StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Reaganomics is Dead (Long Live Reaganomics)

18 Oct 2009
Posted by Bruce Bartlett

Following is the transcript of an interview I gave to Money Magazine that appears in its November issue. BB

Old-school supply-sider BRUCE BARTLETT says America needs a tax hike-and that Republicans should fight to make sure that it's done right.

BRUCE BARTLETT WAS A LIEUTENANT in the Reagan revolution. As an aide to congressman Jack Kemp, he helped write the legislation underpinning Ronald Reagan's 1981 tax cut and then worked in the Reagan and the George H.W. Bush administrations. Bartlett still thinks low marginal tax rates fired up the '80s economy, but he laments that conservatives misunderstand Reagan's legacy, thinking of tax cuts as a cure for every ill. His book criticizing George W. Bush got him fired from a conservative think tank in 2005. His latest, The New American Economy, should stir up more controversy. For a start, he argues that conservatives can learn from John Maynard Keynes, the economist who argued for big government spending in times of crisis.

You were a Reagan-era tax cutter, but now you've written a book praising Keynesian economics, more spending, even tax hikes. What gives? I wanted to show that economic ideas go through cycles. A crisis happens that the dominant thinking can't deal with, and a new theory comes along to solve the problem. When the crisis is past, that theory becomes the new all-purpose way to deal with every problem. And that leads to the next crisis.

Before John Maynard Keynes, economists had no solution to the Great Depression. They thought the government should do nothing. But after wartime spending pulled the economy out of the Depression for good, Keynes became the new conventional wisdom. But Keynes's ideas were designed for a deflationary depression. When you apply that medicine in an inflationary situation, you get even more inflation. Keynesianism met its Waterloo in the stagflation of the 1970s.

Enter "supply-side" economics. Almost. First the monetarists stepped in, arguing that to whip inflation we had to tighten the money supply. Supply-siders argued that we needed big tax cuts to give people incentives to work harder and get growth going. Tight money, tax cuts, and deregulation-that was the model. Once Reagan did all that, cutting the top tax rate as low as 28% in 1986, there was nothing left to do. But armies don't disband at the end of wars. They find new ways to fight.

So are Republicans fighting the last war? What good are tax cuts when people have no income to tax? In this crisis we've run into the same problem we had in the Great Depression: a liquidity trap. Money isn't circulating. The stimulus package may have been over-sold by Obama, but the principle was correct. We need government spending to get out of the trap.

Do you support the idea of another stimulus package? No. The lags in implementation are so great that it would have no effect until long after the recovery is under way. And I think the makings of a fairly rapid recovery are here.

Nice to hear some optimism. My Republican friends, to a person, think that Obama's policies are going to be disastrous and that they'll be able to waltz into the White House in 2012. I keep asking, "What if you're wrong? What's your backup plan in case the economy does recover and Obama gets credit for bringing us out of the biggest crisis since the Depression?"

What should we be worried about? It's inevitable that we're going to have substantial inflation down the road. You know Congress and the White House will pressure the Fed to delay acting when the time comes. The longer-term problem is the aging of society and uncontrolled entitlements. When everyone realizes we have to tighten spending, it will be impossible to do because there will be so many old people, and they vote.

That leaves us one alternative: raising taxes. Conservatives view all tax increases as equally bad--they'd rather default on the debt than raise taxes. But there are better and worse ways of raising taxes.

What's the better way? A value-added tax. [A VAT is similar to a sales tax but easier to enforce, because it's paid every time a business makes a sale, not just on retail sales to consumers.] It's a consumption tax that has very little negative effect on incentives to work and save, meaning that you can raise a lot of revenue at relatively low economic cost. But conservatives think if we make it too easy for the government to raise revenue, then they'll raise too much, and the next thing you know we'll be like Europe.

As Larry Summers [Obama's chief economic adviser] once put it, we don't have a VAT because liberals think it's regressive and conservatives think it's a money machine. We'll get a VAT when liberals figure out it's a money machine and conservatives figure out it's regressive.

Obama is more likely to want to tax the incomes of the rich. The mistake of the left is to assume you can raise rates on the rich and they won't react. They'll put more effort into tax avoidance and evasion. That won't do anyone any good except tax lawyers. But not raising taxes at some point isn't an option. If Republicans refuse to put anything on the table, Democrats will raise taxes in a way that suits them.

