The Accidental Theorist (4 page)

Fifteen years ago, just after François Mitterrand became president of France, I attended my first conference in Paris. I can’t remember a thing about the conference itself, although my impressions of the food and wine—this was my first adult visit to the city—remain vivid. The only thing I do remember is a conversation over dinner (
canard aux olives
) with an adviser to the new government, who explained its plan to stimulate the economy with public spending while raising wages and maintaining a strong franc.

To the Americans present this program sounded a bit, well, inconsistent. Wouldn’t it, we asked him, be a recipe for a balance-of-payments crisis (which duly materialized a few months later)? “That’s the trouble with you Anglo-Saxon economists—you’re too wrapped up in your theories. You need to adopt a historical point of view.” Some of us did, in fact, know a little history. Wasn’t the plan eerily reminiscent of the failed program of Léon Blum’s 1936 government? “Oh no, what we are doing is completely unprecedented.”

The French have no monopoly on intellectual pretensions, or on muddled thinking. They may not even be more likely than other people to combine the two. There is, however, something special about the way the French political class discusses economics. In no other advanced country is the elite so willing to let fine phrases overrule hard thinking, to reject the lessons of experience in favor of delusions of grandeur.

To an Anglo-Saxon economist, France’s current problems do not seem particularly mysterious. Jobs in France are like apartments in New York City: Those who provide them are subject to detailed regulation by a government that is very solicitous of their occupants. A French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant. New York’s pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live. France’s policies have produced nice work if you can get it. But many people, especially the young, can’t get it. And, given the generosity of unemployment benefits, many don’t even try.

True, some problems are easy to diagnose but hard to deal with. If George Pataki can’t end rent control, why should we expect Jacques Chirac to cure Eurosclerosis? But what is mysterious about France is that as far as one can tell, absolutely nobody of consequence accepts the obvious diagnosis. On the contrary, there seems to be an emerging consensus that what France needs is—guess what?—more regulation. Socialist leader (and now prime minister) Lionel Jospin’s idea of a pro-employment policy is to require employers to pay workers the same money for fewer hours. Even conservative leader Philippe Séguin, regarded as an iconoclast by French standards because he has questioned the sacred goal of European monetary union, thinks that one way to add jobs is to ban self-service pumps at gas stations.

Beyond more of the same, what does the French elite see as the answer to the nation’s problems? For more than a decade its members have sought salvation in the idea of Europe—that is, a unified European economy (under French leadership, of course), with common regulations and a common currency. In such a continental market, they imagine, France can once again prosper.

Now a unified European market is a pretty good idea. There is even a reasonable case for unifying Europe’s currencies—although there is also a good case for doing no such thing. (There is a whole industry of people—eurologists?—who make a living by debating that issue.) But to acknowledge the potential virtues of European economic integration risks missing the essential fatuousness of the whole project. France’s problem is unemployment (currently almost 13 percent). Nothing else is even remotely as important. And whatever a unified market and a common currency may or may not achieve, they will do almost nothing to create jobs. Think of it this way: Imagine that several cities, all suffering housing shortages because of rent control, agree to make it easier for landlords in one city to own buildings in another. This is not a bad idea. It might even slightly increase the supply of apartments. But it is not going to get at the heart of the problem. Yet all the grand schemes for European integration amount to no more than that.

Indeed, in practice, the dream of European unity has actually made things worse. If you are going to have a common currency, everything we know suggests you should follow what Berkeley’s Barry Eichengreen calls the Nike strategy. But instead of just doing it, European nations agreed to a seven-year transition period during which they would be required to meet a complex set of criteria—mainly to reduce their budget deficits while keeping their currencies strong.

There is nothing wrong with balancing your budget. In fact, European nations need to do some serious fiscal housecleaning. And as the happy experience of America under Bill Clinton has shown, it is quite possible to reduce the deficit and increase employment at the same time. All you need to do is cut interest rates, so that private spending takes up the slack. But you can’t cut interest rates if you are obliged to keep your currency strong. So the Maastricht Treaty (the blueprint for European currency union) ensured that the budget-cutting it required would be all pain and no gain. Nobody can make a precise estimate, but a guess is that without Maastricht, France’s unemployment rate might be two or three percentage points lower than it is.

