Lately, Hillary Clinton and her supporters have been criticizing Bernie Sanders’s proposals not so much because they are wrongheaded, but because they are too utopian to pass Congress. I find this to be a curious line of attack because, in effect, Clinton is playing by Republican rules—saying that Democrats should only propose things that could be enacted by a Republican Congress.
Economists would call this an example of static analysis, assuming that circumstances will not change or that leadership is incapable of altering political possibilities. If Republicans had held this same point of view, Ronald Reagan’s 1981 tax cut never would have been enacted and, very likely, they would never have gained control of Congress. The 1981 tax cut fundamentally altered political dynamics.
This was not a result that anyone would have predicted when the Reagan tax cut was first conceived by Representative Jack Kemp of New York in 1977. At the time, he was a junior congressman much better known for his career in professional football than for his legislative accomplishments, which were modest.
In those days, seniority was the principal determinant of legislative success. Junior members of Congress were expected to defer to their elders. Additionally, the committee system was very powerful. Those wishing to enact a bill needed to go through the members of the relevant committee and get their blessing before congressional action was even contemplated. If the chairman or ranking member of the committee of jurisdiction turned thumbs down on a legislative idea, it was pretty much dead.
It was in this atmosphere that Kemp did something quite daring. He proposed a big tax cut that was opposed by every member of the tax-writing House Ways and Means Committee, of which he was not one, on both sides of the aisle. Moreover, it had close to zero support among the GOP’s senior economic advisers, who were mostly former chairmen and members of the Council of Economic Advisers under Republican presidents. Even those who thought Kemp’s plan was a good idea in principle thought it was pie-in-the-sky that would never be enacted by a Congress in which Democrats held large majorities in both the House and Senate.
Yet, almost exactly four years after Kemp introduced his tax cut, together with Senator Bill Roth of Delaware, it was enacted into law. What happened in the meantime is that the political dynamics changed dramatically, partly due to leadership and partly due to fortuitous circumstances. It was a remarkable accomplishment for which Kemp is rightly revered in the Republican Party.
In 1977, the Republican Party was at possibly its lowest ebb in the postwar era. It had been decimated by Watergate in the 1974 elections, and the defeat of Gerald Ford in 1976 by Jimmy Carter took away the last vestige of the Republicans’ leverage. There really was almost nothing they could do to stop whatever the Democrats wanted to do or to enact their own legislation. Kemp knew defeat from his years as quarterback of the Buffalo Bills. He knew that sometimes you had to throw the bomb to get your team back in the game and thought that a big tax cut had the potential to alter the political dynamics and make the Republican team competitive.
Kemp’s conversion to the idea of a tax cut came to him principally by way of The Wall Street Journal editorial writer Jude Wanniski, who thought that it was both good economics as well as good politics. Wanniski had been convinced by the Columbia University economist Robert Mundell, who later won the Nobel Prize in economics, that a big tax cut combined with a tight monetary policy was the best cure for stagflation.
It’s important to understand that Mundell’s ideas were far outside the mainstream of economic thinking, which was dominated by Keynesian economics, and had virtually no support even among conservative economists. Both conservative and liberal economists thought that the federal budget deficit was a prime, if not the prime, driver of inflation, which was far and away the nation’s biggest problem. Since a big tax cut would sharply raise the deficit, which would raise inflation, the idea was at least politically impossible.
Of course, many Republicans also supported big spending cuts that could have offset the revenue loss from a tax cut, but there was no way that Democrats would have supported cuts of such magnitude. And liberals also thought that a tight money policy would crash the economy, which conservatives didn’t deny but thought was a necessary price to pay for breaking the back of inflation.
Mundell thought that a major but little noticed cost of inflation was in pushing people up into high tax brackets, which sapped incentives. Thus, a tax cut could bring forth additional work, savings, and investment that would be anti-inflationary by increasing the supply of goods and services. Mundell also thought that a tax cut could offset the contractionary effect of a tight money policy.
In 1977, virtually no one except Mundell’s protégé, Arthur Laffer, thought his loose-fiscal/tight-money policy mix made the slightest bit of sense. It was like putting one’s foot on the gas and the brake at the same time, most economists thought. But after Laffer and Mundell converted Wanniski to their cause in 1974, they had a powerful publicist in their corner. He converted the entire Wall Street Journal editorial page to the Mundell-Laffer view and in 1976 brought Kemp on board as well.
I joined Kemp’s staff in late 1976 as his staff economist and had a bird’s eye view of the changing political dynamics. It was also my job to draft actual legislation embodying the emerging supply-side philosophy, as well as get cosponsors and defend the idea against heavy attack from both right and left.
The idea of a tax cut had been floating around Republican circles for years but was always frustrated by fear of raising the deficit and, hence, inflation, and by the political impossibility of big spending cuts. The most that could be done was a one-shot tax rebate in 1974, which all the supply-siders thought was economically worthless because it didn’t change incentives, but it could be enacted because it didn’t undermine the federal revenue base or add to the long-term deficit.
Of enormous importance to the supply-siders was the historical narrative—much of which I discovered and related in my 1981 book, Reaganomics—of Republican support for tax cuts in the 1920s and the enormously positive impact of the Kennedy-Johnson tax cut enacted in 1964. In fact, the Kemp-Roth tax cut was explicitly modeled on the Kennedy-Johnson tax cut. One day, Kemp simply told me to draft something that replicated it. The economist Norman Ture, who was deeply involved in developing and passing the Kennedy-Johnson tax cut, was invaluable in helping us make the connection.
When the Kemp-Roth tax cut was introduced in mid-1977, it went nowhere fast. Except for a couple of Kemp acolytes, such as Representatives David Stockman of Michigan and John Rousselot of California, there wasn’t much support. But gradually Kemp was able to win cosponsors by telling his GOP colleagues that they had to get on the offense if they wanted to win and work to change the political dynamics. Many came over to the cause simply because they had nothing to lose politically and because the tax cut was never going to be enacted anyway, they thought.
But something remarkable happened in 1978 when voters in California enacted Proposition 13, which slashed property taxes with no offsetting cut in spending. Suddenly, politicians in both parties saw a nationwide tax revolt and the Kemp-Roth bill was already established as a federal counterpart to Proposition 13.
Reagan, who had lost the Republican presidential nomination to Ford in 1976 on a proposal to slash government spending, saw the Kemp plan as a better way to reduce the size of government and stimulate the economy. He and top Republican economists such as Alan Greenspan were also influenced by an idea called “starve the beast,” which said that the best way to cut spending was to take away Congress’s ability to spend by reducing taxes.
Reagan managed to overcome doubts about the tax cut and won the 1980 election, sending the Kemp-Roth proposal to Congress in February 1981. Democrats still thought it was a bad idea, but they were very impressed that Reagan was able to sell it. At least a few thought it would be an economic disaster that would put them back in the White House in 1984. This may be a key reason why Democrats didn’t put up insurmountable obstacles to the Reagan tax cut, which they undoubtedly could have done in the House. (The Senate was by then under Republican control.)
The rest, as they say, is history. The relevance to today’s policy debates is that what may at first appear to be politically impossible can quickly become possible with the right leadership, changing circumstances, and a little luck. I’m not saying that Sanders’s ideas are necessarily good or politically doable. But I am saying that it’s wrong to oppose them simply because they could not pass Congress today. If Republicans had taken that view in the late 1970s, the world today would look very different, both politically and economically. Sometimes it’s necessary to throw the bomb and see what happens.