Clinton's Riskier Scheme Jude Wanniski October 11, 1996

Memo To: Vice President Al Gore
From: Jude Wanniski
Re: Risky scheme

In your Wednesday night debate with Jack Kemp, you mentioned several times the “risky scheme” the Republicans propose in their $550 billion tax cut over a six year period. I suggest that the far riskier scheme of the administration is to do nothing to alter the status quo. If we stay on the growth path we are now on, we will never dig ourselves out of the hole we have gotten ourselves into as a result of the mismanagement of the economy that began thirty years ago. It was not long ago that Democratic economic advisors to Presidents Kennedy and Johnson adhered to Okun’s Law, after the late Arthur Okun, who reckoned that the U.S. economy had to grow at 3% annually simply to maintain the same level of employment. This meant it had to grow faster to reduce the level of unemployment. For you to insist that the federal tax codes remain basically untouched in order to pay down the deficit will only perpetuate the social pathologies that are eating away at the foundations of our nation. It is the Clinton administration that is taking the riskiest gamble, betting that it can get through the next four years without seeing an even more serious erosion of the racial and cultural problems that afflict American society.

It is a core assumption of the supply-siders that all growth, including political growth, is the result of risk-taking. Because the Ph.D. economists who advise the Clinton administration and the Democratic Party honestly do not share that core belief, they do not see a way to have the economy grow faster than it is. The economists at CEA, Treasury, Labor and the White House were taught that once the economy runs out of bodies, it can’t grow faster, except by technological advance. This is why the administration has acceded to the false idea that the economy cannot grow fast enough to put upward pressure on wages. The only answer to an economy that has been in decline for 30 years, to the point where our capital stock is valued at only 60% of its measured value of April 1966, is a rapid increase in the formation of capital relative to labor. Because the fiscal and monetary policies of Keynesians and monetarists have favored labor over capital, labor has been growing rapidly and capital has been in decline. To boast that 8 million jobs have been added is not a good thing when the aggregate value of all jobs continues to decline. To have everyone working twice as hard to stay in the same place is an indictment of the economic management of this administration, as it was of previous administrations -- with the exception of those few years under President Reagan when capital was forming faster than labor. It is only when capital is in surplus and labor in short supply that real wages will rise, which of course means that the national living standards of ordinary Americans will rise. The risks you are taking by resisting reforms of the tax system that reward risk-taking are genuinely frightening to me.

Your debate with Jack Kemp demonstrated a sincere concern on your part to have the government take care of the American people, to give them the security of all manner of government programs that may help them weather the forces of economic and social decline that beset us. On a great many of the points you made in this regard, I could even agree with you relative to my friend Jack, and could see why the instant reaction of the caring American people would side with your willingness to use more government to that end, and to protect them against the risky schemes of the GOP. Where you have no answer, though, is how to get out of the ditch we are in. I’m afraid that unless the American people are willing to take some calculated risks for more rapid economic growth, the ditch we are all in will get even deeper.