W hen President Clinton announced his economic plan in 1993, Wall Street Journal editor Robert Bartley had no doubt about what would happen. Clinton's proposals, he predicted in a column in February 1993, would "cripple" the economy. While the plan was debated, this absolute certainty about its effects pervaded the Journal's discussion on both its editorial and op-ed pages. By the time the plan passed the House, the recession had already begun: "[W]e are seeing," the Journal editorialized, "the early signs of the stagflation that we knew so well during the Carter presidency." The only "debate" the editors saw was whether this would cause another Clutch Plague or merely a severe recession.
Nor was the Journal editorial page alone in predicting doom. Shortly after Clinton's plan passed, Forbes ran a cover featuring investment officer Barton Biggs's advice to move assets overseas. "We want our clients' money as far away from Bill and Hillary as we can," he said. "The president is a negative for the U.S. market."
Moving assets abroad, for Forbes, was the more moderate course of action. The other choice it advocated in two 1994 articles was to renounce citizenship and flee the country. Renounce citizenship? "The people who are in power want to confiscate other people's property," it quoted a lawyer by way of explanation. The hysteria also resonated in the Journal, which printed a series of editorials called "The Class Warfare Economy." Lest the point be too subtle, the line was helpfully accompanied by a graphic of a guillotine.
Reacting so wildly to a small hike in the top marginal rate to 36 percent--now only the second lowest in the industrialized world--was not just loony but objectively wrong. The rich, it turns out, have fared rather better under Clinton than under a lot of Republican presidents. The economy has hummed along (particularly for the well off), and the stock market has boomed, breaking one record after another.
But you're not likely to find any admission of error by the business commentators who were predicting doom. Take, for example, the columns of Steve Forbes, son of tycoon Malcolm, in Forbes. In May 1993, Forbes wrote, "Clinton's proposed tax increases are what is dampening the economy." This was before they went into effect, or even made it past Congress. In April of the next year, Forbes was telling his readers, "The thought won't occur to anyone in the White House, but there is a more than passing connection between financial market wobbliness and taxpayers' feeling the full brunt this month of Clinton's tax increases."
The economy, nonetheless, continued to grow. Apparently, it took somewhat longer for taxpayers to feel the brunt. In June 1995, 14 months after increased rates went into effect, Forbes announced that the Clinton economic plan was finally taking its terrible toll: "The economy is faltering and it's no secret why: increased interest rates and increased taxes."
To date, it hasn't happened. But whenever the business cycle does turn down, we can be sure Steve Forbes will be there to say "I told you so." On the bright side, in July Forbes finally reconciled himself to the stock market's success: "What's stoking the stock market? Principally, the potent prospect of a significant cut in the capital gains tax and the possibility that it will be made retroactive to Jan. 1."
In other words, investors were ignoring the supposedly crushing tax rates that were in effect because of the possibility that Congress would pass a capital gains tax cut and override a presidential veto.
REAL MEN HATE TAXES
How did it come about that an influential minority of the business press would become so incorrigibly fanatic that it went haywire over Clinton's economic plan and then could not bear to admit it was wrong? The answer dates back to the 1970s, when a clique of radical journalists centered around Bartley's Wall Street Journal editorial page developed supply-side theory.
In his recent book The Freedom Revolution, House Majority Leader Dick Armey writes, "There was nothing particularly complicated about what Reagan did. The big thinkers departed. No more macroeconomic meddling. No more talk of aggregates this and aggregates that. Above all, no more reliance upon `experts,' but instead a reliance on real men and women."
This may come as news to Bartley (not to mention Alan Greenspan). As Bartley writes in his book The Seven Fat Years, Reaganomics grew out of conversations over dinner in the 1970s at the posh New York restaurant Michael 1 among a small circle of thinkers who rejected mainstream economic thinking. "These discussions," Bartley recalls, "spawned, at least in my mind, what later became known as supply-side economics-if not indeed what later became the Reagan administration's economic policy."
