Michael Munger performs public choice on public choice
Do markets always corrupt? A thought experiment with Prof. Michael Munger.
How seriously is Mike Munger taking public choice theory of economics?
So seriously that his new book Is Capitalism Sustainable? calls many of the sacred cows of the free market crowd into question — asking whether real capitalism is even a stable equilibrium, or if it always morphs into its ugly twin: cronyism.
While public choice is best known for its analysis of the rational, self-interested behavior of so-called “public servants”, Munger steps back and asks when the rational interest of CEOs and corporate boards might also betray free market principles. In other words, does competitive rent-seeking becomes the norm in a world where executives are expected to get the sweetest deal possible from the government?
Is Capitalism Sustainable? is a collection of essays published by the American Institute for Economic Research that will provoke central planners and free-marketeers alike to consider how real-world frictions, ethical norms, and those pesky transaction costs muddy the waters of pure economic theory.
Find out what violations of norms provoked not one, but two old German women, to publicly shame Munger while he was living abroad… and what this has to be with the study of economics and political science.
Follow Mike on Twitter: (@mungowitz), buy his book on Amazon.com [Is Capitalism Sustainable?], and listen to the show now.
Or, read the transcript below.
TRANSCRIPT
Mike Munger is Taking Public Choice Seriously
Bob Zadek : Welcome to The Bob Zadek Show. This morning’s show asks the somewhat frightening question, “Is capitalism sustainable?” Well, I sure hope so, because we are doomed without it. So there is the question. The answer, as you will learn from our guest this morning, is kind of scary as well. Professor Mike Munger is a professor of political science, economics, and public policy at Duke university. He is very active in the American Institute for Economic Research.
He is also a scholar with the Independent Institute, a wonderful Think Tank in Oakland, California. Mike has just published the book “Is Capitalism Sustainable? We sure hope that it is. Mike wonders whether or not the advent of a phrase “crony capitalism” the Achilles heel in the capitalist free market system? Will crony capitalism weaken ultimately destroy capitalism? Mike, welcome to the show this morning.
Mike Munger: It is great to be on the show and let me say, I think that tentatively scary is an excellent band name. Somebody ought to use that.
Bob Zadek : Well I don’t think crony capitalism is a weakness of capitalism. It should be called crony socialism, because crony capitalism involves the immoral, if not illegal interference of government in the capitalist system. Capitalism in and of itself is simply individuals entering into mutually advantageous bargains between themselves, and crony capitalism is the cancer that occurs when government interferes with an otherwise free market. So, the phrase itself almost gives capitalism an unfair black eye, but we can have that conversation during the show this morning.
Mike, explain to our friends out there the premise of the book. What troubles you about crony capitalism? Help our friends out there understand what you mean by the concept.
Crony Capitalism: Explained
Mike Munger: Well, let me take one step back. For years I have been a critic of defenders of socialism and the question that I always ask is, “show me an example of a single socialist nation that has been a success.” There aren’t any. There are zero examples ever of real socialism succeeding.
If I look at Cuba, North Korea, Venezuela, the Soviet union before it converted to a market system, and China, before it converted to a market system, they were all just abject failures.
My friends say, “Oh no, that’s not real socialism.”
When I say, “Look at what happened at Venezuela,” they’ll say, “Well, that’s not real socialism. It’s not the kind of socialism that I mean.” And then I realized one day, and I have to admit I was thunderstruck, that we do the same thing.
So let me ask you, Bob, what’s an example of a capitalist country? There aren’t any. All of them turn towards what I would call crony capitalism. You said it’s a pathology of socialism. That’s not right. It’s a pathology of democracy. And so in a capitalist system located in a democracy, the temptation for there to be a conspiracy between some corporate CEOs and members of the government, both in the bureaucracy and elected officials find it to their individual advantage at the expense of the, the dynamics of the system to arrange side deals and subsidies.
They’re not exactly illegal, but they are clearly immoral. So the result is that all capitalist systems tend towards cronyism in a democracy, which means that I am committing or I have been committing the same sin that I have decried on the left, because their idea of socialism is not sustainable.
So that’s where the title of the book comes from. Capitalism in a democracy has what seems to be an almost irresistible tendency towards cronyism, towards substituting the profit motive and the making of good products for consumers to stop doing that and find ways to get subsidies, tax protection, protection from foreign products, all of the things that increase your account in profits but are harmful to the system that capitalism is supposed to serve. That’s what I mean by “crony capitalism.” I’m willing to be corrected. Tell me an example of a capitalist system in a democracy that has not become crony.
