A supply sider at the Treasury - Sec of the Treasury-designate Lloyd Bentsen

National Review, Feb 1, 1993 by Paul Craig Roberts

I KNOW Lloyd Bentsen, and he's no Nick Brady. Bentsen was one of five senators (the others are Russell Long, Sam Nunn, Bill Roth, and Orrin Hatch) who, along with Representatives Jack Kemp, Clarence Brown, and Marjorie Holt, created the supply-side revolution.

Lloyd Bentsen was born in Mission, Texas, on February 11, 1921, and had already had a long life before I met him in the late 1970s when he became chairman of the Joint Economic Committee. Since its inception in 1947, the JEC had been a mouthpiece for Keynesian demand management.

Chairman Bentsen changed all that in 1979 with the committee's Annual Report. Policy-makers, the report declared, must "alter the policy mix to encourage supply, reduce disincentives, and raise the reward to production." In a pure statement of supply-side theory, the report said: "The greater the tax burden on a factor of production, the smaller the quantity of that factor that will be offered to the market. The greater the tax burden placed on production, the less production there will be."

It was the first unanimous report in twenty years. Even Ted Kennedy and George McGovern signed it, thereby endorsing the supply-side approach that a few maverick Republicans had been advocating.

Bentsen was leading the Democrats to face stagflation--the simultaneous drain on the economy of inflation and unemployment--which had become the overriding economic problem. Keynesians wanted wage and price controls, but supply-siders reasoned that stagflation was the result of economic policies that pumped up demand while strangling output with high taxes and regulations.

Consequently, the response to increased demand was rising prices rather than more output. "Even if demand is high," concluded the JEC, "capital spending and the supply of output in general may be low if the after-tax real rate of return is inadequate."

The 1980 Annual Report, titled "Plugging in the Supply-Side," followed up the pathbreaking recommendations of the previous year. "Traditionally," the report said, "tax cuts have been viewed solely as countercyclical devices designed to shore up the demand side of the economy," but now a tax-rate reduction was needed to improve incentives to work, save, invest, and to take risks.

At the press conference for the 1980 report, Senator 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." For the 1980 report, Bentsen persuaded Otto Eckstein, former Harvard Keynesian and president of Data Resources Inc., to construct a supply-side econometric model.

Eckstein testified that "the mistake we have made over the last twenty years is that we have always looked at the short-run demand effects, and have thereby ignored what we are doing to the long-run growth potential of the economy." Among the "things that we did not do very aggressively was to focus on the question of the effect of the tax system on the supply of labor, the supply of saving." When questioned about the 1980 Annual Report, Eckstein said 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."

As the 1980 presidential election approached, the New York Times was curious whether Bentsen and the JEC Democrats could stick with a policy more likely to be identified with the Republican presidential candidate than with Jimmy Carter. "I believe so," Senator Bentsen said. "I think all of us have come to understand that this nation desperately needs economic policies that encourage savings, investment, and increased productivity."

Liberals were incensed. Americans for Democratic Action angrily responded, finding the implication that "the private sector is the best place to implement important social goals" totally unacceptable. But Senator Bentsen said: "I don't see any of us retreating."

That, however, was before White House Chief of Staff James Baker III politicized supply-side economics in 1981 by cutting the Democrats out of the tax bill. This gratuitous challenge, designed to make Baker look good by giving Roagan a "victory," left the Democrats with no stake in the policy revolution. Unanticipated disinflation shriveled nominal GNP relative to forecast and produced unexpected budget deficits. Fighting for their political life against a successful economic policy, Democrats, with help from the Republican Establishment and the media, misinterpreted the deficits as evidence of supply-side failure.

It reinams to be seen whether Lloyd Bentsen can extract himself from the rhetorical war of the past decade and recover his original supply-side position, or whether he will be swept along by the flaky Laura D'Andrea Tyson, who believes "there is no relationship between the taxes a nation pays and its economic performance.

To avoid capping his career by eating crow to please left-wing colleagues, Lloyd Bentsen should recall that the policy he advocated in 197980 did exactly what he said it would. Stagflation is gone, killed by a record economic expansion that created 18 million new jobs. In 1980 this was a heretical thought, and it was a heretical policy in 1981--but one that succeeded.