Memo To:Paul Gigot, The Wall Street Journal
From: Jude Wanniski
Re: Punishing Republicans in 1974
In your July 31 column, you noted that in the off-year elections of 1974 the voters punished the Republicans for the disgrace President Nixon had brought to the party via Watergate. The President resigned in August and in November more than 40 Republicans lost their seats in the House of Representatives. In the Sunday NYTimes “Week in Review” section a similar point is made. This is actually a myth that has lasted all these years. Not one seat was lost because the voters decided to punish Republican members of Congress for what Richard Nixon did or did not do. They punished the GOP for President Gerald R. Ford’s proposal to pull the economy out of recession with a 5% surtax on income-tax liabilities, part of a $5 billion tax package designed to balance the budget and fight the rampant inflation. In fact, one of the big reasons Nixon resigned his office was the economic distress that followed the Keynesian program on which he had built his presidency. Give much of the blame to Nixon’s chief economic advisors, Herb Stein and George Shultz, who help talk Nixon into leaving the gold standard. But if you want to pin a tail on Ford’s donkey, it should go to his chief economic advisor, Alan Greenspan, who presided over the proposed tax increase of October 9, 1974, as well as Ford’s fiendishly clever plan to fight the inflation that Stein and Shultz had helped create with lapel buttons labeled WIN, for “Whip Inflation Now.”
Imagine the stupidity of that program and realize that it was partly responsible for the birth of supply-side economics. I’d met Bob Mundell at a conference in Washington of the American Enterprise Institute, at which almost every one of the assembled economists predicted a fairly strong economy going through 1975. Mundell told me that the country would go into an “automobile recession” in September, when the ‘75 models would come out and consumers would rebel at the price increases. Mundell also told me that in January 1975, the economy would “go over the edge.” To be sure, the economy contracted at a 7.7% annual rate in the last quarter of 1974 and at a 10% annual rate in the first quarter of 1975. I was at the WSJ editpage at the time and had spent enough time with Art Laffer, Mundell’s protégé, to see exactly what Mundell was predicting. I rushed back to New York at told Bob Bartley, then my editor and still yours, that there had to be an immediate tax cut to offset the impending recession.
Alas, Bartley shook his head and showed me the typescript of a essay that he would be forced to run on the editorial page, as it was written by the president of Dow Jones & Co., the late William F. Kirby. The gist of the editorial was that the inflation was obviously being caused by the budget deficit and had to be brought to its knees with a tax increase!! Bob was cornered. He could not possibly begin a campaign to cut taxes with the big cheese urging fiscal responsibility. I remember Bob throwing up his hands at me and saying, “I thought all we had to do was go back on gold. Now you tell me we have to cut taxes too!” Sorry, Bob. But all we could do was watch the Dow Jones Industrial average continue to decline under the weight of these inane ideas, hitting bottom somewhere around 580, when the markets took courage with polls showing the Republicans would not do well in the elections and there would of coure be no tax increase.
All I could do is sit back to watch the slaughter. Except I did call three weeks in advance of the elections to make appointments with key officials of the Ford administration. I chose the day after election day, knowing my arguments might get their attention in the carnage I was sure would have occurred at the polls the previous day. I met with Treasury Secretary Bill Simon first, then with Ford’s personal advisor at the White House, William Seidman, then with Greenspan, and finally late in the afternoon with Ford’s brand new chief of staff, Don Rumsfeld. To each I delivered the message that the political wipeout was caused not by Watergate, but by Ford’s economic program. Simon, Seidman ande Greenspan each had fingerprints on the murder weapon and so only gave me polite attention. Rumsfeld had been NATO commander when the Oval Office changed hands, and as a result had not been involved in the decision to promise the voters a big tax increase. When I told him why I thought the wipeout occurred and why the President had to shift gears and go for a tax cut, Rumsfeld told me he thought it made sense, but does anyone but you believe in this idea? I told him there were two economists who had persuaded me, but that he probably had never heard of them. One was a Canadian named Robert Mundell, the other an American named Art Laffer. “Laffer! Why I know Laffer,” Rumsfeld barked. “He’s a genius!”
It then dawned on me as Rumsfeld reminded me that before he went to NATO he had been Nixon’s director of the Office of Economic Opportunity (OEO), and as such had to attend the daily 8 a.m. White House staff meeting. Laffer also attended as chief economist of the Office of Management and Budget. “Where is Laffer now?” Rumsfeld asked, and I told him he was back at the University of Chicago, where he had been before his OMB appointment. “Let’s get him down here!!” Rumsfeld said. Remember this was early November, the Wednesday after election day.
It took until December 4 to arrange for Laffer to get to DC for a meeting with Rumsfeld. When the appointed hour arrived, 4 p.m., Rumsfeld’s office said he could not make it, but that he would ask his deputy, Dick Cheney, to meet with us. I’d known Cheney from the OEO days, talked to him, and arranged for us to meet in the cocktail lounge of the Two Continents restaurant of the Washington Hotel, across the street from the Treasury Department and a five-minute walk from the White House. It was at that fateful meeting an historic event occurred. Over drinks, Laffer tried to explain to Cheney how there were always two tax rates that would produce the same revenue. When Cheney expressed puzzlement, Art grabbed a paper cocktail napkin and sketched on it something I had never seen before, a graph with a curve on it, lines twice intersecting the curve to show the two points at which national production would yield low revenues or high revenues. For the next several years, I drew that curve hundreds of times for hundreds of politicians and opinion leaders, and in the spring of 1977, when I began Chapter 6 of The Way the World Works, I decided to call it “The Laffer Curve.”
Pardon me for taking much time at this, but I could not miss the opportunity to retell this story, hinged on you casual comment about Republicans being punished for Watergate in 1974. Which leads me to conclude with the prediction that the November elections will turn on how the Republicans now in control of Congress play the tax issue, and what Democrats and President Clinton do with it. If President Clinton is seen as playing the better tax cards, Democrats may win control of Congress even if the House Judiciary Committee has material indicating Clinton might be impeached.
By the way, we were successful in persuading the Ford White House to propose a tax cut instead of an increase, but they screwed it up anyway. They offered a $50 tax rebate to every American taxpayer, to put money in his pockets, a dizzy Keynesian idea presumably sanctioned by Alan Greenspan. As we now contemplate the President’s unenviable options, we should be aware that on economic policy he has a high degree of confidence in Greenspan, the fellow who has most recently caused the economic collapse in Asia and Russia with his monetary deflation. Hmmmmm.