Bob Zadek : I’ll give you a response in this way. In any society where there is a government, there are always individuals who would seek to curry favor outside of the economic system. If I am stopped for speeding, and a government agent stops me for speeding, I might be tempted to offer the policemen a bribe. That act of offering the policemen a bribe so that I don’t get a speeding ticket or bribing a building inspector to approve my building so I can get a certificate of occupancy. That act does not indict an economic system. It simply is a criminal act. It is like robbery on that level. It is a felony. It is a criminal act, but it’s not an example of a weakness in capitalism. It is just a dishonest player trying to improperly influence and buy a favor from government. So I equate crony capitalism with bribery writ large.
Mike Munger: Bribery is illegal. Cronyism is not illegal.
Bob Zadek : So when I say crony capitalism, I tend to give more of a pass and maybe this is a weakness in my comment, I give more of a pass to the offeror the requester of the favor and less of a pass to the grantor of the favor. And so I say crony capitalism indicts government more than it indicts the business person or individuals seeking a favor. But we can disagree on that.
Mike Munger: You’re right about that. The fact that government makes these favors legally available is the problem.The problem is that government makes these favors legally available. It is a problem of government. You’re absolutely right about that. But why would the government not do that? Why would you not expect the government to do that? That really is the heart of the question. Bob, you have said the real problem with crony capitalism is that governments make these favors available legally. And how can we prevent that? And I come from a branch of political science called public choice. And you guys did for this for the show today said by naming the blurb “Michael Munger performs public choice on public choice.” Public choices is an approach to political science not to economics.
It says that we cannot assume that virtue and good action on the part of the state. We have to have rules that prevent bad action even when people who work for the government maybe don’t have a very strong moral sense. So the problem is that for the policeman not to accept the bribe and for the member of Congress not to accept the campaign contribution, would require good people. That’s the one thing that public choice tells us we cannot assume. How can we prevent the individual elected officials who have to operate in their own self interest from operating in their own self-interest? Their first priority is to service themselves.
Bob Zadek : And that’s not per se bad.
Mike Munger: It is in a system where you can offer favors to capitalist companies. That’s when it becomes bad. I think people operate within their own self interest in a system that causes that self interest to operate for the public good. That’s the institutions we are trying to devise. That’s not per se bad but assuming people are going to be altruistic and act for others is the path to destruction. The point is there is a paradox in public choice. It seems that given the argument you correctly made, that it is the government’s fault for offering these favors, public choice says you cannot assume that good people are in the government, and we have to have good people or otherwise we are going to offer these favors to the corporations.
Public Choice Theory, Simplified
Bob Zadek : We agree on that. You have used the important phrase “public choice” which is the subtext of your book. Explain James Buchanan’s Public Choice Theory. It was revolutionary at the time yet so obvious. Help our friends understand what public choice theory is and how it influences their study of political science and economics.
Mike Munger: Well, Public Choice Theory was devised in the late fifties and early sixties as a response to what was mostly in political science a functional theory that says that “The president serves us this way. The Congress serves us this way.” Public choice said government is not an aggregate of institutions. It is individual people and those people have their own goals, their own incentives. And as you said before, that’s not bad. That’s just human nature.
The question is what sort of person government attracts and how do they react to the incentives that they are presented with? So public choice is the study of the interaction between rules for choosing and the likely behavior of the very real human beings who occupy those offices. It merges psychology, political science, and economics. The advantage of political science of public choice is that it allows us to look at individuals as people who have their own goals, plans and purposes.
A big concept in public choice is aggregation. What are the aggregate consequences of all these individuals acting according to their own self interest? You might contrast that with the market. The market is an aggregation process of everybody operating in their own self interest. The baker makes bakes bread, the butcher provides meat. We all rely on each other. And if we use the price mechanism, the result is that people acting in their self interest actually benefit other people. So public choice asks the question, is that true in the sphere of politics? And the answer is, unfortunately, not always. Generally not, unless you have good rules.
And in the United States we got really lucky that the U.S. Constitution, with its protections for both political and economic rights, was either a work of genius or great good fortune. The result is a set of rules that generally led even politicians acting in their own self interest to benefit the public interest. But you can’t assume that self interest and public interest are the same. That was a long answer, but a simple characterization of public choice is that you cannot assume the self interest of members of the government and the public interest of citizens are identical.
