Newt's First Mistake Jude Wanniski November 9, 1998

Memo To:The Next Speaker of the House
From:   Jude Wanniski
Re:  Where Gingrich went wrong

When I woke up on November 2, 1994, knowing the Republicans had scored an enormous victory by taking the House and Senate for the first time in 40 years, even before I took my head off the pillow I thought “Now, we can do dynamic analysis.” Which is to say, we can cut tax rates without having to pay for them with spending cuts. Tax cuts would be automatically “scored” for legislative purposes as revenue losers. Under the Democrats, control of the key tax committees meant tax rates could not be reduced even though Nobel Prize winners and Alan Greenspan would agree they could be reduced with beneficial effects. With Newt in the driver’s seat, he could immediately put through the Contract With America provision cutting the capital gains tax to 15% from 28%!!  The stock market would boom, the economy would expand rapidly, interest rates would fall, revenues would balloon! That was the plan.

Well, it didn’t happen. In complicated negotiations, Newt gave in to the Hoover wing of the party, which insisted that there be no more supply-side experiments in tax cuts. No dynamic analysis. No Reaganesque tax cuts. No Laffer Curve. It would be pay-as-you-go. PayGo. It was an unspoken repudiation  of Reaganomics, which had the state, not the people, bear the risks of tax cuts designed to expand the economy. If the tax cuts worked, the bonds issued to finance them would be easily paid down and revenues would be higher with lower tax rates. Newt never really understood the mechanics, which is why at critical decision points he made the wrong turn, and I told him so. We’d known each other since 1978, when he wrote me at The Wall Street Journal to introduce himself as a candidate for the House of Representatives. He’d been a loyal lieutenant to Jack Kemp in the late 1970s when supply-side ideas were still considered way out. I’d sung Newt’s praises as a “World Class Leader” when he challenged President Bush’s 1990 tax increase. I’d talked to him hundreds of times by telephone and in person during those years. But Newt did not want to be told he’d made a mistake, and in the last four years the only time we spoke was when we bumped into each other at political parties.

What he had done is give the Democrats the sword they needed to slay him. Without dynamic scoring, the Democrats would argue that Gingrich and the mean old Republicans would cut tax rates for the rich by cutting the school lunch program or by reducing Medicare benefits for little old ladies. Newt allowed himself to be talked into a zero-sum game, which Republicans would always lose because there are so many more people at the bottom half of the pyramid than at the top. If you are going to throw the dice on tax cuts, as Reagan did, you don’t ask the people at the bottom to pay the house if you crap out -- which is Newt’s story boiled down to the essentials.