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The Flaws in Dave Stockman’s Thinking

Tuesday, 03 Aug 2010 07:36 AM

By Larry Kudlow

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My former boss Dave Stockman blames Republicans and supply-side tax cuts — rather than big-spending by the Democrats — for our debt problems and (by inference) the weak economy. I disagree.

We have a bipartisan spending problem, largely driven by entitlements over the long run and ineffectual stimulus in the short term. Stockman seems to want to solve the spending problem with higher taxes. Some recent estimates suggest the need for an 80 or 90 percent tax rate to do that. But what would it do to the economy? Or global competitiveness?

We’re not going to tax our way out of the entitlement quagmire. That’s the fundamental flaw in Stockman’s thinking.

By the way, in the ’80s and ’90s, the debt-to-GDP ratio averaged around 40 percent. Nothing destructive there. Reagan’s low tax rates, which on balance were maintained during the Clinton years (Clinton raised the top personal rate but signed the Republican bill to lower the capital-gains tax rate), generated a long boom of 3.7 percent annual growth, 39 million new private jobs, and low inflation.

I agree with Stockman that Paul Volcker was the great inflation killer. Absolutely. But lower tax rates helped spur growth while Volcker brought down the money supply and stabilized the dollar. In fact, gold basically declined through the whole period, while stocks went up. Government debt held by the public did increase $2.4 trillion. But household wealth jumped $32 trillion.

Incidentally, budget spending as a share of GDP declined during the whole period, from near 24 percent to around 18 percent. Much of that was during the Clinton years, when the president worked with the Gingrich Congress. And a lot of the spending restraint came from the peace dividend after the Soviets folded and defense spending was cut.

Now, Stockman is more on target when he says Bush and the GOP overspent and created new entitlements. But blaming Bush’s tax cuts for the Great Recession and for dropping revenues to 15 percent of GDP is utter poppycock. Of course, Obama is overspending even more, with still more entitlements.

The truth is that spending on entitlements and a stimulus that didn’t really work has made for some truly horrible long-term debt projections. So let’s address the spending instead of jacking up tax rates.

And let’s not forget that tax rates are coming down around the world, both for individuals and businesses. High tax rates in the U.S. will cause us to lose the global race for capital.

At some point the question of taxes is really an issue of economic freedom. Let people keep more of what they earn. Marginal tax rates produce huge incentive effects for work, investment, and risk. Higher tax rates undermine economic growth and entrepreneurship. So let’s go for tax reform, with flatter rates and a broader base that gets rid of unnecessary deductions, credits, exemptions, loopholes, and special-interest subsidies.

The goal of policy should be to limit spending and taxes.

Now, I really do agree with Stockman when he fingers the Fed’s erratic stop-and-go monetary policy over the past ten years. Re-linking the dollar to gold or some commodity standard to impose financial and trade discipline is a very good idea. Putting limits on financial leverage is another good idea.

But I would say to my former boss Dave Stockman: You know there’s a spending problem. Let’s tackle that without crippling the economy.

© Creators Syndicate Inc.

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