Bob Zadek: Madison tries not to deify government officials. “If all men were angels, we wouldn’t need laws.” But of course all men are not angels. By men he meant people. Therefore, you can’t make an assumption that somehow there is something special, that there is something in the DNA of people who happen to be employed by the government that makes them more moral or more generous people in the private sector. People who elect to work in public service because their goals, personal or career or economic are best satisfied by working for the government. But other than that they are not self-sacrificing individuals, whether they are teachers or first responders. It is a job, and they have chosen that job because the combination of benefits satisfies them the best.
But if you’re going to assign some lofty motivation to people in the government, then either assign the same goal to people in the private sector or more accurately don’t assign that label to either. Just assume it’s all the same. It’s either one job or another job, but individual motivation is identical. There’s nothing special about public servants. That is, in short, the public choice theory. And if we start with that, we start to understand the issue of crony capitalism. You have explained in your book the thinking of a CEO of a large corporation, why the CEO might be driven to seek a favor from government, and why the seeking of the favor is actually part of that CEOs duty. Not only is it not bad, it is his duty to at least seek the favor and please explain that dynamic to our listeners.
The Inescapability of Crony Capitalism?
Mike Munger:That’s the reason that I call it “crony capitalism.” I think I think of it like a virus. So, the AIDS virus uses the body’s own defense mechanisms against itself. Crony capitalism uses capitalism’s own defense mechanisms against itself. It operates at three levels. First, suppose that I’m a corporate CEO and I’m self interested. I want to make a good living. I want to be able to retire. I would like to get more money and make my stockholders happy. So I look and I see that it is possible for me to apply for some subsidies. I realize that these subsidies from the government actually don’t have any rational basis. If I pretend that I’m producing something called “green energy” and I fill out some forms, I can get this subsidy.
The result is we can get an extra million dollars a year, not from consumers who buy our product voluntarily, but from the government who takes money involuntarily from taxpayers and funnels the money to us because we have promised to do something that the government wants.
So, imagine I am a corporate CEO and I realize that it is actually immoral for me to do this because it’s not a voluntary exchange. Capitalism is based on voluntary exchange. If I put something out there for consumers and they buy it, it’s because they want it. If I apply for subsidies from the government and I get them, that money was taken at gunpoint from taxpayers.
You can’t blame the CEO because he is increasing his return and increasing his stock price by doing this legal but immoral thing, which is to go to the government, hiring more lobbyists, not more engineers, but hiring more lobbyists, in order to get these this subsidy money. That’s level one. The person themselves might do it. But suppose, and this happens, the corporate CEO says, look, I got into this business in order to make good products and sell them to consumers who want to buy them voluntarily. It would be wrong for me to do that.
So the second level is that my stockholders say, “Well, there were these subsidies, you didn’t apply for them.” And I said, yeah, it would be wrong. That’s not capitalism. That’s cronyism. And they say, all right, at the annual meeting, we fire the CEO and hire another CEO. There is a competitive market for managers. If you won’t do it, we will find someone who will because it’s legal but immoral. We want to have increased stock prices. That’s level two. But suppose that even your stockholders say “that’s just wrong. Yes, we could have a higher rate of return, but we’d rather not. We would rather have the lower rate of return and know that this is a morally conducted business.” So level three is the acquisitions and takeover market. This is the essence of capitalism. And this is the reason that I want to argue it’s crony capitalism, because they’re using the internal mechanisms of capitalism itself to attack capitalism.
And what happens is, I am a corporate takeover artist and I look and I see that this company could be applying for subsidies. They could be applying for protection from competition, but they’re not, which means that if I were to take over that company and impose new management that does these crony things, applying for subsidies and getting this other kinds of protections, the stock price should be $105. Well, that means that I can go to a bank and I can borrow against the $105 that the stock price will be knowing that it’s only $90 now I can offer $95 a share. Probably quite a few of the stockholders will sell. I take it over, fire management, the stock price goes up to $105, I pay off my loans and I make a fortune as a corporate raider
So the reason I think it’s crony capitalism is that this virus of cronyism is using what would normally be the defense mechanisms such as competition. The competitive market for managers is competition. The mergers and acquisitions market means that outside people are looking to see if you’re underperforming and if your capital is underperforming. The problem is that it means that even a corporate CEO who is moral or stockholders who say, you know, “that is just not right,” it can’t survive, and that’s why capitalism is not sustainable in a capitalist system.
