Those Wacky Editors at the Wall Street Journal Strike (Out) Again
According to the editorial writers at the Wall Street Journal, "The Senate dealt America's wartime economy a blow ... by voting to chop President Bush's tax cut proposal by more than half, to a maximum of $350 billion over 10 years."
So why did the Senate act? "The excuse, at least for the TV cameras, was that America can't pay for a war and cut taxes at the same time."
The Journal went on to claim: "We've heard some whoppers out of Washington, but this one deserves its place in history." The editors then pounced on a statement by Montana Democrat Max Baucus, who claimed that the United States has "never" cut taxes during a war.
Oh really? asked the editors. Never? What about during the American Revolution. Poor Baucus "forgot" "that America's first war more or less started over the issue of taxes."
Fact: American colonists objected to taxes imposed by the faraway British government to pay for the war against the French known as the Seven Years' War. Under the Articles of Confederation colonial leaders repeatedly tried to raise taxes during the war to pay for General Washington's army, which as the editors no doubt remember from their history books, was strapped for cash at places like Valley Forge. Late in the war the government found it was so short of funds it could not even pay for the support of our ministers abroad."In 1781, desperate for revenue to pay its ministers abroad ... and the interest due on Revolutionary debts, the Congress tried to impose a 5 percent tariff on exports," according to economics historian Stanley Lebergott. Unfortunately, under the Articles unanimity was required for tax increases, and "Rhode Island quashed the attempt." The Constitution was adopted to remedy this glaring defect in the Articles.
Next, the Journal cites the Cold War, "which was finally won in the 1980s with a combination of Ronald Reagan's tax cut to spur the economy and defense buildup to show the Soviets they couldn't win." The editors forget that after Reagan cut taxes in 1981 to spur the economy, he subsequently approved more than half a dozen tax increases to stem the flow of the red ink which David Stockman accurately predicted would breach the walls of the budget for years and years.
The editors also cite the "experience of the 1960s, when JFK cut taxes and spurred a boom that helped finance war in Vietnam as well as the Great Society, at least until LBJ decided he had to 'pay for' the war by passing his growth-inhibiting 'surtax.'" Fascinating--and utterly misleading. Historians are agreed that Johnson's mistake was not that he increased taxes but that he did not increase them enough to pay for the war. According to Herbert Stein (R-Nixon/Ford), "The decision to cut taxes was made in 1962 in response to the fear that the economy was going into recession. But by 1963 when the cut was being debated the economy was recovering. Indeed, there was some suggestion that the cut was no longer needed." By 1966 LBJ's economic advisors wanted a tax increase; Johnson, worried about the politics of a tax hike, resisted. Though he subsequently approved a surcharge, by then the inflationary fires stoked by Vietnam were out of control, ultimately leading in the 1970s to wage and price controls under Nixon, stagflation under Ford, and recession under Carter.
The Journal ended its editorial in favor of tax cuts with a quote from White House spokesman Ari Fleischer, who "cited JFK on this point, from 1962 at the height of the Cold War, and the words are worth reprinting: 'We shall, therefore, neither postpone our tax cut plans, nor cut into essential national security programs. This Administration is determined to protect America's security and survival. We are also determined to step up its economic growth. I think we must do both.' "
Perhaps the Journal instead should be looking to Herb Stein for economics wisdom. By 1966, he noted, LBJ "recognized that the Vietnam War, if it continued, would require higher taxes." But a slump in the economy persuaded him that the imposition of new taxes should be deferred, with the consequence that the government "went into a large deficit, about 2 percent of GNP."
His officials knew that the Johnson approach was counterproductive. "But in public they supported his decision." (The Federal Reserve then abetted Johnson by loosening monetary policy, triggering inflation while undermining the fundamentals of the economy.)
So Johnson was right and his advisors were wrong? That's an interesting way to look at things.
Sources:
Herbert Stein, Presidential Economics (1985).
Stanley Lebergott, The Americans: An Economic Record (1984).