Armey may be deluded in recalling Reagan's advisors as plain old folks, but he's right that the supply-siders weren't experts. It was more like a cult. From the start, they had two preoccupations that distinguished them from much conservative as well as liberal mainstream economic thinking. First, they were obsessed with the idea of returning to the gold standard; and second, they rejected business cycle theory, holding instead that the economy's performance was almost exclusively determined by marginal tax rates. Since neither party showed any interest in bringing back the gold standard, the supply-siders became increasingly identified with the more politically appealing idea of lower tax rates, until that passion entirely consumed them. No mere data, such as the performance of the economy after enactment of Clinton's higher rates on the affluent, could possibly be allowed to muddy the pristine clarity of their beloved theory.
The insulated intellectual culture that Bartley created at Michael 1 and on the Journal's editorial page helped maintain the vehemence of this tiny coterie in the face of contradictory evidence. In this closed marketplace of ideas, the true believers fed off of each other's mutually reinforcing insights without challenge, gaining legitimacy in both their own eyes and the eyes of their powerful readers.
The supply-side cult has only grown larger and more influential since Reagan's ascent. Bartley and his disciples in right-wing business publications and think tanks continue to wield a wildly disproportionate voice in our national debates over economics. "Equal distances from the center of economic thinking don't carry equal weight," observes Stanford economist Paul Krugman. "Surprise, surprise! The right has more money, and more magazines."
But if the supply-siders are just out to protect the interests of wealthy investors, they're not doing a very good job. While Bartley and his sect portray themselves as coolheaded capitalists (Forbes advertises itself as a "capitalist tool"), they're actually ideological hotheads whose reputations are so tied to the fortunes of the supply-side wing of the Republican Party that they can't provide useful market analysis. It would have been poetic justice if they had followed their own advice and moved their assets overseas in 1993, maybe to Japan, as they would have missed out on one of the biggest stock market booms in history.
DECRYING WOLFF
During the past two decades, the United States has grown more economically stratified. The evidence from numerous sources on this trend is overwhelming--and overwhelmingly accepted by economists--although there is much dispute over the causes and no agreement whatsoever about how to respond to it. Most of the major news magazines and newspapers, including the Wall Street Journal's own news columns, have reported the trends. Business Week, in a cover story, contrasted the sharp rise in corporate profits with the flagging pace of wages.
In contrast, the ideological business press has devoted itself to obfuscating and denying the trends. One recent example is a spate of articles denouncing a study by the economist Edward Wolff of New York University showing that the gains in wealth went overwhelmingly to the super rich between 1983 and 1989--Bartley's seven fat years. Wolff's findings appeared in these pages ("How the Pie Is Sliced: America's Growing Concentration of Wealth," TAP, Summer 1995) and in a longer report from the Twentieth Century Fund. While some reputable economists take issue with the magnitude of Wolff's findings, few deny the trend toward rising inequality. The Journal op-ed page, however, ran no fewer than four critiques of Wolff's study, including a series of columns called "The Inequality Myth." The articles, taken as a whole, made two basic arguments:
Argument A: There has been no increase in inequality of wealth.
Argument B: There has been an increase in inequality of wealth, and it's a good thing, too.
"Did the rich get richer and the poor get poorer during the Reagan years?" asked John Weicher of the Hudson Institute, "No, or at least not much, if at all." (Argument A).
