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Can History Save Us From A Depression?
It depends on whose interpretation of both history and the current crisis you believe. For one of America’s most prominent supply-side economists, the answer is yes.
February 1988 | Volume 39, Issue 1
When we talk to the Germans now, all they seem to hear us saying is that they should increase their budget deficits and inflate their money supplies. And they’re afraid of doing that because they think it will lead to inflation. But supply-siders are not saying that. We’re talking about having them bring down their marginal income tax rates. They have a 56 percent top rate in Germany. Now they’ve promised to bring it down, by 1990, to 53 percent. But that’s not enough. And it’s not only Germany and Japan. I met with Treasury Secretary Baker a few weeks ago, and I told him, “You’ve got to get Germany and Japan to lower their tax rates, not just because those two countries are the problem but because they would serve then as models for Europe and Asia.” Once Germany cuts its tax rates, then the rest of the European community would have to, in order to compete with Germany.
What would happen if they did not follow the German lead?
The Germans would have tremendous capital inflows. They would then switch from a trade-surplus country to a trade-deficit country. There’s another, human dimension here too. Unless they were followed quickly by the rest of Europe in getting tax rates down, the Germans would then have to import workers from Italy and Turkey—guest workers—to come in and perform the work, just as now we have pressures in the United States with these great capital inflows to import people from the rest of the world to do the work.
The only real solution to the trade and budget deficits is to persuade the Western industrial democracies to reduce their tax rates, to expand.
The political disequilibrium is horrendous. Imagine, in the ridiculous extreme, that the United States was the only country in the world applying a correct economic policy. Then the only solution for the rest of the world would be to move to the United States. Everyone would come to the United States eventually if you had open immigration and if tax rates were 100 percent around the rest of the world and they were at optimum here. But we shouldn’t have to do that. We shouldn’t have to import the rest of the world just because we’re the only land of opportunity.
Our mission is to serve as a beacon to the rest of the world, so that we can export our ideas. People in Mexico shouldn’t have to move to San Diego to fulfill themselves. They should be able to stay where they are, with their families, their friends, their roots, their background and their culture. That is the objective of the 1990s. This is the challenge for the next American President and the growth leaders in the United States and in the Western world: to export the ideas of growth so that we solve the problems by having the rest of the world grow, not by having the United States decline.
That’s the challenge. But what do you think will really happen?
The crash we had in October 1987 was a good dose of ice water, even on those growth-oriented politicians and businessmen who have come to take it all for granted and who may have brushed aside the idea that we have to worry about the rest of the world, believing that we can be an island of prosperity in a world of either semiprosperity or poverty. The world won’t let that happen. The global electorate won’t let that happen.
Even if 98 percent of the world is prosperous and 2 percent somewhere has still not been brought aboard—and I can imagine this happening centuries from now—that 2 percent will give the rest of the world great headaches until we resolve that. They have to be brought up to the next stage. That’s the march of history, the way I see it.
So in the long run, and in the short run, I’m very optimistic. I think this time around, the United States is going to sidestep protectionist trade legislation. We’re going to avoid a recession. And we’re going, in 1988, to choose a political leader who will be able to deal with the rest of the world problem. But the margins for error have narrowed. It’s a very sporty course out there.