Monday, May 18, 2009

Jude Wanniski, Robert Mundell and Arthur Laffer

Unless the government enacted a tax cut of at least $10 billion that summer [1974], Mundell insisted, the automobile industry would suffer and egregious depression in the fall, and the rest of the economy would "fall off the cliff" in January. Unemployment, Mundell predicted, would reach a horrendous eight percent, and next year's budget deficit might be $70 billion. Wanniski remembers looking at Mundell and Laffer and observing how coldly mesmerized they were by these numbers. "Where they saw numbers, I saw people, and I felt sick to my stomach. I was in possession of awful, terrible wisdom that no one except us had. I asked them how they sleep at night? They told me all they could do was come up with ideas; they couldn't live them. But I had to live them or els go crazy. At that moment, I became a true zealot.

... In late 1974 the Commerce Department had just completed final statistical revisions on the Gross National Product for the year 1971. Wonder of wonders,, because of the year's unexpected burst of inflation, Laffer's seemingly absurd forecast of $1.065 billion had turned out to be almost exactly right, one of the most accurate GNP forecasts ever recorded. "Get Laffer down here," ordered Donald Rumsfeld.

Laffer came to Washington in December, a month after the elections in which the Republicans suffered epic defeat. Rumsfeld was unavailable, but he dispatched an aide, Richard Cheney, to meet with Wanniski and Laffer. The trio met for drinks and dinner at a restaurant near the White House. It was a historic meeting, but not for reasons anyone else could have predicted. As Wanniski recalls the evening, Laffer, a man of uncontrollable energy, simply talked too fast to be comprehended by anyone not already versed in his views. As the meeting wore on, it became obvious the Cheney did not understand. In a fit of exasperation, Wannisky recalls, Laffer grabbed a paper cocktail napking and sketched a simple graph on it - a bell-shaped line that Wanniski would enshrine as the "Laffer Curve" - which showed how in theory two different tax rates might produce the identical amount of revenue for the government.

... Years later, after Laffer and Wanniski had had a falling out, Laffer would insist he could not remember the cocktail napkin incident. Neither could Richard Cheney. Yet Jude Wanniski, a born genius in the art of publicity would never forget it. "I just went wild over that curve," said Wanniski. And so would the electorate six years later, after Wanniski had made the "Laffer Curve" a household phrase.

... Kristol published the piece [by Wanniski], "The Mundell-Laffer Hypothess: A New View of the World Economy," the blue print for the as yet unnamed Supply Side movement. ... former Nixon economics advisor Herb Stein, wrote a column attacking supporters of the tax-cut idea as a bunch of "supply-side fiscalists," criticizing their lack of concern for monetary policy and inflation. Wanniski disapproved of Stein's orthodox conservatism, but he had to admit that the professor had a way with words. He seized Stein's phrase, lopped of the cumbersome "fiscalists," and dubbed the ideas espoused by himself and his friends "Supply Side Economics." Stein probably would never forgive himself.

-- From Worldly Power: The Making of the Wall Street Journal by Edward Scharff, pp. 258-264.

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