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Working with Jack Kemp

Jack French Kemp passed away on May 2 at 73 years of age.  Kemp won many battles, but lost his fight with cancer.

He had an improbable career.  A bottom-tier professional football pick (203rd) who was cut from five teams, Kemp became a seven-time all-star quarterback and led the Buffalo Bills to two league championships.

As a junior member of the Republican minority in the House of Representatives, Kemp led a revolution in economic policy.

I went to work for Jack in the summer of 1975, the first year of his third term in the House.  I had been interviewing the Ford White House, which wanted to do something about capital formation but could not find the courage or determination to take on the issue.

Capital formation was a difficult issue.  Keynesian economists believed that capital formation was driven by consumer demand.  If more capital was needed, the answer was to rev up consumer demand with larger budget deficits, and companies would invest to meet the increased demand.

Conservative economists and Wall Street believed that investment was determined by the interest rate.  According to their theory, bigger deficits would drive up the interest rate and curtail investment.  Conservatives and Wall Street wanted balanced budgets.

Neither economists nor Congress appreciated that capital formation was an important issue.  Inflation had reared its ugly head and was destroying the real value of the depreciation allowances.  Depreciation was drawn out over so many years that companies could not recover the value of their capital investment.

Obviously, Congress was not going to cut any spending programs to make room for faster depreciation. Thus, the Ford White House understood that capital formation would have no support from liberals or conservatives.  Moreover, any such initiative would be demonized as handouts to business and “the rich.”  The result would be political damage for President Ford without any gain in capital formation, a Quixotic campaign.

The White House passed me off to Jack Kemp.  When I arrived, he already had a capital formation bill, the work of supply-side economist, Dr. Norman Ture.

Kemp’s capital formation bill was renamed the Jobs Creation Act. Among its provisions was “a reduction of the income tax rate graduation,” that is, a reduction in marginal tax rates.

Although a good speaker, Jack was in danger of opponents on both sides of the political aisle defining his issue as “trickle-down economics” or “voodoo economics” before he could get the new point across.  He asked me to provide an explanation that would raise the awareness of his colleagues and the general public of the problem and the solution.

As this was before Jude Wanniski and the Wall Street Journal had discovered us, I wrote an article for Kemp that appeared in the Sunday Washington Star on September 21, 1975.  The article was a fundamental challenge to Keynesian policymakers, because it emphasized that fiscal policy works by affecting incentives rather than consumer demand.  The article was the opening shot of a revolution in economic policy, and it established Kemp as the leader.

Keynesian policymakers understood fiscal policy as a tool for managing demand. If unemployment was the problem, a tax cut or an increase in government spending would increase demand and, thereby, employment.  If inflation was the problem, a tax hike or a surplus in the government’s budget would reduce demand and cool down inflation.

Supply-side economics added to the knowledge of economists by establishing that fiscal policy affects supply. Marginal tax rates determine important relative prices that govern the choice at the margin between work and leisure and saving and consumption.

High marginal tax rates make leisure cheap in terms of foregone current income, and they make current consumption cheap in terms of foregone future income. Thus, the higher the tax rates, the less the supply of productive inputs.

Low tax rates make leisure expensive in terms of foregone current income, and they make current consumption expensive in terms of foregone future income.  The lower the tax rates, the greater the supply of productive inputs.

With their fixation on managing demand, Keynesian policymakers did not understand that the combination of high demand and high tax rates resulted in stagflation.
Pumping up consumer demand while high tax rates restricted the supply of productive inputs resulted in demand increasing relative to supply.  The result was rising prices.

Keynesian policymakers believed that economic growth had to be “paid for” by accepting higher inflation.  But the trade-off worsened and finally broke down.  Milton Friedman summed up the demise of the trade-off between employment and inflation with the phrase, “more inflation, more unemployment.”

The breakdown of the Keynesian model opened the door to the supply-side revolution.

Kemp’s Jobs Creation Act addressed the problem.  However, as a collection of capital formation measures, it appeared business-oriented, which did not open new political space to Republicans.  In a competitive political environment in which capital formation was not generally perceived as a problem, the Jobs Creation Act was open to demonization for expanding “loopholes for special interests.”

Kemp, being a natural leader, had already shifted the focus from capital formation to jobs.  The new congressional budget process provided the forum from which to challenge the demand-management policy.  I moved from Kemp’s staff to become the first chief economist, Republican staff, House Budget Committee, and the Kemp-Roth bill was born.

It took courage for Kemp to take on the economic establishment.  He succeeded because he was intelligent and sincere.  Supply-side economics was not a political gimmick.  It was the answer to an economic policy that had put brakes on employment but not on inflation.  Americans had given up hope that the economy could grow without rising inflation.  Kemp led an economic restoration that lasted until offshoring undermined American job growth.

Working with Jack was a pleasure.  He was not egocentric or self-important.  He was a colleague rather than a boss.  He didn’t ride herd. He was forgiving and loyal to his aides. He could laugh at himself.  He believed in persuasion and relied on good will.

Leaders of Jack’s quality do not often appear.  We should all mourn his passing.

PAUL CRAIG ROBERTS was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

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Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format. His latest book is The Neoconservative Threat to World Order.

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