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The reality of the new Administration's economic program, of course, turned out to be far different from Reagan's campaign speeches and his Government's early projections. Though industrial production and investment were somewhat higher than most economists expected in view of the high cost of borrowing money, the specter of those larger-than-expected budget deficits soon began to cast a shadow over the whole Reagan program. Says Donald Miller, vice chairman of the Continental Illinois Corp.: "Supplyside economics has been oversold, and people have come to expect too much." Adds Conservative Economist Martin Feldstein, president of the National Bureau of Economic Research: "I think the Administration hurt itself by a series of unbelievable statements, starting with those optimistic forecasts about growth of the economy."
The credibility problem of Reaganomics is based, in part, on its origins. In a sense, it was born one evening in December 1974, in the Two Continents restaurant in Washington, D.C. Three men were sipping drinks: Arthur Laffer, a young economist with an early-Beatles haircut who was considered a maverick by many of his colleagues; Jude Wanniski, an editorial writer for the Wall Street Journal; and Richard Cheney, a White House aide under President Ford.
Laffer argued that the fundamental problem with the American economy was that federal tax rates had got so high that they were beginning to discourage work and investment, and were thus holding down the supply of goods in the economy. Because the demand for goods raced ahead of their supply, inflation had become a chronic problem.
If tax rates were slashed, Laffer said, the result would be a boom in work, saving and investment. The "supply side" of the economy would be so stimulated that before long the Government would gain more revenue than it lost through cutting taxes. To illustrate his point, as legend now has it, Laffer sketched a crude diagram on a cocktail napkin on the table.* It showed that if taxes went too high, the Government would take in less revenue because people would be working less. That first Laffer curve landed in a wastebasket, but it was destined to become one of the most controversial concepts in recent economic theory.
Wanniski became Laffer's most avid apostle and spread the gospel of tax cutting with all the fervor of a circuit-riding preacher. An important early convert was Jack Kemp, a New York Congressman and former quarterback with the Buffalo Bills. In 1977 Kemp, together with Senator William Roth Jr. of Delaware, introduced a bill in Congress to reduce personal income taxes by almost 33% over three years.
AIthough the plan was defeated in Congress, the Kemp-Roth bill gained a loyal supporter: Ronald Reagan. As the 1980 presidential campaign began, the tax-cut proposal was the centerpiece of his economic policy. But when Reagan wrapped up the Republican nomination, the G.O.P.'s mainstream economists flocked to his fold, and the influence of Laffer, Wanniski and Kemp waned as old-line conservatives began having an impact. Among the most prominent: Alan Greenspan, Gerald Ford's chief