The Real Larry Kudlow? Jude Wanniski October 2, 1996

October 2, 1996
       
Letters Editor
The Wall Street Journal
200 Liberty Street
New York, NY 100281

Dear Editor:

On your page Monday, September 30, Lawrence J. Kudlow argues that Bob Dole’s 15% tax cut proposal would be good for the country because it will dry up federal revenues and force our government to cut spending. The headline says it all: “Cut Taxes: Starve the Beast.”

Is this the same Lawrence J. Kudlow who worked as chief economist at the Office and Management and Budget in 1981, for David Stockman, who subsequently told the Atlantic Monthly that the Reagan administration never believed that tax cuts would increase tax revenues? If you will recall, Mr. Stockman told the magazine that the Laffer Curve -- which showed that a tax cut could increase revenue -- was only a Trojan Horse, which President Reagan employed in his 1980 campaign to fool the people into voting for him.

If this is the same Kudlow, are you sure you have his current place of employment correct? You have him identified at “economics counsel for Laffer, Canto & Associates,” which I understand to be the consulting firm of the fellow for whom the Laffer Curve is named? I’m sure if you check this out you will find this is either a different Kudlow or a different Laffer.

In fact, by either the Keynesian model or the supply-side model, the Dole tax cuts will cause revenues to rise, not fall, which means the Beast, our government, will flourish, not starve. The author of the Keynesian model, John Maynard Keynes, a half century ago said that income tax rates would be counter-productive in excess of 25%. As our current 38% top rate is higher than 25%, reductions down the line would be in line with his model. The law of diminishing returns has different effects in the supply-model, but the result is the same.

In the same way, the Keynesian model would see a 15% capital gains tax as being more conducive to capital spending than the current 28% rate, although it would explain the effects via aggregate demand, not aggregate supply. If he were alive, he would probably resist a rate below 15%, while supply-siders would argue that a zero rate is optimal.  He would be perfectly happy with the Dole tax cuts, I think, and argue that they would be self-financing.

The only popular model that would agree that the Dole tax plan would “Starve the Beast” is the neo-Keynesian model developed by the students of Lord Keynes, after his death in 1946. The neo-Keynesian model is similar to that which Keynes fought against while he was alive. It argues that federal budget deficits must be reduced in order to prevent the government from making use of scarce capital in order to finance the deficit.

This idea, that the government “crowds out” private enterprise in the capital market, has survived to the present day and thrives in the White House of President Clinton, and in his Treasury Department. The Kudlow “starve the beast” thesis takes this a step further, arguing that in addition to the size of the deficit we must consider the size of the government. Neither are arguments that make any more sense now than they did in the Great Depression.

Sincerely,

Jude Wanniski