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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Monday, November 13, 2017

Jack Kemp, Tax Reform, And The Way The World Works

Jack Kemp
by Ralph Benko, Contributing Author:  As one of the last living Old Guard veterans of the Reagan Supply-Side Wars I enjoy an unusual historical perspective on the current tax reform efforts occurring in Washington. As Santayana once said, “Those who cannot remember the past are condemned to repeat it.” Follow along.

A long time ago (1985) in a galaxy very close to home (Washington, DC) I came to town yearning to recruit into the Supply-Side. The first major Reagan tax reform then had already been enacted. Thus, much of what I am about to reveal is second-hand yet comes from first-hand accounts from those who were there.

The 1970s were even more of a mess, economically speaking, than today. As I wrote, several years ago, in a piece for The Conservative Review, now pay-walled:
On November 13, 1979, the day Ronald Reagan declared for the presidency, the Dow Jones Industrial Average was at 814. (No, there’s no comma missing.)  …  Supply-side having been picked up from America by many world leaders propelled world annual GDP, then around $11 trillion dollars in 1980, to over $60 trillion today.Make that around $73 trillion now.

Along came Jack Kemp. A championship football quarterback (and staunch foe of soccer, which he indicted as a form of socialism), Kemp at first was largely dismissed by his peers in Congress as a hail-fellow-well-met-jock. That assessment proved profoundly misguided.
Kemp was brilliant, even inspired, although not conceited. Kemp made himself into the hinge upon which history swung.

Kemp was not possessed of high academic credentials and referred to himself in a self-deprecatory way as a Physical Education major from Occidental College. Yet he was a voracious reader… and a bright light.

As the New York Times put it in a 1985 profile:
THE OLD QUARTERback sneaked in with 52 percent of the vote, and he came to Washington as a freshman Congressman with a lot to learn about public policy. But he began reading widely, mainly in economics, and one bit of history intrigued him: The tax cut enacted during the Kennedy Administration had engendered a strong recovery. Then The Wall Street Journal ran a piece by Jude Wanniski, one of its editorial writers, outlining the theories of Robert Mundell, a Canadian economist. Mundell made the case for ''supply-side economics,'' the concept that tax cuts lead to economic expansion and an inevitable increase in tax revenues.

Soon Kemp made contact with Wanniski and other followers of the supply-side faith, particularly Irving Kristol, the editor of The Public Interest. During many months of talk, often far into the night at the Kemps' house in suburban Maryland, the supply siders refined their thoughts into the Kemp-Roth tax-reduction bill.

''It was a radical idea,'' says Charlie Black, a political consultant who worked for the Republican National Committee at the time, ''but politically, it had great value. The Republican Party since Hoover had been viewed as the party of the rich and 'Big Business.' After Watergate, the corruption image was added into it. Of the first 10 things people thought about Republicans, eight or nine were negative. It didn't take a genius to see the way to shake our terrible image was to take Jack Kemp's bill, and his rhetoric, and spread it to the party's candidates. For the first time in years, Republican candidates were out there running for something, not just against something.''
There today are many bright, some brilliant, staff members on Capitol Hill. Yet no Member of Congress that I know of has assembled a brain trust to explore, refine, and crusade on a fresh doctrine for general prosperity.

Certainly, there are no signs of any who, even remotely, are inclined to convene a brain trust in their home “far into the night” to explore, refine, and advocate how to get the economy growing, for workers as well as investors, at 3% per year or more. We see attempts to emulate the last Big Thing -- quarterbacked by Kemp -- not at finding and promoting the next Big Thing.

In addition to his keen intellect and avid curiosity Jack Kemp had other major advantages over the other 434 Members of Congress. (And almost all 100 United States Senators.)

Kemp came from the world of professional sports, all about winning fairly and squarely. As football coach Red Saunders famously said, “Winning isn’t everything, it’s the only thing.”

Most Members of Congress come out of risk-mitigation cultures: lawyers, small business, junior politicians, and so forth. Jack was not reckless. Yet he was prepared to depart from a risk-mitigation strategy, to go outside the Comfort Zone, and go bold in pursuit of championship.

Kemp was a multiple All Star and the leader of a team -- the Buffalo Bills -- which he led to two consecutive AFL championships. Jack Kemp lived for high achievement. He was not cautious to protect the moderate glory of elective office.

