The Ideologically Invested

When 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 Great Depression
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.



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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?



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