American politics has been hijacked. Over the past three decades, a fringe group of economic hucksters has corrupted and perverted our nation’s policies. With dark, engaging wit, Jonathan Chait reveals how these canny zealots first took over the Republican Party and then gamed the political system and the media so that once unthinkable policies—without a shred of academic, expert, or even popular support—now drive the political agenda, regardless of which party is in power.
Why have these ideas succeeded in Washington? How did a clique of extremists gain control of American economic policy and sell short the country’s future? And why do their outlandish ideas still determine policy despite repeated electoral setbacks? Chait tells the outrageous and eye-opening story, expertly explaining just how politics and economics work in Washington. He has produced a riveting drama of greed and deceit that should be read by every concerned citizen, especially in an election year.
|Publisher:||Houghton Mifflin Harcourt|
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About the Author
Jonathan Chait is a senior editor at the New Republic and writes the magazine’s signature TRB column. He is a contributing editor to the Los Angeles Times and has written for many publications including the New York Times, the Washington Post, the Atlantic, and the Wall Street Journal.
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CHARLATANS AND CRANKS
For many, many years, Republican economics was relentlessly sober. Republicans concerned themselves with such ills as deficits, inflation, and excessive spending. They did not care very much about cutting taxes, and (as in the case of such GOP presidents as Herbert Hoover and Gerald Ford) they were quite willing to raise taxes in order to balance the budget. By temperament, such men were cautious rather than utopian. Over the last three decades, however, such Republicans have passed almost completely from the scene, at least in Washington, to be replaced by, essentially, a cult.
All sects have their founding myths, many of them involving circumstances quite mundane. The cult in question generally traces its political origins to a meeting in Washington in late 1974 between Arthur Laffer, an economic consultant, Jude Wanniski, an editorial page writer for the Wall Street Journal, and Dick Cheney, then chief of staff to President Ford. Wanniski, an eccentric and highly excitable man, had until the previous few years no training in economics whatsoever, but he had taken Laffer's tutelage. His choice of mentor was certainly unconventional. Laffer had been an economics professor at the University of Chicago since 1967. In 1970 his mentor, George Shultz, brought him to Washington to serve as a staffer in the Office of Management and Budget. Laffer quickly suffered a bout with infamy when he made a wildly unconventional calculation about the size of the 1971 Gross Domestic Product. President Nixon seized on Laffer's number, which was far more optimistic than estimates elsewhere, because it conveniently suggested an economic boom under his watch. When it was discovered that Laffer had used just four variables to arrive at his figure — most economists used hundreds if not thousands of inputs — he became a Washington laughingstock. Indeed, he turned out to be horribly wrong. Laffer left the government in disgrace and faced the scorn of his former academic colleagues yet stayed in touch with Wanniski, (who died in 2005), whom he had met in Washington, and continued to tutor him in economics.
Starting in 1972, Wanniski came to believe that Laffer had developed a blinding new insight that turned established economic wisdom on its head. Wanniski and Laffer believed it was possible to simultaneously expand the economy and tamp down inflation by cutting taxes, especially the high tax rates faced by upper-income earners. Respectable economists — not least among them conservative ones — considered this laughable. Wanniski, though, was ever more certain of its truth. He promoted this radical new doctrine through his perch on the Wall Street Journal editorial page and in articles for the Public Interest, a journal published by the neoconservative godfather Irving Kristol. Yet Wanniski's new doctrine, later to be called supply-side economics, had failed to win much of a following beyond a tiny circle of adherents.
That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points — zero taxes and zero revenue, 100 percent taxes and zero revenue — Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.
At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100 percent tax rate would also produce zero revenue was just as obviously false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve — that is, that rates were then high enough that tax cuts would produce higher revenue.
But Cheney did not say either of these things. Perhaps, in retrospect, this was due to something deep in Cheney's character that makes him unusually susceptible to theories or purported data that confirm his own ideological predilections. (You can almost picture Donald Rumsfeld, years later, scrawling a diagram for Cheney on a cocktail napkin showing that only a small number of troops would be needed to occupy Iraq.) In any event, Cheney apparently found the Laffer Curve a revelation, for it presented in a simple, easily digestible form the messianic power of tax cuts. The significance of the evening was not the conversion of Cheney but the creation of a powerful symbol that could spread the word of supply-side economics. If you try to discuss economic theory with most politicians, their eyes will glaze over. But the Curve explained it all. There in that sloping parabola was the magical promise of that elusive politician's nirvana: a cost-free path to prosperity: lower taxes, higher revenues. It was beautiful, irresistible.
