Long ago Albert Jay Nock made a key distinction between political power and social power. When one waxes, the other wanes. In the great periods in history social power has been dominant, with wars localized and infrequent. Nineteenth-century America is an important case in point: here, on an open continent, inventiveness went hand in hand with low taxation, industry thrived, and great universities were founded on the basis of voluntary giving.
Nock was not a person to quantify his concepts; he relied on common sense observation to make his points. But common sense is not enough, particularly in a world in which there is so little of it. We have needed economists to demonstrate in cold arithmetical terms just how the seizure of the usufructs of social power by the political arm can diminish all our lives.
Recently Jude Wanniski, in The Way the World Works, has popularized and expanded upon the thinking of some of the new pro-social power anti-Keynesian economists, notably Arthur Laffer of the University of Southern California, and Robert Mundell of Columbia University. Between them, Laffer and Mundell have proved the case for the Nockian insight that taxation, when pushed to progressively high levels and combined with inflation, can asphyxiate an economy. But how do you get this across to politicians who thrive on the transfer of resources to the State?
Luckily, there are some politicians who care more for their productive-minded constituents than they do for themselves. One of them is Jack Kemp, the Congressman from Buffalo, who was once a most effective professional football quarterback. An observant man, trained to read an enemy’s defenses, Jack got into politics without much knowledge of economics. But he was, as he says in his An American Renaissance: A Strategy for the 1980s (Harper and Row, 207 pp., $8.95), an expert in incentive. In football, he says, “your success is easily measurable. You have three seconds to get the ball, get back, and choose a receiver from four or five different possibilities. It’s incentive. It’s price theories, a reward-risk ratio.”
This is a little fanciful, but the subject of reward-risk ratios led Kemp into the deeper waters of price theory. “Clearly, work and saving,” he told an interviewer in 1978, “are more important than just consumption and leisure, and a society that rewards consumption and leisure more than it rewards saving and work is a society, black or white, rich or poor, Third World or developed world, that is on the decline.”
The Incentive to Produce
At first Kemp had difficulty seeing the whole problem. He thought that the only way to increase the nation’s productivity was to lower business taxes as an inducement to greater profits and production. Taxes on labor seemed to be in a different category, for workers were consumers, and, theoretically, if they kept more of their income they would be using it to bid up prices. But Jude Wanniski, then of the Wall Street Journal, pointed out to Jack Kemp that he was still thinking in Keynesian terms. He had not stopped to consider that labor, if it could keep more of its wages after taxes, would also have more incentive to produce.
Once Jack Kemp had grasped the idea that both capital and labor had the same interest in tax reduction, he was ready for Professor Laffer’s theory of the “wedge.” Taxes on capital, taxes on labor, inflation, bureaucratic regulation, minimum wage laws, are all slices of the wedge that stands between maximizing individual effort and reward. True enough, some taxes are inevitable as long as people prefer limited government to anarchy. But it seemed obvious to Laffer—and to Kemp, as a reader of Laffer—that reduction of the wedge should be a prime concern of the statesman interested in productivity.
Productivity, of course, is the source of taxes. It follows that there can be two tax rates along a productivity curve that will produce the same revenue. A high tax rate on low volume won’t generate any more government income than a low rate on high volume. The duty of the statesman is to find the point on the “Laffer curve” that will produce enough revenue to run the government without cutting into the individual’s marginal incentive to produce that last widget, or pair of shoes, or whatever.
Kemp, in his book, has digested Laffer’s thinking. His response, as a Congressman, has been to introduce the so-called Kemp-Roth bill calling for a thirty per cent reduction in taxes over the period of a few years. Kemp is fond of quoting Jack Kennedy’s phrase, “a rising tide lifts all boats.” Kennedy, though surrounded by Keynesians, had hit upon the Laffer solution before Laffer had ever been heard of. The trouble with the Kennedy tax reduction is that it couldn’t get the country moving fast enough to sustain both the Vietnam War and the Lyndon Johnson Great Society. There is a necessary limit to the miracles that a low-tax-rate-high-volume theory can work, as Jack Kemp himself realizes. Budget balancing can’t be put off forever, or the inflation will get us all.
A Question of Priorities
But what should come first, budget balancing or tax reduction? Kemp has his own theory of priorities here. Americans, he says, “have two complementary desires. They want an open, promising ladder of opportunity. And they want a safety net of social services to catch and comfort those less fortunate than themselves and those unable to share in the productive processes when the economy goes sour.”
Kemp’s advice is to begin cutting taxes across the board now and worry about money for the “safety net” later. “A vibrant economy,” he says, “can afford to leave the safety net in place and at the same time ensure that the net is as empty as possible.” With “real economic expansion” resulting from tax reduction, people would be bouncing out of the safety net into productive jobs. We wouldn’t need all those appropriations for the Department of Health and Welfare, or for urban renewal, or for unemployment insurance or whatever.
There would be a short-term problem in accepting Jack Kemp’s priorities if his fellow politicos happened to be laggard in getting away from old institutional habits. With people bouncing out of the social service “safety net” to take productive jobs, the need for a huge net-tending bureaucracy in Washington, D.C., would be diminished. But would the bureaucrats be inclined to depart in peace? And would Congress have the fortitude to fire net-tenders who had long-term records of party reliability?
These are questions that Jack Kemp thinks can be settled as transfer payments to individuals become less of a government problem. With less work to do, bureaucracies can wither. Or so we must hope.
Some two thirds of Kemp’s book are devoted to the problems of incentives in society. The remainder goes into energy matters and into foreign and military policy in an extremely intelligent way. There is a great chapter on “exporting the American idea.” The book is much more than a campaign document; it is a prod to high and serious thinking about problems that will be with us well into the twenty-first century.