The foundational document of Supply-Side Economics, preceding Jude’s 1978 book The Way The World Works -- which, back around 1980 when I was a provincial country lawyer, converted me to the Supply-Side -- was Wanniski’s The Mundell-Laffer Hypothesis--a new way of looking at the world, published in the Spring 1975 issue of The National Interest.  In essence (pp. 37-38) it held:
In the Mundell-Laffer scheme of things, a common currency is not a utopian fantasy; it has been around before. For decades prior to World War I, the world had a simulated common currency as national currencies were tied to the pound sterling and the pound was fixed to gold. In the years after Bretton Woods (1944) until about 1967, or even 1971, the world had a simulated common currency bound to the dollar. The system was flawed, but still enormously successful.The later-famous "Laffer Curve," not yet denominated as such, was but a footnote on page 49. This fountainhead article was about good monetary policy (and, in particular, the gold standard).

Of course, in the event the tax rate cuts propounded by Kemp took political center stage while the core value proposition of Supply-Side economics, a high integrity dollar policy, got relegated to the Fed.

According to a presentation on the 30th anniversary of the introduction of Jack Kemp’s Gold Standard Act of 1984 by Dave Hoppe, Kemp’s chief-of-staff during that era, Jack crusaded relentlessly on the unconventional -- even heterodox -- Supply-Side idea. Kemp crusaded so relentlessly, according to Hoppe, that other Members of Congress seeing him approaching in a hallway would bail into a cross-corridor to avoid being buttonholed by Kemp and given a long lecture on how Supply-Side economics would cure the national economic malaise.

Jack’s relentlessness paid off. He slowly but surely built a coterie of supporters, including ambitious Young Turk Congressmen, some destined to ride the Supply-Side wave to higher office: Newt Gingrich, Vin Weber, Connie Mack and the faux-Supply-Sider David Stockman among them. Kemp thereby built a potent constituency, if not quite a consensus, in the House for stabilizing the dollar and cutting marginal tax rates.

According to the report of one Kemp insider, Reagan, on the verge of his presidential campaign, came to seek Kemp’s endorsement. The Reagan campaign's purpose was to prevent Kemp from entering the race too, splitting the conservative base. Jack Kemp offered his endorsement in return for Reagan’s endorsement of the Kemp-Roth 30% across-the-board tax rate cut.

That policy was controversial among both Republicans and Democrats. It was famously attacked by Reagan’s chief rival for the 1980 presidential nomination, George H.W. Bush, as “voodoo economic policy.” Reagan, on the advice of his then-top advisors, reportedly intended to check Kemp's box, pocket Kemp’s endorsement, and never mention the tax rate cut again.

Until, that is, President Carter attacked Reagan’s endorsement of Kemp-Roth as irresponsible. Reagan rose to its defense. Carter doubled down. So did Reagan.

As a result, Kemp-Roth emerged unbidden as Reagan’s central economic policy campaign issue. When elected, Reagan was sort of stuck with it (at least so long as Kemp would not let it go, which Kemp did not). According to Mort Kondracke and Fred Barnes’s biography, Jack Kemp, The Bleeding Heart Conservative who Changed America:
Reagan himself was unsure whether he had promised during his campaign to reduce rates or merely reduce taxes. Laffer said he was at a meeting in the Oval Office with a dozen or so top Reagan aides and outside advisors when Reagan asked which he had promised. His pollster, Richard Wirthlin, and his communications guru, Michael Deaver, convinced him he’d only promised overall tax reductions, not an across-the-board rate cut for everyone. To the horror of the supply-siders, the confusion led to the watering down of Kemp-Roth. By the time Reagan’s cuts were enacted, Kemp’s (and Reagan’s) original 30 percent proposal was cut back to 23 percent and its effective date was postponed until October 1981. By then, the economy was plunging into recession.Working and middle class Americans had been propelled into higher and higher tax brackets by inflation. America was experiencing what the media called a “Tax Revolt.” California’s Proposition 13’s chief advocate, Howard Jarvis, was depicted shaking his fist on the cover of TIME Magazine.