With astonishing speed, the message of the Laffer Curve spread through the ranks of conservatives and Republicans. Wanniski evangelized tirelessly on behalf of this new doctrine, both on the Journal's editorial pages and in person. As an example of the latter, one day in 1976 he wandered by the office of a young congressman named Jack Kemp. He asked to talk to Kemp for fifteen minutes, but he wound up expounding on the supply-side gospel to the former NFL quarterback for the rest of the day, through dinner, and late into the night. "He took to it like a blotter," Wanniski later recalled. "I was exhausted and ecstatic. I had finally found an elected representative of the people who was as fanatical as I was." Adherents of supply-side economics tend to describe the spread of their creed in quasi-religious terms. Irving Kristol subsequently wrote in a memoir, "It was Jude [Wanniski] who introduced me to Jack Kemp, a young congressman and recent convert. It was Jack Kemp who, almost single-handedly, converted Ronald Reagan."
The theological language is fitting because supply-side economics is not merely an economic program. It's a totalistic ideology. The core principle is that economic performance hinges almost entirely on how much incentive investors and entrepreneurs have to attain more wealth, and this incentive in turn hinges almost entirely on their tax rate. Therefore, cutting taxes — especially those of the rich, who carry out the decisive entrepreneurial role in the economy — is always a good idea. But what, you may ask, about deficits, the old Republican bugaboo? Supply-siders argue either that tax cuts will produce enough growth to wipe out deficits or that deficits simply don't matter. When Reagan first adopted supply-side economics, even many Republicans considered it lunacy. ("Voodoo economics," George H. W. Bush famously called it.) Today, though, the core beliefs of the supply-siders are not even subject to question among Republicans. Every major conservative opinion outlet promotes supply-side economics. Since Bush's heresy of acceding to a small tax hike in 1990, deviation from the supply-side creed has become unthinkable for any Republican with national aspirations.
The full capitulation of the old fiscal conservatives was probably best exemplified by Bob Dole, the crusty old Kansan once thought synonymous with the traditional midwestern conservatism of the GOP. Early on, Dole had openly scorned the supply-siders. "People who advocate only cutting taxes live in a dream world," he said in 1982. "We Republicans have been around awhile. We don't have to march in lockstep with the supply-siders." By the time he had risen high enough in the party to gain its presidential nomination, Dole had no choice but to embrace the Laffer Curve. He chose Jack Kemp, an original supply-side evangelist, as his running mate and made a 15 percent tax cut the centerpiece of his campaign.
George W. Bush's fidelity to tax-cutting runs even deeper. He took as his chief economic adviser Larry Lindsey, a fervent supply-sider, whose book The Growth Experiment defended Reagan's tax cuts. He picked as his running mate yet another original supply-sider in Cheney, who summed up the new consensus by declaring (according to the former treasury secretary Paul O'Neill), "Reagan proved deficits don't matter." Bush has poured every ounce of his political capital into cutting taxes, having signed four tax cuts during his administration; when fully phased in, they will reduce federal revenues by about $400 billion a year. Bush and his staff repeatedly tout tax cuts as an all-purpose cure-all. Bush can endorse even the most radical supply-side claims — "the deficit would have been bigger without the tax-relief package," he asserts regularly — without raising eyebrows. So deeply entrenched is the devotion to supply-side theory that even in the face of large deficits and a protracted war, not a single Republican of any standing has dared broach the possibility of rolling back some of Bush's tax cuts.
CRANKERY MADE UNDERSTANDABLE
Like most crank doctrines, supply-side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences. And there have been periods in American history when, nearly any contemporary economist would agree, top tax rates were too high, such as the several decades after World War II. And there are justifiable conservative arguments to be made on behalf of reducing tax rates and government spending. But what sets the supply-siders apart from sensible economists is their sheer monomania. Indeed, the original supply-siders believed — and many of them, including their disciples at places like the Wall Street Journal editorial page, continue to believe — that they have not merely altered established economic thinking but completely overturned it.
Let me explain this as quickly and painlessly as possible. Traditional (or, as it was called, "neoclassical") economics held that markets were perfectly rational and inherently self-correcting. According to this view, if the economy entered a recession, it merely reflected a needed correction by which wages would fall to their natural level, after which things would return to normal. During the Great Depression, this complacent view became less and less tenable. That's when John Maynard Keynes argued that recessions often reflect a failure of demand for goods and services. Keynes endorsed government measures — such as reducing interest rates or deliberate deficit spending — in order to put more money into circulation under such circumstances. Since then, traditional conservative and liberal economists have debated exactly what causes expansions and recessions, with different schools of thought placing more or less emphasis on different factors, like the money supply, deficits, the global economy, and so on.
