Lloyd Bentsen Has The Soul Of A Supply Sider

Senator Lloyd Bentsen, Treasury Secretary-designate in the Clinton Administration, was one of the six congressional leaders of the supply-side revolution. On Apr. 23, 1980, he told the U.S. Senate: "The Joint Economic Committee, which I chair, has tried during the past two years to move our nation's economic policies along the paths suggested by supply-side theories, emphasizing the need to stimulate savings and investment in order to improve productivity, get more goods on the shelves, and reduce inflation and fight unemployment at the same time."

In his remarks, Bentsen praised me for my work "as a Hill staff member" in formulating supply-side ideas into policy, and he inserted my Wall Street Journal column on supply-side economics into the Congressional Record.

POOR STRATEGY. Since that time there has been good news and bad news. The supply-side policy that Bentsen advocated achieved exactly what he said it would: Stagflation is gone, and inflation was cured during a record economic expansion that created 18 million new jobs. Tragically, to give President Reagan a political victory, White House Staff Chief James A. Baker III made supply-side economics a partisan issue by allying with Southern Democrats in order to freeze the House Democratic leadership out of the tax bill.

This proved to be a strategic error because it denied the Democrats any stake in the success of the new policy. Forced to fight for their political life against a successful economic policy, Democrats, with help from the anti-Reagan Republican Establishment, used the budget deficit to brand the supply-side policy a failure. In effect, a quicker-than-expected victory over inflation was transmogrified into a deficit defeat. The unanticipated disinflation shriveled nominal gross national product relative to forecast and resulted in unexpected budget deficits. However, the Democrats and their acolytes in the media falsely claimed that the Reagan Administration had predicted the tax cut would pay for itself and that the deficits were evidence of Reaganomics' failure. This bum rap has been ground into the public's consciousness for more than a decade.

Baker's error in politicizing the policy was gratuitous. Supply-side economics had gained much of its credibility from Senate Democrats: Sam Nunn persuaded the Senate to pass the Kemp-Roth bill combined with spending limits in the autumn of 1978. Russell Long's Finance Committee reported out a supply-side tax cut during the 1980 Presidential campaign, and Bentsen turned the Joint Economic Committee--which had previously been a forum for tax-and-spend policy--into a bipartisan advocate of supply-side economics.

At a 1980 press conference introducing the committee's annual report, Bentsen proudly announced that "the JEC is on the cutting edge of a new approach to economic policy. In 1979, we were a pioneer of the concept of supply-side economics." Bentsen's interest changed the focus of econometric models used in policymaking. In May, 1980, Bentsen set the tone for JEC hearings on the models when he said: "For too long we have focused on short-run policies to stimulate spending, or demand, while neglecting supply. Consequently, demand has been overstimulated and supply has been strangled in a noose of disincentives woven of unnecessary regulations, taxation, and inflation..." Bentsen warned that "if we continue to focus solely on demand policies, we risk the nation's economic future."

The economic-model builders got the message. Otto Eckstein, a Harvard University professor who was proprietor of the Data Resources Inc. model, gushed that supply-side economics "is the most exciting thing I'm doing at the moment. The world is about ready for assimilating supply-side ideas."

LAUGHABLE. In 1980, Bentsen affirmed that he was not going to back away from supply-side economics. "I'm going to stay with it," he assured The New York Times. He was convinced that Phillips curve trade-offs between inflation and employment resulted from an incorrect policy mix and that it was not necessary to fight inflation with unemployment and vice versa.

If Bentsen can extract himself from the rhetorical war of the past decade, he has a golden opportunity to recover George Bush's supply-side fumble and make Bill Clinton, like Ronald Reagan, a two-term President. Pulling in the opposite direction will be Laura D'Andrea Tyson, the designated chairwoman of Clinton's Council of Economic Advisers, who believes that "there is no relationship between the taxes a nation pays and its economic performance." In 1980, Bentsen and his fellow Democrats on the JEC would have laughed such an uninformed statement out of the committee room.

Bentsen helped restructure federal economic policies in favor of private incentives and away from public spending. We only got halfway there. Incentives have improved, but public-spending growth continues to be excessive. It is up to Bentsen to finish the job that he began in 1979, when he declared against conventional pump-priming policies, such as the public-works spending that the political left wing and special interests are trying to foist upon the Clinton Administration.

Before it's here, it's on the Bloomberg Terminal.