To paraphrase John Kennedy, “Ich bin ein Keynesian.”
Jude Wanniski coined the term “Supply Side Economics” in 1976 as a reaction to Keynesian and monetarist thought. In his book, The Way The World Works, Wanniski argues against taxes. “Working together three men can build three houses in three months. Working separately, they can build three houses in six months…. If the tax rate on home building is 49% they will work together … if the tax goes to 51% they will suffer a net loss because of their teamwork and so will work separately in the barter economy and pay no taxes. … the government loses all the revenue and the economy loses the production…”
Here are Wanniski’s assumptions:
- Working alone three men can build a total of six houses in one year. Working together they can build 12 houses in the same year.
- A 4% change in the tax rate, from 49% to 51%, is significant enough to cause someone to “drop out.”
- The government taxes people when they work together but not when they work separately.
These assumptions are flawed.
Working alone each gets 100% of the profits on two houses. Working together each gets one third of the profits on 12 houses. If the profit of each house is $100,000, then working alone each gets $200,000 per year. Working together each gets one third of $1,200,000, or $400,000.
The tax rate does not effect the decision. All things being equal, any intelligent person would rather pay 49% than 51%. But if the choice is 49% on $200,000 versus 51% of $400,000, every sane and intelligent person would choose to be taxed at a rate of 51% on earnings of $400,000 as opposed to a tax of 49% on $200,000. In the first case he or she takes home $101,000. In the second case he or she takes home $198,000.
If the government will take a chunk of the profits of the houses the men build working together it will also take a chunk of the profits of the houses of the men working separately. Wanniski postulates that men can choose to work in the underground economy. Last I checked the mafia didn’t advertise jobs for wiseguys.
If you want a real economics book, check out Economics Explained, by Heilbroner & Thurow, or The Wealth of Nations, by Adam Smith.
Unfortunately, Wanniski was not just another crackpot with a web-site and publishing contract. Wanniski is credited with teaching economics to Jack Kemp and, as an adviser to Ronald Reagan from 1978 to 1981, with designing the Reagan tax cuts. (click here for wikipedia).
While Wanniski wrote the book – literally – on neo-conservative supply side economics, he was critical of American policy toward Iraq. Wanniski wrote that UNSCOM inspectors found and destroyed all of Iraq’s Weapons of Mass Destruction, with the help of Saddam’s regime in the months following the first Gulf War, and never found WMD’s in Iraq after November 1991 . Wanniski not only recognized the prospective importance of the Iraqi WMD question before other journalists, he argued correctly that Iraq didn’t have any WMD and stated that the U.S. would never allow UNSCOM to end the inspections regime no matter what Iraq did.
He vocally opposed the impending US War with Iraq at the beginning of 2003. On October 27, 2004, he publicly denounced George W. Bush, saying that “Mr. Bush has become an imperialist — one whose decisions as commander-in-chief have made the world a more dangerous place”. Eventually Wanniski endorsed John Kerry.