Memo To: Alan Blinder
From: Jude Wanniski
Re: Dole's Conversion to Supply-Side Economics
Your NYTimes op-ed today, "The Republican Riverboat Gamble," displays an astonishing level of ignorance about the simplest tenets of supply-side economics. If this were 1975 or even 1980,1 could excuse such ignorance in an eminent Princeton Ph.D. economist who has recently served as vice chairman of the Federal Reserve and a member of President Clinton's Council of Economic Advisers. But Alan, this is 1996! It's 21 years after I coined the phrase "supply-side economics," and probably 25 years since Professors Bob Mundell and Art Laffer began putting it together at the University of Chicago. How could you have gone all this time without inquiring into the nature of the basic analytical framework we have been using? It is clear from your essay that practically everything you know about supply-side economics was learned by reading the newspapers. If you had taken the slightest trouble in asking those of us who developed the system, you would have discovered that we do not equate tax cuts with an increase in the savings rate!! I say that again: When tax cuts are called for in a supply model, there is absolutely no consideration given to increasing the savings rate!! The savings rate is a concept that is only appropriate in the static demand-side model you were taught. It is the chief reason why you and your Keynesian colleagues cannot now even imagine an economy that can grow at high rates without inflation — because an increase in the savings rate requires a decrease in the rate of consumption. Your basic problem is that you study the economy exclusively through the national income accounts, which exclude an analysis of existing wealth on human behavior. Don't you realize that as the recorded savings rate of income was falling from 1982 to 1986, the value of previous savings, i.e., national wealth, was rising dramatically. The value of publicly traded stock, which is merely the tip of the iceberg of national wealth, tripled in that period. Why should you or I save more of our income when the value of our wealth is exploding?
If you once had taken the trouble of raising these questions with me over the past 20 years, we could have sorted this out, and you would not now be writing such silly pieces in the Times. Do you recall that when you were appointed to the Fed, I told the press it was a good move by the President because, although we disagreed, you were intellectually honest? In your years at the Fed, I will remind you that I called for an appointment at least a dozen times, and never was your door opened to me. Once you know what you know, you obviously do not need to know any more. Your intellectual honesty comes through in the op-ed, when you allow that the recession of 1981-82 was caused by the Fed's tight-money policy. Some of your colleagues will not even allow that much. Your intellectual ignorance comes through in your assertion that the 15% interest rates following the Reagan tax cuts of 1981 were caused by the market's fear of ballooning budget deficits. At least Jim Tobin at Yale understood that you cannot be fueling demand for money with tax cuts and starving liquidity by a Fed policy that sent the gold price plunging from $625 in late 1980 to below $300 in early 1982 without causing stratospheric interest rates. If you were too embarrassed to ask me or any other supply-sider what was going on, you could have called Paul Volcker and he would have given you a heads up.
You still have a few years left to your tenure at Yale. I would suggest you throw out the comic books from which you teach your students the elements of supply-side economics and for starters read The Way the World Works , which I wrote in 1977 and was published in 1978. You should not be afraid to learn something new. If you had taken the trouble to go to the sources on supply-side before you advised President Clinton, he could have been a much better President. As it is, he still believes that the economy is growing as fast as it can. If he loses in November, it will be because he has not one single economist around him at the White House or in Treasury who knows as much about economic growth as any of a dozen people who routinely report to Kemp.