A month later, Bruce Bartlett disputed Wolff's conclusions. What was his source? John Weicher's data. Only Bartlett's interpretation of Weicher's study was different from Weicher's: It was headlined, "The Rich Get Richer, and That's All Right" (Argument B). The next day, in "What Wealth Gap?", Michael Novak of the American Enterprise Institute piled on:
Between 1983 and 1989, family wealth (marketable possessions) went up for all income groups. Contrary to most news reports, however, it went up more for those at the lower levels. (Argument A)
and:
Today, well into the greatest stock market boom in history, the "gap" between those who invest and those who do not has necessarily grown. . . . Besides, why even suggest that it's wrong for "the top 1%" (or even the "top 20%") to invest successfully, so that their wealth keeps growing? Isn't it better that the rich invest, rather than merely consume. . . (Argument B)
These rejoinders were misleading as well as contradictory. Novak's article showed little growth in the wealth of the richest groups because he lumped together all those with incomes over $50,000 a year. This obscured the changes within that category, which is where all the action took place. Weicher's article featured a chart breaking down wealth not by per capita income but by race and marital status. Again, it implied wealth equality by hiding the changes. "The rich aren't different from you and me because they are married without children," replies Krugman, "they're different because they have more money."
The gang-up on Wolff was classic Journal editorial page. The rash of critical responses, laden with charts and numbers, projected the impression of an academic dispute over wealth inequality. In fact, the only substantive dispute with Wolff came from Weicher's study, and this boiled down to a technical quarrel over weighting of measures. The "debate" over wealth inequality, like much discussion on the Journal editorial page, was a series of specious and often contradictory attacks by an insulated group of concordant thinkers intent upon reaching a preordained conclusion. Cognitive dissonance is not appreciated. Wolff, who is editor of the economics journal Review of Income and Wealth, sent a letter to the Journal responding to his critics, but it was never published.
THE NEXT CRUSADE
A recent Forbes story attributed America's economic recovery to the tax cuts of the 1980s. When do Reagan's tax cuts stop getting credit for the economy? Whenever it slows down. Supply-siders blamed the recession of the early 1990s on George Bush's abandonment of Reagan's policies. Somehow the boost from Reagan's tax cuts has been felt anew.
Unfortunately, the supply-side press is not exclusively concerned with rehabilitating Reagan's economic record. They have a new project: Abolish the progressive income tax and replace it with either a flat tax or a national sales tax. The theory is not new. Reducing the burden on the wealthy (this time by shifting it downward rather than financing it with government debt) would create an economic boom that benefits everyone. Only, the latest tax reform proposals redistribute the tax burden on a scale that Reagan never imagined. This is why the radical business press so strenuously denies the fact of growing inequality. If the rich are growing richer as everyone else falls behind, how can you possibly justify instituting new tax policies that radically compound this trend?
One answer of theirs, amazingly, is fairness. Our current system, tax reformers point out, is riddled with loopholes that benefit the rich and hence replacing it could be "fairer." But why not eliminate the loopholes and keep the progressive rates? Because the right thinks the current system is, on balance, biased not in favor of the rich but against them. An editorial in the American Enterprise made this case in perhaps its strongest form. Noting the medieval European practice of levying higher tax rates on religious minorities--"discriminatory taxes imposed by one class of citizens against another"--it complained that today, "disparately higher rates have been slapped on the wealthy." Apparently, taxing people based on their ability to pay is equivalent to taxing them based on their religion. (By this logic, of course, giving food stamps only to the poor--"reserving special benefits for certain classes of citizens," the American Enterprise might call it--is tantamount to limiting suffrage to male landowners.) Hence, the flat tax becomes a moral imperative.
The Republican tax plans, though, would not tax everyone at the same rate. Take Armey's flat tax, which is the most progressive of the Republican alternatives. It totally exempts capital gains from taxation and imposes a huge consumption tax. Since the rich receive a disproportionately high percentage of their income from capital gains and devote a disproportionately low percentage of their income to consumption, they would pay the proportionately lowest taxes. This is undeniably true, yet it will undeniably be denied, repeatedly. It's already happening in the same publications that nurtured supply-side theory from a laughable fringe to the nation's economic policy. It may seem preposterous to suppose that the purveyors of a discredited theory could convince the Republican Party to raise taxes on the vast majority of Americans in order to enrich the well off. But they already have more support than they had in 1980.
Will the spirit of enlightened self-interest, wherever you are, please stand up?