Cap Gains vs. Income?

Refreshing to read assessments of policy that are applied contextually rather than by rote philosophy. Bravo.

That said, I'm wondering what Bruce thinks about the plunge in the Cap Gains rate (10%, IIRC). While I'm no economist, my sense is that if you set Cap Gains BELOW the highest income tax rate, (and in this case drastically below), that there is a massive incentive for the best and brightest to NOT work - but instead to simply invest their previously worked for dollars, and quit working at all.

How can an economy survive long term if the best and brightest have a clear and undeniable incentive to "jump ship" (retire early), intent on living off the labor and effort of people who are in all likelihood, less talented or bright?

Tax Rate

A much bigger problem is setting the personal income tax rate well above the corporate tax rate.


Bravo on the VAT recommendation. It falls into the "low-rate / broad-base" mantra. This minimizes the size of the tax-wedge and it's distorting influence (and the subsequent size of the deadweight loss).

The only downside is it's lack of visibility.

Taxes don't get raised too high when they are most visible. The VAT, by its ubiquity, becomes as invisible as the sales tax.

Any suggestions as to how to increase its visibility? My recommendation would be a national property tax. Everyone sees it, it has no "wedge effect" for homeowners, and it would be despised and hated.

But I don't think that proposal has a snowball's chance in hell of going anywhere.

Msybe a national poll tax?

I am interest to hear your

I am interest to hear your thoughts on some of the other relevant issues. It's not just the budget that's a problem, but health-care, finance reform, education, etc. Part of the major problem with Republicans seems to be a complete and unwavering belief in market outcomes, even when such outcomes would clearly never be accepted by the majority of the population and likely wouldn't be optimum anyways since markets require a number of conditions to operate at peak efficiency.

The problem with this approach is that they end up surrendering these issues to the Democrats, who seem far more concerned about social justice than actually wringing out the inefficiencies in the marketplace.

Take health-care, for example. There seems to be sufficient evidence for a reasonable person to conclude that we are getting gipped. Republicans are adopting an approach that varies between pretending there is no problem to supporting a variety of market based reforms that would dump us all into the high-administrative-cost individual insurance market while pushing through malpractice reform to reduce defensive medicine that we are not even sure exists. High deductible policies and cross-state insurance buying may help, but I'm doubting the increase in administrative costs and the large asymmetrical information will be low enough to lower health care costs.

Democrats are primarily concerned about increasing government control over insurance when Medicare/Medicaid are already growing faster than other health-care spending. This seems not to concern them, as they assume they will simply be able to eventually use their negotiating power to cram down costs by simply telling doctors and drug makers to accept less. There seems to be little concern about actually improving productivity in hospitals through EMRs, for instance. And even though costs will be higher, they don't see this as sufficient reason to deny extending coverage to people NOW, which is priority #1.

The Republican approach is burying their collective head in the sand, while the Democrat approach is putting social justice ahead of actual cost concerns

In the long-run, I don't see very many productive results from this process, but perhaps I am looking at this incorrectly

Bruce, You really should drop


You really should drop that line you keep repeating:

What good are tax cuts when people have no income to tax?

With all due respect, it makes you sound silly and gives the false impression that you lack depth and thoughtfulness and instead just offer extreme hyperbole that doesn't make sense anyway. First of all, I don't know how many trillions of dollars above zero taxable income would have to be for you do consider it "no income" -- the hyperbole is extremely crude and thus silly. Second, it misses the point that the argument for tax cuts (whether adequate or not, and I'd say not) is that cutting taxes will increase economic growth and create more income, so income (individual, corporate, or both) being down X% is hardly an argument against lowering tax rates to provide growth-producing and job-creating incentives.

Again, I oppose tax increases and I think the growth they would produce doesn't justify the addition to deficits, but that's a counter-argument that should be made rather than just avoiding the tax cut argument via silly hyperbole and illogical argumentation.

correction -- I meant to

correction -- I meant to say:

I don't know how many trillions of dollars above zero taxable income would have to be for you not to consider it "no income"

I'll agree to a 5% tax hike

I'll agree to a 5% tax hike if we cut spending by 5%. Let's start by killing all farm subsidies.

When conservatives figure out a VAT is regressive

Why do conservatives like regressive taxes? Sounds to me like class warfare.

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