While some French politicians have been willing to say nice things about budget deficits, however, nobody seems willing to challenge the dogma that European integration is the answer. Even Séguin the iconoclast declares that “the fight against unemployment is inseparable from the realization of the grand European design.” But let us not blame French politicians. Their inanities only reflect the broader tone of economic debate in a nation prepared to blame its problems on everything but the obvious causes. France, say its best-selling authors and most popular talking heads, is the victim of globalization—although adroit use of red tape has held imports from low-wage countries to a level far below that in the United States (or Britain, where the unemployment rate is now only half that of France). France, they say, is the victim of savage, unrestrained capitalism—although it has the largest government and the smallest private sector of any large advanced country. France, they say, is the victim of currency speculators, whose ravages President Chirac once likened to those of AIDS.

The refusal of the French elite to face up to what looks like reality to the rest of us may doom the very European dreams that have sustained the nation’s illusions. After this last election it is clear that the French will not be willing to submit to serious fiscal discipline. Will the Germans still be willing to give up their beloved deutsche mark in favor of a currency partly managed by France? It is equally clear that France will not give up its taste for regulation—indeed, it will surely try to impose that taste on its more market-oriented neighbors, especially Britain. That will give those neighbors—yes, even Tony Blair—plenty of reason to hesitate before forming a closer European Union.

But if it turns out that Chirac’s political debacle is the beginning of a much larger disaster—the collapse of the whole vision of European glory that has obsessed France for so long—we can be sure of one thing: The French will blame it all on someone else.

S
ome of my friends tell me that I should spend more time attacking right-wingers. After all, while the economic nonsense of the right may be no worse than that of the left, it is a fact of life that any idea appealing to the prejudices and interests of the wealthy is guaranteed a powerful constituency. Supply-side economics is a crank doctrine pure and simple, yet it has been the official ideology of the Republican party for seventeen years.

The problem is finding things to say. Supply-siders never tire of proclaiming that taxes are the root of all evil, but reasonable people do get tired of explaining, over and over again, that they aren’t. My personal experience is that once you have stated the main case against supply-side economics a few times, diminishing returns set in; after that you must find other angles of approach.

One such angle, of course, is to ask why anybody believes this stuff in the first place; I begin here with an essay called “The Virus Strikes Again,” originally written just after Bob Dole’s presidential campaign decided to run on a supply-side platform.

Another apparent opportunity to say something useful about supply-side economics came in the summer of 1997, when even conservatives found themselves asking how the remarkable prosperity of the economy could be reconciled with the grim warnings of their ideologues only a few years earlier. In fact, the new op-ed page editor of the
Wall Street Journal
commissioned me to write a piece on the subject, which I duly did. What was he thinking? For that matter, what was I thinking? As surely as night follows day, the supply-sider editor, Robert Bartley, intervened to kill the piece, accusing me of “intellectual dishonesty.” Anyway, the piece is published for the first time here as “Supply Side’s Silly Season.”

Supply-siders are actually most interesting (and self-revealing) when they talk about subjects other than the miraculous effects of tax cuts. It is illuminating, for example, to see how they deal with uncomfortable realities. The third essay here, “An Unequal Exchange,” looks at the contortions that the House majority leader—a former economics professor—is willing to go through in an effort to deny the plain fact that America’s income distribution has become much more unequal in the last twenty years. “The Lost Fig Leaf” is about another piece of conservative mythology, the belief in a thoroughly false picture of what the government actually does with taxpayers’ money. The final essay is about the near-mystical devotion of some conservatives to the gold standard.

Within a few days of presidential candidate Bob Dole’s announcement of an economic plan that relied on the magic of supply-side tax cuts, hundreds of articles were published explaining why the plan wouldn’t work. And there were hundreds more explaining why Dole, whose contempt for people who believe in that kind of magic is a matter of public record, nonetheless chose to accept their program—and chose one of the most prominent believers as his running mate. I have nothing to add to all of that. But it seems to me that the success of the tax cutters in taking over yet another presidential campaign requires a deeper explanation. Why does supply-side economics have such durability?

