[This article is excerpted from The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics by Jonathan Chait.]

American politics has been hijacked by a tiny coterie of right-wing economic extremists, some of them ideological zealots, others merely greedy, a few of them possibly insane. The scope of their triumph is breathtaking. Over the course of the last three decades, they have moved from the right-wing fringe to the commanding heights of the national agenda. Notions that would have been laughed at a generation ago--that cutting taxes for the very rich is the best response to any and every economic circumstance or that it is perfectly appropriate to turn the most rapacious and self-interested elements of the business lobby into essentially an arm of the federal government--are now so pervasive, they barely attract any notice.

The result has been a slow- motion disaster. Income inequality has approached levels normally associated with Third World oligarchies, not healthy Western democracies. The federal government has grown so encrusted with business lobbyists that it can no longer meet the great public challenges of our time. Not even many conservative voters or intellectuals find the result congenial. Government is no smaller--it is simply more debt-ridden and more beholden to wealthy elites.

It was not always this way. A generation ago, Republican economics was relentlessly sober. Republicans concerned themselves with such ills as deficits, inflation, and excessive spending. They did not care very much about cutting taxes, and (as in the case of such GOP presidents as Herbert Hoover and Gerald Ford) they were quite willing to raise taxes in order to balance the budget. While many of them were wealthy and close to business, the leaders of business themselves had a strong sense of social responsibility that transcended their class interests. By temperament, such men were cautious rather than utopian.

Over the last three decades, however, such Republicans have passed almost completely from the scene, at least in Washington, to be replaced by, essentially, a cult.

All sects have their founding myths, many of them involving circumstances quite mundane. The cult in question generally traces its political origins to a meeting in Washington in late 1974 between Arthur Laffer, an economist; Jude Wanniski, an editorial page writer for The Wall Street Journal; and Dick Cheney, thendeputy assistant to President Ford. Wanniski, an eccentric and highly excitable man, had until the previous few years no training in economics whatsoever, but he had taken Laffer's tutelage.

His choice of mentor was certainly unconventional. Laffer had been on the economics faculty at the University of Chicago since 1967. In 1970, his mentor, George Shultz, brought him to Washington to serve as a staffer in the Office of Management and Budget. Laffer quickly suffered a bout with infamy when he made a wildly unconventional calculation about the size of the 1971 Gross National Product, which was far more optimistic than estimates elsewhere. When it was discovered that Laffer had used just four indicators to arrive at his figure--most economists used hundreds if not thousands of inputs--he became a Washington laughingstock. Indeed, he turned out to be horribly wrong. Laffer left the government in disgrace and faced the scorn of his former academic colleagues yet stayed in touch with Wanniski, whom he had met in Washington, and continued to tutor him in economics.

Starting in 1972, Wanniski came to believe that Laffer had developed a blinding new insight that turned established economic wisdom on its head. Wanniski and Laffer believed it was possible to simultaneously expand the economy and tamp down inflation by cutting taxes, especially the high tax rates faced by upper-income earners. Respectable economists-- not least among them conservative ones--considered this laughable. Wanniski, though, was ever more certain of its truth. He promoted this radical new doctrine through his perch on The Wall Street Journal editorial page and in a major article for The Public Interest, a journal published by the neoconservative godfather Irving Kristol. Yet Wanniski's new doctrine, later to be called supply-side economics, had failed to win much of a following beyond a tiny circle of adherents.

That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And, if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points--zero taxes and zero revenue, 100 percent taxes and zero revenue--Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.

At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve--that is, that rates were then high enough that tax cuts would produce higher revenue....

Jason Blake Keuter - 9/21/2007

Once you dispose of the underlying premise that equal incomes is a sound measure of economic performance, this article is pure blather. Once you question the premise that some people in society have the right to confiscate the property of other people through taxation, this article rests on nothing. Once you realize that the inequality is an unequal sharing of blessings but those at the bottom still have a blessings they would never have in an economy of "equality", this article represents an evil ideology that denies people that can improve their existence the right to do so. Last, once you realize that laissez-faire capitalism is JUST, that no individual who cannot produce can accuse one who can of selfishness and then proceed to take a "share" of that person's production and pretend that there exists any moral code that can justify this act, then this article is morally wrong. Last, there is no NATONAL INCOME that should be split into "FAIR SHARES". I want my fair share of the author's car. We now have a time share agreement. I get it on weekends. I want my fair share of the author's children's college savings. I want my fair share of the author's heating oil and wardrobe. Why don't we just cut to the chase? I want my fair share of the author's income!

If one is going to advocate income redistribution, at least be honest about it. Our wage statements should list WHO are taxes are going to, so we can call them up and ask them what they're doing with their share of the national income. Then I can write my Congressman and explain that I would use the income to do something more in the NATION'S INTEREST and hope that he would channel it back to me - - once he got enough votes in the House and Senate and had the President's support. Since that won't work, I guess I'll have to spend all my time trying to find people like me and form an interest group to campaign for the change.....


Or we could just cut the bull and cut my taxes entirely.

Edwin Moise - 9/14/2007

Chait's assertion that the Soviet Union had a "100 percent tax rate" is not true. Indeed it strikes me as bizarre. The Soviet enconomy had three main components.
There was a rather small private sector, where people conducted economic activities for personal profit. Some of this was illegal. I doubt there was any formal taxation of black market actities. Bribes collected by policemen would not have approached 100 percent, and would not have been taxes by any reasonable definition. I don't know the tax rate on the legal private sector, but my impression is that from the 1950s through the 1970s, at least, it was pretty low.
There were the collective farms, in theory owned by the farmers, which paid a tax rate which was for the most part (with some ugly exceptions in particular areas in the early years) far enough below 100 percent to leave them with enough of their income to continue functioning.
And then there were the state-owned enterprises. Some of their income was used to pay their work force, some for raw materials and equipment, and some was passed to the government that owned them.
What I believe Chait has done was a) treat the state-owned sector as if it had represented the whole of the Soviet economy, and b) decide that a state-owned factory was a part of the government, and that the entire income of the factory was therefore government income, and that all government income was by definition tax, making the tax rate on the factory 100 percent.
Chait's reference to a "100 percent tax rate" is not a valid description of any one of the three sectors of the Soviet economy.