Bob Zadek : Mike, I’m smiling. You can’t hear me smile, but I’m smiling because you said something in the beginning of that comment you just made. You snuck it by the audience. You started the discussion by saying the CEO applies for a subsidy, which is available. The cause of all of this is the subsidy that was available. If the subsidy wasn’t available that last comment doesn’t even get off the ground. So it is the distortion starts with the money being available, which is a governmental act. If the money wasn’t available, the series of unhappy events resulting in the corporate takeover never occurs.
Mike Munger:The question is, will a rational agent make it available?
Bob Zadek: That’s right. So there it is. So when I say that crony capitalism starts with a government shortcoming, your story starts.
Capitalism’s Essential Information: The Price Mechanism
Bob Zadek: Now, Mike, we talked a bit about whether capitalism is sustainable. I have a somewhat different, perhaps more optimistic view. I find capitalism to be somewhat inevitable. There is a cycle of course, and we are in a period of American economic history when capitalism is being weakened by wars and by a movement to give government more and more power over the market.
That is a symptom of too much wealth being produced. There are understandable distortions in the market, so-called “income inequality.” I hate the phrase, it doesn’t tell us anything except the obvious. It’s like saying there is inequality in height of individuals. Some people are taller than others. Everybody can’t have exactly the same amount unless it’s through legislation, but it can’t happen in the market. But when the government distorts the market, it interferes with the key element of a free market system, the “price mechanism.”
No economy can function without the most important of bits of information, which is what the relative value of a good or service is versus something else. Imagine how individuals would have an impossibility running their economic lives if they could not tell what the relative value of something is.
Isn’t it correct to say a free market system is essential simply to provide information about what items are worth relative to another item? And we cannot function without that crucial bit of information?
Mike Munger: Of course, that’s right. But who says we are going to function? Look at Venezuela. It was a developed wealthy nation that used the price mechanism. It was as capitalist as can be and it elected Hugo Chavez who said capitalism is not sufficiently considerate of the needs of the people, and the majority voted for that. The result was that, first, they just started to distort the price mechanism. Then they started nationalizing industry and the result was that they basically have become a third world country. It’s one of the only examples in history of a developed nation reverting to being an undeveloped nation. Argentina did something close to the same thing by substituting central planning and price controls for the functioning of a market. In 1900 Argentina was a very wealthy country. So you’re saying, and you’re right, the market system is essential if we are going to survive.
The rules matter a lot. We keep going back to the founders. The founders of the American Republic recognized that the rules really are important and they tried to embed them in a Constitution that’s very difficult to change. But it turns out that over time we have changed a lot of the provisions of the U.S. Constitution using the Supreme court. The Supreme Court has imposed those changes in the period of the 30s and the 40s. So yes, markets are essential, but they’re not inevitable.
And the reason I say markets are inevitable is because in Venezuela, and in any centrally planned economy, what happens is the proverbial black market springs up and the black market is simply society requiring a market to determine the price and to provide goods and services. Black market is nothing other than a capitalist system within a planned economy. Because a black market always springs up, you cannot legislate away a market.
You can make it illegal, but it doesn’t go away. It just goes underground. It’s like prohibition. You cannot legislate that one cannot drink alcohol, you cannot legislate that you cannot use marijuana, because society has a natural way of behaving. And the natural way of behaving is for there to be markets, i.e., negotiated exchanges between individuals. So the reason I say the reason I am marginally optimistic is that markets inevitably spring up and grow even when suppressed by a government system.
Mike Munger: I agree about markets but capitalism is not inevitable. Capitalism is a subset of the system. Capitalism is a system where you have open private ownership. So the essential feature of capitalism is liquid capital and the reason that liquid capital is so important is that the stock ownership form of being able to sell shares of equity in the future prosperity of the company means that we have reasons to look forward. So not just to go and buy eggs in the black market today.
I agree, markets work for that. Capitalism requires that we have an actual legal system that defines the ownership and exchange of equity shares in corporations and I don’t think that’s inevitable. Venezuela has destroyed that. I’m worried that we’re going to by having basically public management of corporations. So some of the democratic candidates want to have all sorts of other representatives on the board of directors.
And if people vote for that, the problem in a democracy is, if we vote for that, it’s going to happen even though it’s not part of the logic for capitalism. The counter argument to my claim might be, look at China. China for a very long time was poor and then they switched to markets not to capitalism. China does not have the stock ownership form. They don’t have equity shares of these corporations, but they do have markets. And the result has been the greatest increase in prosperity the world has ever known. The poverty rate in China defined in an absolute sense has gone from 70% to less than 10%. So the greatest market success story that I think we’ve ever seen is China. And so maybe markets are inevitable. Maybe I’m being too pessimistic.
