From Economic Theory to Political Practice

The Supply-Side Revolution: An Insider's Account of Policymaking in Washington, by Paul Craig Roberts, Cambridge, Mass.: Harvard University Press, 327 pp., $18.50

The comprehensive economic program that Ronald Reagan proposed during his 1980 campaign and tried to enact when he became president drew heavily on the intellectual work that many unsung scholars had been pursuing for decades. Paul Craig Roberts not only was a major contributor to the intellectual development of an important aspect of this program, but he also had the invaluable experience of wrestling with the difficulties of translating ideas into action, both in the Congress and in the executive branch.

Roberts's new book, The Supply-Side Revolution: An Insider's Account of Policymaking in Washington, reflects that experience. It is a valuable addition to the growing literature on the major changes in national economic policy that occurred during the early years of the Reagan administration.

Authors who know both the intellectual and the political worlds are fairly rare. But those, like Roberts, who do have this combination of experience have more insight and are better able to make shrewd judgments than those with a less rich experience. It also helps to be able to write in clean, clear English, as Roberts does. While one may not agree with all of his observations of President Reagan's administration, one will never be unclear about his views on the subject.

By the end of 1980, this country was in an economic mess that was worsening daily. The real income of the average American was falling, unemployment was high, productivity was low, and both interest rates and inflation had approached the almost unthinkable level of 20 percent.

Bad as things were, prospects for the future seemed to be even worse. Federal spending seemed to be out of control; tax rates had risen so high that they were destroying people's incentives to work, to save, and to invest; and laws then on the books promised to push these punishing rates even higher in the near future. There was an economic crisis; and as its implications for the prosperity of individuals became more widely understood, the crisis became an acute political issue in the 1980 presidential campaign.

The comprehensive economic policy blueprint that Reagan had developed by the time he began his campaign for the presidency had five major elements: (1) to control the rate of growth of federal spending to more-reasonable, prudent levels; (2) to reduce tax rates on individuals and businesses to restore incentives; (3) to reform, change, and eliminate existing and proposed government regulations; (4) to foster a more-stable, more-predictable monetary policy; and (5) to pursue a steady economic-policy strategy. In The Supply-Side Revolution, Roberts focuses on the development of the tax-policy element of this comprehensive program, with his emphasis on policymaking in Washington rather than on the intellectual and campaign battles that preceded the assault on official Washington.

What came to be known as "supply-side economics" quickly acquired a reputation as being new and radical. It was neither. The powerful incentive effects that taxation has on individual economic action have been an integral and respected part of traditional economic theory for many years. What was new was the increased attention being paid to those effects.

Some of that attention simply grew from the fact that rising tax rates had an increasingly negative effect the higher they got. And some of the attention was due to scholars like Roberts who, in their writing and lectures, tweaked the economic profession's tail for its benign neglect of this critical and basic element of economic policy. In the middle 1970s, Roberts and Norman Ture (who in 1981 became under-secretary of the Treasury for tax and economic affairs when Roberts was assistant secretary for economic policy) began providing intellectual counsel to Rep. Jack Kemp (R–N.Y.), counsel that eventually led to the famous Kemp-Roth tax proposal.

In a sense, Roberts's book is a personal, intellectual, and political odyssey. Its strengths are the observations and judgments that can come only from personal experience, from being there. Its weaknesses lie with the fact that Roberts could not be privy to the whole range of meetings and discussions and considerations that affected the determination of national economic policy.

Over the past few years there has been much speculation on who had the major impact on the making of Reagan's economic policy. Was it Don Regan, the secretary of the Treasury; David Stockman, head of the Office of Management and Budget; Murray Weidenbaum, chairman of the Council of Economic Advisers; Ed Meese, counselor to the president; Mike Deaver, deputy chief of staff and long-time advisor; James Baker, chief of staff; George Bush, vice-president; or myself, the domestic and economic policy advisor? The answer is that all of the above were significantly involved in the formulation of economic strategy, but the most influential of all, the person who dominated the direction of economic policy, was Ronald Reagan himself—a point the media always seem to underestimate.

During the early years of the Reagan administration no changes were made in long-term economic-policy strategy; those had been hammered out during the presidential campaign and the transition. But there were a lot of developments in economic-policy tactics—how to get done what Reagan wanted done. Unfortunately, Congress, controlled by Democrats, did not always agree with the economic program that Reagan proposed during the campaign, and without their votes the president's economic program was not going to go anywhere.

At the outset of Reagan's administration there were few internal discussions about what to do—no one had any doubts about the substance of the program, no one tried to change the president's mind. The real problem that dominated discussion from early in the morning to well after dinner every day focused on how to get a Democratic Congress to support the president. Reagan's economic program never changed (and still hasn't), but his economic tactics changed time and again as he sought ways to accomplish as much of his economic policy as possible.

Paul Craig Roberts, as one of the key participants in this process, gives us a unique and illuminating view of this part of the policymaking process. The economic and political stakes were immense. It was particularly painful from the viewpoint of the Democrats. If Reagan succeeded in passing the essence of his economic program and it worked, they could be doomed to political oblivion for decades. If it didn't pass, or it passed and didn't work, the country could be doomed to economic oblivion for decades.

It's nice when what you want is good for both the country and your party. It can be painful when one seems to preclude the other. The Democrats' opposition was complicated by this dilemma and, after a long grueling battle, what was good for the country prevailed among enough Democrats to enable President Reagan to lock in place the most sweeping economic-policy changes of this century.

This book is a fascinating commentary on one of the most important economic-policy changes of our lifetime, told by one of the people who helped make it happen. More remains to be told about what happened, and more changes need to be implemented. Books like The Supply-Side Revolution may give us some strong clues about what will happen and how and why it will occur.

Martin Anderson is an economist at the Hoover Institution. He served as domestic and economic policy advisor in the Reagan administration from 1981 to 1982.