It should go without saying that the supply-side idea—which is that tax cuts have such a positive effect on the economy that one need not worry about paying for them with spending cuts—does not persist because of any actual evidence in its favor. If you want, any nonpartisan economist can explain to you at length what really happened during the Reagan years, and why you can’t seriously claim his record as an advertisement for supply-side policies. But surely it is enough to look at the extraordinary recent record of the supply-siders as economic forecasters. In 1993, after the Clinton administration had pushed through an increase in taxes on upper-income families, the very same people who have persuaded Dole to run on a tax-cut platform were very sure about what would happen. Newt Gingrich confidently predicted a severe recession. Articles in
Forbes
magazine urged readers to get out of the stock market to avoid the inevitable crash. The
Wall Street Journal
editorial page had no doubts that the tax increase would sharply increase the deficit instead of reducing it. Sure enough, over the next few years the economy created millions of new jobs, the market started setting new records almost every day, and the deficit withered away. I’m not saying that Clinton’s policies led to that result—they accounted for only part of the good news about the deficit, and hardly any of the rest. But the point is that the supply-siders were absolutely sure that his policies would produce disaster—and indeed, if their doctrine had any truth to it, they would have.

Nor, I would argue, do supply-side views spread because they are good politics. True, Ronald Reagan won on a supply-side platform—but one suspects he would have won on almost any platform, and that the taunts of “voodoo economics” actually cost him some votes. Today, the supply-side label is a clear liability. Even promoters of the concept shy away from the label. In 1994, Republican leaders like Gingrich and Dick Armey chose to conceal the extent of their tax-cutting fervor from the voters, who they judged would not trust an economic program based on supply-side assumptions. And the word was that even Republican focus groups—the same groups that were used to craft the Contract with America reacted scornfully to the idea of an election-year tax-cut promise. So why does the supply-side idea keep on resurfacing? Probably because of two key attributes that it shares with certain other doctrines, like belief in the gold standard: It appeals to the prejudices of extremely rich men, and it offers self-esteem to the intellectually insecure.

The support of rich men is not a small matter. Despite its centrality to political debate, economic research is a very low-budget affair. The entire annual economics budget at the National Science Foundation is less than twenty million dollars. What this means is that even a handful of wealthy cranks can support an impressive-looking array of think tanks, research institutes, foundations, and so on devoted to promoting an economic doctrine they like. (The role of a few key funders, like the Coors and Olin foundations, in building an intellectual facade for late twentieth-century conservatism is a story that somebody needs to write.) The economists these institutions can attract are not exactly the best and the brightest. Supply-side guru Jude Wanniski has lately been reduced to employing followers of Lyndon LaRouche. But who needs brilliant, or even competent, researchers when you already know all the answers?

The appeal to the intellectually insecure is also more important than it might seem. Because economics touches so much of life, everyone wants to have an opinion. Yet the kind of economics covered in the textbooks is a technical subject that many people find hard to follow. How reassuring, then, to be told that it is all irrelevant—that all you really need to know are a few simple ideas! Quite a few supply-siders have created for themselves a wonderful alternative intellectual history in which John Maynard Keynes was a fraud, Paul Samuelson and even Milton Friedman are fools, and the true line of deep economic thought runs from Adam Smith through obscure turn-of-the-century Austrians straight to them.

And so it doesn’t really matter whether supply-side economics makes any sense, or even whether it goes down to a crushing electoral defeat. The supply-siders will always have a safe haven in the world of Free Enterprise Institutes and Centers for the Study of Capitalism, outlets for their views in the pages of
Forbes
and the
Wall Street Journal
, and new recruits who never tire of saying the same things again and again. When I was younger I thought that ridicule could eventually bring the whole farce to an end, but now I know better. For once the political pundits were right: Dole’s desperate ploy failed. But while that was the end of him, the supply-siders will be back.

Biologist Richard Dawkins has argued famously that ideas spread from mind to mind much as viruses spread from host to host. It’s an exhilaratingly cynical view, because it suggests that to succeed, an idea need not be true or even useful, as long as it has what it takes to propagate itself. (A religious faith that disposes its believers to become martyrs may be quite false, and lethal to its adherents, yet persist if each martyr inspires others.) Supply-side economics, then, is like one of those African viruses that, however often it may be eradicated from the settled areas, is always out there in the bush, waiting for new victims. I had expected Bob Dole, with his worldliness and sharp wit, to have stronger immunity than most. But weakness in the polls made him vulnerable, and he will never recover.