The recent death of former senator and Treasury secretary Lloyd Bentsen brought forth many laudatory obituaries. Most concentrated on his long career in Texas politics and chairmanship of the Senate Finance Committee. But for my money, the most important thing he ever did came during his chairmanship of the Joint Economic Committee.
In 1980, the JEC issued one of most influential congressional committee reports in history. Written under Bentsen’s leadership, it was critical to the success of supply-side economics, the Reagan economic program, and, consequently, many of today’s tax and economic policies.
The JEC was established by the Employment Act of 1946, which also created the president’s Council of Economic Advisers. The mandate of both organizations was to devise policies that would bring about full employment.
Probably the high point for the committee came in 1963 when it provided much of the intellectual ammunition for the Kennedy tax cut. At that time, Rep. Wilbur Mills (D., Ark.) was a member of the JEC as well as chairman of the House Ways and Means Committee. He relied heavily on JEC economists, especially Norman Ture, to provide him with analysis and research that helped get the tax cut through Congress.
In the late 1970s, Senator Bentsen (D., Tex.) became chairman of the JEC. He installed economist Jack Albertine as executive director and ordered him to find a way to get the committee to speak with one voice in order to raise its influence on economic policy. This history is recounted in a new book, Building the Next American Century, by Kent Hughes, a JEC economist during this period.
Albertine decided that the best way to do this was by trying to work with the Republican members of the JEC, who were closer to the moderately conservative Bentsen than most of the Democrats — which included liberal fire-breathers like Sen. Ted Kennedy.
The Republican staff of the JEC had been thinking for some time about using tax cuts to fight inflation — an oxymoron in the prevailing economic model of the time. Working with economists Arthur Laffer and Robert Mundell, the JEC Republicans made the argument that tax cuts could expand the supply side of the economy, increasing the quantity of goods and services by raising the after-tax return to work, saving, and investment.
Albertine and Bentsen were sympathetic to this logic. They agreed to work together with the Republicans on a unified committee report. Since the committee’s annual report was normally divided between separate Republican and Democratic views, getting everyone on the same page was guaranteed to get attention, and it did.
Issued on March 4, 1980, the JEC’s annual report was unusual at first glance. Unlike most other congressional reports, this one had a cover and a title. It was called, “Plugging in the Supply Side,” and even featured a bit of artwork. The report recommended a tax cut as part of a strategy of getting inflation under control, signaling a clear break with the committee’s Keynesian past. In the Keynesian model, tax cuts would be inflationary.
The critical importance of the JEC’s 1980 annual report was to lend intellectual and bipartisan political support to supply-side economics, an economic philosophy previously confined to the editorial page of the Wall Street Journal and a couple of congressional offices, including those of then-congressmen Jack Kemp (R., N.Y.) and David Stockman (R., Mich.).
Among those who took notice was Leonard Silk, long-time economics columnist for the New York Times. Said Silk in a March 5, 1980, column, the move toward greater concern for the supply side of the economy was long overdue and important to balance the overemphasis on demand in the dominant Keynesian model.
In essence, the JEC’s 1980 report took supply-side economics from the fringe and made it part of the mainstream of economic and political thinking. It made it easier for establishment Republican economists like Alan Greenspan and Herb Stein to support Ronald Reagan’s proposed tax cuts, despite their qualms about the deficit. And it had a lasting impact even among Democrats.
Long after Reagan’s victory, liberal congressman Henry Reuss (D., Wisc.), who succeeded Bentsen as JEC chairman, told the New York Times, “We have learned from our mistakes in the past. We’ve given up blind pursuit of Keynesian demand acceleration.” Bentsen’s work, Reuss said, was important in depriving demand-side economics of “an undeserved primacy.”
Today, it is widely understood that inflation is largely a monetary phenomenon and that the supply side of the economy should not be taken for granted. Both parties are now much more conscious of tax structure and its effect on incentives than they were in 1980. Bentsen deserves much of the credit for this shift in thinking.