Initial reactions to the appointment of John Snow as Treasury secretary missed the point entirely. One fellow was quoted saying Mr. Snow is little more than a clone of Paul O’Neill, with a matching resume.
Really? Mr. O’Neill has a bachelor’s degree in economics and a master’s in public administration (bureaucracy), while Mr. Snow has a Ph.D. in economics and a law degree. John Snow is well qualified to participate in the formulation of policy, not just to be a better salesman for policies that others design. He will prove a more effective communicator than his predecessor because he is more likely to know what he is talking about.
Efforts to downplay differences between Mr. Snow and Mr. O’Neill were matched by efforts to ignore differences between Mr. Snow and Stephen Friedman, the newly appointed director of the National Economic Council. Mr. Friedman’s ties to the Concord Coalition tainted him as someone likely to be more obsessed with future budget estimates than with current economic reality. A Wall Street Journal story, however, went out of its way to stuff Mr. Snow and Mr. Friedman into that same box. The headline screamed, “Fight brews over new tax cuts: Supply‐siders fear new fiscal advisers will bolster deficit hawks.” The story claimed, “Both have strong credentials as deficit fighters, but limited track records as tax cutters.”
If the authors had done minimal homework, they might have discovered that in 1995–96, John Snow was an enthusiastic member of Jack Kemp’s National Commission on Economic Growth and Tax Reform. As the research director for that distinguished group, I had ample opportunity to witness Mr. Snow’s views on tax reform and have several technical discussions with him. Whatever his views may be on “tax cuts” in the Keynesian sense — policies whose primary objective is to reduce federal revenue — John Snow clearly understands the importance of an investment‐friendly tax system that keeps marginal tax rates to a minimum.
The Journal article went on to say that “early next year, Mr. Bush plans to introduce an economic growth package with a price tax of between $250 and $300 billion over 10 years.” That is an unacceptable way to describe such policies as bringing the scheduled reduction in tax rates forward to 2003 or cutting the tax on dividends to 20 percent. It is one thing to propose better tax policies that may or may not bring in less revenue and quite another to suggest that the reason those policies are better is because they have a large “price tag.” Measuring policies by their assumed effect on budget deficits is Keynesian theology, not supply‐side analysis.
That same article and an adjacent column by CNBC Washington bureau chief Alan Murray alluded to CBO deficit estimates prepared for Sen. George Voinovich, Ohio Republican, as bait for gullible journalists. Mr. Murray claimed the CBO’s projection of a $500 billion surplus in 2012 “was based on a cathedral of unrealistic assumptions. Make the tax cuts permanent, as Mr. Bush has requested, and assume spending continues to grow at the rate of the past two years, and that $500 billion deficit becomes a $500 billion deficit.” The author apparently hoped to make it sound as though avoiding a $500 billion deficit is critically dependent on reneging on the modest 2002–2006 reductions in tax rates in 2010, and restoring a 55 percent estate tax.
Howard Gleckman at BusinessWeek played a similar game, claiming making 2001’s rate reduction permanent would be a “recipe for ruin putting Washington on a starvation diet.” Yet the CBO figures show that making “permanent” all the tax reduction now scheduled to be repealed in 2010 would still leave the budget in surplus by $294 billion in 2012.
The phantom “$500 billion deficit” that Mr. Murray refers to has nothing to do with tax cuts and everything to do with assuming that discretionary spending — mainly defense — keeps growing indefinitely at the astonishing rate of 8.5 percent a year. At that rate, such spending would double every 8 years. That may be Mr. Gleckman’s idea of putting Washington on a starvation diet, but it is my idea of an unsustainable trend.
The Treasury Department’s Office of Economic Policy just released a nifty graph showing that “periods of high federal spending on goods and services were associated with periods of relatively lower private investment.” Government consumption, mostly salaries, increased by 7.1 percent in 2001 and by 11.7 percent over the past four quarters. That bipartisan spending spree has been a major drag on the weakest link, business investment. The renewed hysteria about deficits is a deliberate distraction.
Back in 1987, Nixon’s former Commerce Secretary Peter G. Peterson wrote a gloomy tome for Atlantic Monthly calling me a “supply‐side guru” because I have long denied that budget deficits have any of the effects that Mr. Peterson and other Concord Coalition zealots pretend they have. Budget deficits do not cause “twin” trade deficits, reduce national savings or raise long‐term interest rates. But budget deficits also do not “stimulate demand” or “jump‐start” the economy. Government borrowing is just like any other borrowing — sometimes useful in hard times or to finance long‐term projects but never a free lunch. Runaway spending, on the other hand, is a drag on the economy regardless how it is financed.
John Snow grasps the importance of curbing federal spending, as do Budget Director Mitch Daniels and Council of Economic Advisers Chairman Glenn Hubbard. But all these gentlemen also understand very well the huge potential economic benefits of making the tax system friendlier to productive effort, investment and entrepreneurship. Noisy apologists for overpriced government who hoped they could dismiss supply‐side economics with a bit of rude ridicule are in for another big surprise.