Most of the speculation concerning Dick Cheney for VP is centering on the political pros and cons. But it turns out Cheney is a good economist as well as a master of the inside government game. In fact, Cheney can lay claim to being one of the original supply-siders, in favor of lower marginal tax rates to create work and investment incentives that spur economic growth. “Dick Cheney is unabashedly for tax cuts,” supply-side guru Art Laffer, who has had extensive experience with Cheney, told me this morning. “He’s not a wuss; he stands up for what he believes in.”
When Cheney was deputy chief of staff to President Ford, he was involved in a number of meetings with Laffer. Laffer was originally the chief economist in the Office of Management and Budget during the first two years of the Nixon administration. He left to return to his native California, but was later summoned to be a consultant to Donald Rumsfeld, President Ford’s chief of staff, who was Cheney’s boss.
In 1975 and 1976, Laffer met frequently in Washington with Rumsfeld, Cheney, and other members of Ford’s staff. He was trying to persuade them that one of the policy levers necessary to rid the country of stagflation was an across-the-board reduction in marginal tax rates on individuals and business. At the time, Laffer was teaching at the University of Southern California, where he had already become a cult figure among undergraduate and graduate students in the business school. He had developed a theory which stated that when tax rates are prohibitively high, fewer people worked and invested in the economy because after-tax returns were insufficient: “Tax something, and you get less of it. Tax something less, and you get more of it,” Laffer asserted. His policy prescription to end the Republican recession was designed to raise work effort and capital investment by reducing tax rates and increasing after-tax returns on all economic activity. Further, the Chicago-trained economist argued that lower tax rates would actually increase tax revenues as a result of improved incentives and more rapid economic growth. On numerous occasions, the Californian drew his famous parabolic curve, which showed the theoretical maximum revenue yield from the most efficient tax system. Using the model, when tax rates are moved up the curve into the higher tax zone, the economy weakens and revenues fall. Moving tax rates down the curve would strengthen the economy and generate a flood of tax revenues for the federal budget.
During these meetings, both Rumsfeld and Cheney came to believe in the Laffer Curve. Regrettably, they were unable to sell Laffer’s idea to President Ford, who was counseled by then chief economic advisor, Alan Greenspan, and who remained a traditional Republican budget-balancer, refusing to accept the dynamic model of growth outlined by Art Laffer. Of course, Ford went on to lose the ‘76 presidential race to Jimmy Carter. When Ronald Reagan used the Laffer curve as the economic centerpiece in his 1980 run against Carter, the challenger won in a landslide.
But back to Cheney. Years later, in 1986, Cheney was the only elected official — by then he was a Republican House member — to endorse Laffer in a crowded Senate primary run in the Golden State. Even Jack Kemp refused to take sides in that race. Two years later, I found myself on an economic panel at Gerry Ford’s annual get-together in Beaver Creek, Colo., sponsored by the American Enterprise Institute. Ford would meet yearly in the spring with his former fellow heads of state, including James Callaghan of Britain, Valéry Giscard d’Estaing of France, and Helmut Schmidt of Germany. Dozens of businessmen attended the event. As a former OMB chief economist in Reagan’s first term, the same job Laffer held ten years earlier, I made the case that seven years of prosperity under Reagan, creating 20 million new jobs, a 4% economic growth rate and substantially reduced inflation, proved that Laffer was right. In fact, tax revenues came pouring in after Reagan’s supply-side tax cuts were fully implemented in 1983, so much so that the overrated budget deficit had diminished to less than 2% of GDP. And counting state and local receipts, the overall U.S. budget was nearly in balance.
I also argued that if the then-VP George Bush Sr. kept his “Read my lips, no new taxes” pledge, the economy would continue to roar and the federal budget would soon move into surplus. My riff caused quite a stir. All the former heads of state opposed me during the Q&A period. Most of the traditional budget-balancing CEOs sitting around the large table were skeptical.
After the session broke up, I was collecting my papers, feeling kind of lonely, when Dick Cheney came up to me to chat. By then the Wyomian was Republican Whip in the House. He told me that he really enjoyed my talk and agreed with me that the Reagan tax cuts worked successfully. We were standing alone drinking coffee when President Ford walked over. Cheney told Ford, “You know, Mr. President, Kudlow here is right.” Ford responded by looking me straight in the eye saying, “Kudlow, you’re my favorite supply-sider. But I don’t believe a word of it.”
An AEI staffer had snapped a photo of the three of us, and that picture is hanging in my office today. If Dick Cheney winds up being vice president, he’ll have a strong hand in the Bush Jr. economic policy process. It speaks well of Gov. Bush’s tax-cutting commitment that he would appoint Cheney as his No. 2. Look for Cheney to not only press for Bush’s initial tax-rate reduction plan, but also to push even broader and more powerful tax-cut programs later on.