Manic-Keynesianism Jude Wanniski July 20, 2001

Memo To: Supply-Side Students
From: Jude Wanniski
Re: “Goodbye, Great Britain”

Here is an editorial I wrote for the WSJournal on April 29, 1975, which resonated across the Atlantic. I ran across it recently while thumbing through files, and remembered what fun we had at the editorial page in those early days of supply-side economics. There are still plenty of economists who celebrate the memory of John Maynard Keynes and are even willing to call themselves “Keynesians.” Paul Krugman of the NYTimes, recently of MIT, is one. I do appreciate the contributions of Keynes in the Great Depression, as he argued for government spending to boost consumer spending [aggregate demand]. It was after the death of Keynes in 1946, though, that his students made a mess of things, carrying his nostrums to ridiculous extremes. The London School of Economics, which had been a Keynesian hangout, was happy to grind out theories in support of the view that rich people did not spend their money fast enough, so the government should tax it away from them and spend it for them, on poor people. Really, students, grown men and women used to believe that stuff, and they occupied positions of great power. In Great Britain, the “British disease” was born of manic-Keynesianism, which was not really contested by the Conservative Party. Monetary policy was aimed at producing “export-led growth,” through currency devaluation. Fiscal policy was aimed at fighting inflation, through tax increases. In 1975, the top tax rate on income was 98%. It was not until Margaret Thatcher got a look at the Laffer Curve in 1977 that the decline of Great Britain came to an end. To get a feel of how things looked in 1975, here is “Goodbye, Great Britain.”

Review & Outlook
Goodbye, Great Britain
The Wall Street Journal - April 29,1975

"Steady as She Sinks," proclaimed the April 25 cover story of The Economist, the British weekly journal of news and opinion. It is the British economy, of course, that is sinking. But that's not news. What makes this issue of The Economist valuable - it should be bound in leather and made required reading in every U.S. school of economics - is that it so finely, albeit unwittingly, traces the ultimate consequences of the welfare-state-manic-Keynesian syndrome.

Britain's current contribution to the world is to reveal the ultimate result of economic and social policies rapidly gaining ascendancy in the United States. To wit, the state must fulfill all needs, especially medical care. Income must be redistributed, principally through taxes on the returns from capital. After all, transfer payments and redistribution stimulate the economy (don't they?). The inflationary results can be contained by various forms of price control (can't they?).

And if problems arise, the solution lies in finding the magical proper balance between government spending and taxes. Thus we have Denis Healey, the Chancellor of the Exchequer, announcing his latest budget, widely praised as "brave" and "courageous" because in the midst of world recession he has imposed another $3 billion in taxes on an economy whose chief problem is that it already is strangling on taxes. By some mad twist of logic, known only to British politicians and economists, this "mildly deflationary" move is designed to run the unemployment rolls up to one million, punish the unions for pushing up wage rates so fast (32.6% annual rate in March), and position the economy so that it can take advantage of next year's forecast of a world trade boom.

We learn that The Economist itself does not think it fair of Margaret Thatcher, the Conservative Party leader, to describe the budget as "typical Socialist." After all, Mr. Healey did not increase the 52% corporate tax rate. Nor did he increase the 83% marginal tax rate on earned income above $48,000 or the 98% marginal tax rate on "unearned income" -- interest and dividends, for example -- above $48,000. And he does provide for government assistance to selected private industries in the amount of $240 million, especially those that government divines will be able to increase exports.

There are other interesting statistics. Because of the effect Britain's 20% inflation has in moving workers up the progressive tax schedule, combined with Mr. Healey's two point tax increase, a Briton earning $24,000 this year will have to get a pay raise of $9,600 merely to maintain his purchasing power. A worker now getting $12,000 needs another $3,000 to stay in the same place.

Public spending rises to $128 billion from $105 billion or to 60% of gross national product. In that the U.K.'s gross national product is about one-eighth the size of ours, this is the equivalent of a $900 billion federal budget. Mr. Healey boasts that the "social wage" - all the government goodies such as health, education and welfare - now amounts to $2,400 a year for every member of the working population. To get this in perspective, it has to be pointed out that Britain's per capita income last year was $3,085.

Britain, it is regularly noted, always seems to somehow "muddle through" despite the best efforts of its government. One reason has been that, in their imperfect understanding of economics, the income redistributors have always overlooked a few opportunities to confiscate wealth. Through these tiny cracks in the tax laws, otherwise known as "loopholes," the private economy has always been able to spy enough incentive to keep producing. As a result of the current economic crisis, however, the Labor government made a determined search for these tiny cracks and has found most of them.

Because most of what businesses pay their managers in increased wages is taken away by the government in taxes, there have been exotic schemes to permit managers to live off business perquisites. These are being closed up. A year from now, employers will be taxed on any private medical insurance cover they receive, the government having determined that private medical treatment is a great incentive to keep producing. Mr. Healey also promises to tighten up on capital-gains taxation, and has already closed an accounting loophole whereby corporations could avoid some taxation by selling shares they owned and taking the loss, and buying them back the next day.

The British government is now so clearly headed toward a policy of total confiscation that anyone who has any wealth left is discounting furiously at any chance to get it out of the country. Mr. Healey wisely halted the importing of gold coins, which could be rather easily smuggled out, and he's slapped a 25% value-added tax on jewelry, along with radios, televisions and electrical appliances. The result of all this is of course, to bring investment to a screeching halt by drying up both available funds and potential returns. The price can only be still slower economic growth, and still lower living standards for all the British, rich and poor.

Goodbye, Great Britain. It was nice knowing you. Since we're following down the same road, perhaps we'll meet again.