I arrived in Washington on July 8, 1985, after Kemp-Roth’s enactment but in time to have a front row seat for its successor which, in a merry competition with Democrats Bill Bradley and Dick Gephardt, succeeded in cutting the top marginal rate to 28%. With inflation having been wrung out of the system by Fed Chairman Paul Volcker -- brutally, but he got the job done -- and the tax rate cuts phased in the economy roared. The Mundell-Laffer Hypothesis was vindicated.

Reagan’s successor George H.W. Bush broke his GOP nominating convention declaration, “Read my lips: no new taxes.” That broken promise, and the attendant recession, cost Bush re-election. Clinton continued the essence of Reagan’s economic policies with great success and great across-the-board job creation and general prosperity.

When I had arrived in Washington I was eager to find the enlistment office to recruit into the Supply-Side. As I discovered, there was none. So I built one.

I sought out about a dozen Supply-Siders and invited them to convene, with me, at the Apple and Eve bar in a L’Enfant Plaza hotel. Many had never actually met in person and were happy to do so.

I converted this event into an ongoing monthly gathering, initially called “the Gathering of the Supply-Side Tribes” and eventually renamed “The Prosperity Caucus.” It continues to convene monthly to this very day. Supply-Side poster child Steve Moore succeeded me, after about six years, as secretary. It is now under the leadership of Supply-Side thought leader Ike Brannon.

It still charges $5 for its beer and pizza as it did 30 years ago.

This represents a minor loaves-and-fishes Supply-Side miracle.

What has this to do with tax reform proposals now brewing in the House and the Senate and cheered on by the Trump administration?  As Deroy Murdock recently wrote in The Dallas News:
Top-flight tax fighters are delighted that middle-class taxes would drop but are aghast that Republicans would boost levies on anyone.

"If you let the other side set the terms of debate, you lose," publisher and flat-tax guru Steve Forbes tells me. "The Republicans have been letting the Left define the terms of debate on health care and taxes and losing badly on both. Incredibly, when it comes to cutting taxes, the GOP turns out to have the backbone of a cream puff. Pathetic!"

"The GOP should stick to growth," says free-market economist and co-founder of the Committee to Unleash Prosperity Larry Kudlow. He also advises Republicans: "Stop letting Dems mau-mau them on rich people and redistribution. … ."
Jack Kemp had a Big, unconventional, Idea: stabilizing the dollar and cutting marginal tax rates across-the-board. These were not ends. These were a means to an end: robust, across-the-board, economic growth. They worked.

As Old Guard Supply-Sider Peter Ferrara wrote at Forbes.com in 2011:
These economic policies amounted to the most successful economic experiment in world history. The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990, when the tax increases of the 1990 budget deal killed it. This set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.

During this seven-year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third-largest in the world at the time, to the U.S. economy. In 1984 alone real economic growth boomed by 6.8%, the highest in 50 years.  Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%.

There are some veteran Supply-Siders still around, some high-ranking veterans of the Reagan Supply-Side Wars.  Among the most distinguished: former presidential candidate Steve Forbes and former Reagan OMB economist Larry Kudlow. There are a few young ones, such as, of course, Jack Kemp’s son Jimmy Kemp, president of the Jack Kemp Foundation (which I have professionally represented very occasionally) and Jonathan Decker of the Committee to Unleash Prosperity, for whose Supply-Side Blog I serve as editor-in-chief.

Lot of talent. We just lack a political quarterback.

Supply-Side economics is, as it was for Kemp and Reagan (and, before Reagan, JFK), all about creating the economic "rising tide that lifts all boats." Absent a Kemp in the Congress will the GOP be able to get the economy roaring again through smart policy, notably good monetary and tax rate reduction policy?

Stay tuned.
-----------------
Ralph Benko is an advisor to nonprofit and advocacy organizations, is a member of the Conservative Action Project, a contributor to the contributor to the ARRA News Service. Founder of The Prosperity Caucus, he was a member of the Jack Kemp supply-side team, served in an unrelated area as a deputy general counsel in the Reagan White House. The article which first appeared in Forbes.

Tags: Jack Kemp, Tax Reform, Way The World Works, Ralph Benko, Forbes To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service and "Like" Facebook Page - Thanks!
Posted by Bill Smith at 3:10 PM - Post Link

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