comments:
There is some debate as to Ford’s understanding of supply-side, but the debate is largely irrelevant given that Ford got the job done regardless of his intentions, “field testing” the principles for Ronaldus Magnus to embrace following the economic quagmire of Jimmy “Peanut” Carter.
This is about as silly as it gets. Ford had nothing to do with supply side, other than being informed of it and not putting it into use. Laffer and Kudlow pretty much refuted this nonsense on Kudlow’s program along with Mr. Luskin on the panel. Ford put tax cuts into law, are we talking about a rebate?
Comment by Michael Q — January 4, 2007 @ 9:47 am
He lowered taxes and govt. revenues went up to cover the increased spending he didn’t veto. He obviously didn’t use the term supply-side econ while doing this, but the result is the point.
As to what the specific cuts were, I’m almost positive they were individual income tax cuts, because at the time, with brackets not indexed to inflation, you had to pass legislation to either stretch the brackets or lower the rates.
I believe this is the situation where Ford “dared” Congress to cut taxs by saying: “I’ll cut taxes by $25 bil if you cut spending by $25 bil.” The Dems passed the tax cut and said “sure, we’ll get to the spending cuts later.” Of course they didn’t, but Ford, as Luskin noted, didn’t veto what the Dems worked up, and it worked out OK anyway. Hence, the lab test for supply-side econ. Not “silly” at all.
Comment by TBlumer — January 4, 2007 @ 10:30 am
If Ford dared congress to cut spending by 25 billion and then he would cut taxes by 25 billion shows he didn’t understand supply side at all. Why does he has to justify a tax cut? Remember Reagan cut rates and increased spending (mostly defense)and the rest is history. By the way, prove he cut taxes and just didn’t offer a rebate, because tax rates where never lowered. What he offered was a rebate. Ford sat on the fence and just didn’t understand supply side, doesn’t make him a bad guy. If he did understand tax rates would have been lowered and that didn’t happen. The silliness is to try to represent Ford as a supply sider now after 30 years.
Comment by Michael Q — January 4, 2007 @ 11:00 am
Let’s try this again:
- He made the dare.
- The taxes got cut.
- Congress didn’t trim the (projected) spending.
- He decided he didn’t need to veto the spending, because he understood that the additional revenues from the tax cut would cover the spending (i.e., he changed his mind about the dare, which BTW ticked off the WSJ at the time, because they hadn’t latched onto the logic of supply-side econ yet).
That last item was a supply-side decision that worked out as anticipated (i.e., the revenues came in), and was the field test for the much larger cuts during Reagan that set off the 1980s boom.
I don’t see why it matters whether or not the tax cut was a rebate or a rate cut/bracket stretch, and I don’t recall which it was.
Comment by TBlumer — January 4, 2007 @ 11:12 am
It appears you really don’t understand “supply side”. You brought spending into the post, supply side has nothing to do with supply side. The napkin Laffer and Winniski proposed to Ford showed that the rate people are tax has a direct effect on revenues the government collects, period. Nothing to do with daring, nothing to do with spending, nothing to do with veto’s, nothing. As Kudlow says “In economic policy, Mr. Ford was a traditional Republican budget balancer who had no pro-growth policies. Arthur Laffer tried to persuade Ford of the merits of supply side economics to reduce marginal tax rates and grow the American economy—but Ford, acting on advice of top economic advisor Alan Greenspan, rejected this.” Both LAFFER and Luskin appeared on the Kudlow program, and both Kudlow and Laffer rejected the idea Luskin proposed that Ford was a supply sider. Unfortunately you don’t get it, but fortunately you have the last say. PS; Laffer as we all know is one of the authors of “Supply Side”
Comment by Michael Q — January 4, 2007 @ 3:36 pm
Zheesh I only brought spending into the post to give context.
Ford reduced taxes, those taxes increased revenues to the point where they even enabled him to avoid a veto he originally intended. The fact that he did not CALL himself a supply-sider or even THINK of himself as a supply-sider does not change the fact that he ACTED as a supply-sider in this instance, and that it provided an example of the concept that cutting taxes can increase revenues. He could have called himself Atilla the Hun while he was doing this, but the ACTION he took to cut taxes had supply-side effects.
Did Luskin back off on what he wrote? A correspondent at his blog reminded him that what Ford did not veto was positioned as so-called stimulus. OK, fine, but I get back to the fact that the tax cut raised revenues (and brought the markets, which had been in the tank, back). The fact that Ford might have been doing a double-up as a Keynesian does not change that.
Comment by TBlumer — January 4, 2007 @ 4:36 pm
Cluesless, from the Wanniski web page on SUPPLY SIDE ECONOMICS,Keynesian Failures
During the five and a half years of the Nixon administration, literally every Keynesian economic remedy (both monetary and fiscal) that could be devised had been tried, including wage and price controls, without success. In May, 1974, Mundell forecast that unemployment would increase to 8% by January, 1975, unless an immediate tax cut of at least $10 billion was enacted. The necessary amount of the tax cut would increase with every month of delay.
By December, 1974, Mundell was recommending a tax cut of $30 billion. Yet, after Nixon’s resignation, President Gerald Ford (in Wanniski’s words) “followed the advice of all the big-time Nobel prize winners and other stars of the profession, liberal and conservative, asking Congress for a tax increase to reduce pressure on prices.â€
The Enlistment of Kemp and Reagan
If Mundell and Laffer failed to convert President Ford, they found a devout disciple in Jack Kemp, at the time an obscure congressman from Buffalo, New York. By the time of the 1976 Republican Convention, Kemp had proposed tax cutting legislation called the “Jobs Creation Act†based on the Mundell and Laffer Curve principles.” Now both Kudlow and Laffer snickered at Luskin for his remake of history on Jerry Ford and apparently you want to back him up. All I am saying is that before you go out on a position and perpetuate an idea about supply side economics, first understand what it means. It’s a simple idea and Luskin and you are having a hard time understanding it. Lastly, on Kudlow after Kudlow laughed at Luskin for making the comment on Ford and Supply Side, Luskin then went into some commentary that it was during the Ford admin that the stock market found it’s bottom. Yea, give me a break. Study supply side and the only mention of Ford will be his rejection of it. Good night and good by.
Comment by Michael Q — January 4, 2007 @ 9:43 pm
#7, since you’re not going to buy into the idea that Ford might have ACTED as a supply-sider without recognizing it, and because I’m relying more on Don Luskin’s recall of history than mine (he’s the one who wrote the article this post is pegged to, and I don’t see him as a historical revisionist type of guy), I’m going to ask him if he’d like to respond here.
I hope he does. I am sorry that I didn’t hang on to your e-mail when I moderated your comments, so I hope you’re checking back.
Comment by TBlumer — January 4, 2007 @ 10:45 pm