Reagan Insider Describes Supply-Side Economics

DAVID STOCKMAN, The Triumph of Politics: Why the Reagan Revolution Failed (1986)

Reagan’s inner circle included David Stockman, who served as the director of the Office of Management and Budget and was a key player in budget negotiations with Congress. Stockman’s conservative credentials included his advocacy of supply-side economics, the theory that lowering such barriers to wealth production as taxes and government regulations results in higher government revenues and cheaper goods and services. Wealth, so the theory goes, trickles down to benefit even those at the lower ends of the economic scale. Opponents challenged so-called Reaganomics and pointed out its failures by noting the snowballing federal deficit.

In December 1976, I tried to secure a seat on the House Appropriations Committee and, not surprisingly, failed. The old bulls in the GOP hierarchy take a dim view of awarding seats on such powerful committees to mere freshmen.

If I had gotten a seat on the Appropriations Committee, I might have developed a more realistic attitude toward politics. The Appropriations Committee is the cash register of the Second Republic. Sitting there, day by day, as the politicians greased every squeaking wheel, might have shown me that my anti-political, anti-welfare state ideology would never succeed.

Instead, I landed on the Commerce Committee, and it reinforced my whole critique of Big Government and economic statism. In those early years of the Carter presidency, the Commerce Committee was the front line in the war between the statists and the anti-statists, between those who wanted government to dominate every aspect of American life and those who didn’t.

In the spring of 1977, Carter unveiled his “moral equivalent of war” with great gravity and piousness: the National Energy Plan. It was a plan to regulate every BTU that flowed through the U.S. economy, and by marvelous coincidence its acronym, NEP, exactly matched Lenin’s 1921 plan to rescue the Russian economy from the anarchy wrought by “workers’ soviets.”

Other plans followed: environmental regulations whereby every by-product of technological progress was to be declared carcinogenic; air bags; windfall profit taxes — innumerable ways to regulate how Americans lived and worked. Invariably these statist initiatives had been concocted by some arrogant, self-important appointee possessed of a degree in English and contempt for free enterprise. One day I listened, incredulous, as an obnoxious troll of this genre pounded the witness table and demanded that Congress delegate to him absolute, open-ended power to establish energy efficiency standards for all American-made appliances.

The “moral equivalent of war” and its attendant issues was really a front for state control of resources and the economy. It was a neo-Malthusian1 ideology that held that we were running out of everything and that only the state could be trusted to hoard our diminishing supplies. We were exhausting our resources, and by using what resources we had, we were making the world unlivable. Capitalism was poisoning the earth with chemical time bombs.

Neo-Malthusianism was our term, of course; the Carter Administration preferred to speak of the “era of limits.” The current glut of oil on the world market is eloquent refutation of how idiotic their position was, but at the time they were prosecuting their views with a determination befitting the smallest of their minds. The New Deal had given birth to the statist impulse; during the Great Society it had gathered momentum; with the “Era of Limits” it had become an imperative.

In the trenches of the Commerce Committee, I did battle with this monster every day, hacking away at it with a sword forged in the free market smithy of F. A. Hayek.2 I became a militant anti-neo-Malthusian.

As such, I was one of the very few in the chamber of the politicians. To most of them, the false threat of depletion and environmental degradation was a boon. It kept them busy passing laws, meddling everywhere, and throwing their weight around from coast to coast.

But there was one other of my kind. I had met Congressman Jack Kemp of New York while working for John Anderson.3 Now he was looking for allies on behalf of a new theory of economics that meshed perfectly with my own still emerging views. It was called “supply-side” economics, in stark contrast to the “demand side” that congress had so steadfastly defended. We lived in an era not of limits but of limitless possibilities. Capitalism was endlessly resourceful. If people had enough incentives, prosperity was inevitable. …

[T]he supply-side doctrine offered a plausible premise for idealism amidst the prevailing cynical and pessimistic ethos of the time. The latter had been perfectly captured in Carter’s politically fatal “malaise” formulation. It was an epigrammatic, if unwitting, expression of all the muddled and destructive notions of scarcities, catastrophes, closing frontiers, economic limits, incurably embedded inflations, and unavoidable financial breakdowns that had by then come to enthrall his administration and most of official Washington.

The new supply-side gospel seemed at the time to be a fair bet for the monumental task of reversing this trend. As we had formulated it, the supply-side synthesis encompassed vastly more than a single nostrum — the Kemp-Roth 30 percent income tax cut. … [W]e viewed the supply-side doctrine as all-encompassing. It implied not merely a tax cut but a whole catalogue of policy changes, ranging from natural gas deregulation, to abolition of the minimum wage, to repeal of milk marketing orders, to elimination of federal certificates of “need” for truckers, hospitals, airlines, and anyone else desiring to commit an act of economic production. It even encompassed reform of the World Bank, and countless more. …

As an intellectual and moral matter, this comprehensive supply-side doctrine had a powerful appeal. It offered a rigorous standard of justice and fairness, and provided a recipe for economic growth and prosperity — the only viable way to truly eliminate poverty and social deprivation. But its elegant idealism was hostile to all the messy, expedient compromises of daily governance.

This was made dramatically evident when, toward the end of my second term, the Chrysler Corporation demanded that the federal government rescue it from its own mismanagement. The action was justified by an army of lobbyists who represented every imaginable local interest group and no discernible policy principle.

The notion that the federal government should, on demand, refinance inefficient, bankrupt private enterprises was so loathsome to me that I resolved not only to vote against it, but to take the lead in trying to stop it. So I took the floor of the House to speak out against this abomination that was about to pass. I preached to the politicians my most fevered anti-statist sermon. …

I spoke of economic doctrine but did not manage to see a stark, dramatic truth. The Chrysler bailout passed by a margin of over one hundred votes because the impacted voters wanted it. And if the House of Representatives would go for the raw, unprincipled expediency of that measure, why should I have assumed, only a year later, that the institution, and the electorates it represented, would accept the kind of sweeping austere ideological blueprint the Reagan Revolution called for? I finally had my Grand Doctrine, but it completely overwhelmed my grasp of what the politics of American governance was all about.

David Stockman, The Triumph of Politics: Why the Reagan Revolution Failed (New York: Harper & Row, 1986), 37–40, 42–43.

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