Pure supply-siders, on the other hand, see changes in tax rates as the single driver of all economic change. What caused the Great Depression? Mainstream economists blame different factors to various degrees, but supply-siders insist that the single cause was the 1930 Smoot-Hawley Tariff. (The tariff surely added to America's economic woes, but to blame a higher tax on imports, which accounted for just 6 percent of the economy, for causing the entire economy to contract by a third is just plain loopy.) Likewise, most economists pinned the 1991 recession on mistakes by the Federal Reserve, but supply-siders blame George H. W. Bush's tax hike. Bush raised the top tax rate from 28 to 31 percent. To think that a three-percentage-point jump in the top tax rate would discourage entrepreneurs and investors enough to tip the entire economy into recession requires attributing to tax rates powers bordering on magical.
Indeed, it doesn't take a great deal of expertise to see how implausible this sort of analysis is. All you need is a cursory bit of history. From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year — a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate was 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway.
None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded despite, rather than because of, those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor.
This can be seen with some very simple arithmetic. As just noted, Truman, Eisenhower, and Kennedy taxpayers in the top bracket had to pay a 91 percent rate. That meant that if they were contemplating, say, a new investment, they'd be able to keep just 9 cents of every dollar they earned, a stiff disincentive. When that rate dropped down to 70 percent, our top earner could now keep 30 cents of every new dollar. That more than tripled the profitability of any new dollar — a 233 percent increase, to be exact. That's a hefty incentive boost. In 1981, the top tax rate dropped again to 50 percent. The profit on every new dollar therefore rose from 30 to 50 cents, a 67 percent increase. In 1986, the top rate dropped again, from 50 to 28 percent. The profit on every dollar rose from 50 to 72 cents, a 44 percent increase. Note that the marginal improvement of every new tax cut is less than that of the previous one. But we're still talking about large numbers. Increasing the profitability of a new investment even by 44 percent is nothing to sneeze at.
But then George Bush raised the top rate to 31 percent in 1990. This meant that instead of taking home 72 cents on every new dollar earned, those in the top bracket had to settle for 69 cents. That's a drop of about 4 percent — peanuts, compared to the scale of previous changes. Yet supply-siders reacted hysterically. The National Review, to offer one example, noted fearfully that, in the wake of this small tax hike, the dollar had fallen against the yen and the German mark. "It seems," its editors concluded, "that capital is flowing out of the United States to nations where 'from each according to his ability, to each according to his need' has lost its allure."
Here is where a bit of historical perspective helps. If such a piddling tax increase could really wreck such havoc on the economy, how is it possible that the economy grew so rapidly with top tax rates of 70 and 91 percent? The answer is, it's not. It's not even close to possible. All this is to say that the supply-siders have taken the germ of a decent point — that marginal tax rates matter — and stretched it, beyond all plausibility, into a monocausal explanation of the world.
CHARLATANS AND CRANKS
It is difficult for most of us to get our minds around the fact that American economic policy has been taken over by sheer loons. Economists, after all, are a fairly sober lot. Even if they're wrong, we tend to assume that their theories have at least undergone some fairly grueling academic scrutiny before they even reach the point of becoming a theory in the first place. So if supply-side economics is so off the wall, how could it have survived this review process in the first place?
The answer is, it didn't. In his excellent 1994 book, Peddling Prosperity, the Princeton economist Paul Krugman wrote: "Not only is there no major department that is supply-side in orientation; there is no economist whom one might call a supply-sider in any major [economics] department." To be sure, economics departments are filled with conservatives who very much favor smaller government. But none of them share the basic supply-side view that tax rates, more or less alone, determine the fate of the economy. Nor do they believe that, in anything resembling the present environment, tax cuts can spur enough growth to pay for themselves. Conservative economists do believe that tax cuts can create some increase in growth, but that belief is almost always predicated on a corresponding cut in spending.
Excerpted from "The Big Con"
Copyright © 2007 Jonathan Chait.
Excerpted by permission of Houghton Mifflin Harcourt Publishing Company.
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Table of Contents
The Transformation of the Republican Party
Charlatans and Cranks 13
The Sum of All Lobbies 45
Driving Out the Heretics 80
The Necessity of Deceit 115
The Corruption of American Politics
Media: The Dog That Didn't Watch 139
How Washington Imagines Character 159
The Abuse of Power 189
The Mainstreaming of Radicalism 219
Conclusion: Plutocracy in America 262
Most Helpful Customer Reviews
This book is a must read,it tells how asmall group is taking over our country
This ideology and lack of grasp on reality is precisely why our debt has skyrocketed and our dependence on foreign support has reached an all-time high. I'll never get these hours of my life back.