Bob Zadek : We have a caller on hold. Dave, the welcome to the show this morning. What’s on your mind?
Caller: Over 30 years ago I was chief economist for an oil company and together with the CEO we penned an order for all the people in the company that required they got the CEO’s permission to accept any government subsidy on any program or any investment. And we did it.
Mike Munger: Wow. Well that’s a great example. It is possible, particularly for a small closely held company. It is possible because then, if you have the CEO or the management group also controlling a substantial part of the stock, then it may be possible. But the genius of capitalism is to share broadly the ownership of this equity. And so that’s the reason that I think many large corporations are more susceptible. But isn’t it interesting that that 30 years ago, when this was not nearly as big a problem, a CEO would recognize this tendency that the accepting of bribes is going to change the nature of our company. Dave, that’s just a fantastic example.
Bob Zadek: Dave, thanks so much for your comments. We sure appreciate your thoughts of sharing the story and for your being listening to our show. We really appreciate it.
The Constitution: Economics and Markets
Bob Zadek: Mike, your comment on the Constitution is quite interesting. I would like to remind our listeners that the Constitution says nothing about free markets and nothing about capitalism, and nothing about any economic system whatsoever.
What it does say, however, is that the government cannot interfere with private contracts. It cannot pass a law to abridge a contract, which is a property right. The Constitution, as originally drafted, gives the government enumerated powers. That is how it started in 1789 where the government had limited activities. In economics, it was only enabled to keep interstate commerce between the States regular. There was no need to worry about free markets because the government was never given the power to mess with the markets.
In any event, and as Mike correctly pointed out, under the public choice theory, people who work in government are drawn to, among other things, have power over others. So the people who work in government under the public choice theory are drawn to that as one of the appealing aspects of that occupation. Well, it is human nature, not because you are venal, but because it is human nature. If you enjoy having power, you like more of it. It’s a bit of an intoxicant. You seek to acquire more power.
Mike Munger: I don’t think you’d have to go even there. It’s not just an intoxicant. Many people will go into politics because there’s something they want to accomplish. And suppose I really care about the homeless and you’re saying “yes, but you don’t have the power to do that. You don’t have the power to do this really good thing you want to accomplish.”
So even if it’s not an intoxicant, you’re telling me there’s this way to accomplish what I want if if I could just get more power. I think people who work for government often find the constitution very frustrating because it says you lack the power to do this thing that you really care about. This true of people on the left and the right.
So it is an intoxicant. You become addicted to it. But, it’s also because you want to be able to accomplish things. The problem is that if you have the power to do what you want, you have the power to do other things too. And once the scope of the power of the state is increased, all of us I think are going to agree, we didn’t mean for you to have that power. But this slow accretion over time of the powers of the state has resulted in partly an intoxicant.
Since Roosevelt, since the 1930s and the Great Depression, we have come to expect more from government. And these are things the government can’t actually do. They can’t protect us from risk. They can’t make sure that everyone’s employed. They can’t make sure there’s no hurricanes for heaven’s sake. But we have this idea that we should increase the power of the government because it will be used for good. The core problem is this desire for power in people who think they will use it responsibly, which is just not true.
Bob Zadek : The Constitution becomes really inconvenient when you have that mindset and when people see the Constitution as an inconvenience, it scares the bejesus out of me.
Mike Munger: The second amendment! There are so many people who say that the second amendment is so inconvenient, we should ignore it. Well, I tell my friends on the left, if you can ignore parts of it, I’m afraid we’re going to ignore all of it. And if that’s true, then we’re sunk. We have to take the words of the Constitution seriously. So you can’t say in the Second Amendment that those words don’t mean anything unless you also think the first fourth and fifth amendments can be ignored.
Bob Zadek : And as you point out in your series of essays. You used the correct metaphor of a virus. And what happens is once the floodgates are open, once one economic activity is given a benefit, then every other competing activity is in catch-up mode and they desperately need their own benefit to stay even. You give lots of examples. You mention the sugar and agricultural subsidies in general and the distorting effect that has on the market and how harmful that is to consumers. Explain that to our listeners if you would, Mike.
Detrimental Government Subsidies: A Case Study
Mike Munger: The sugar industry was concentrated in the state of Florida. it is relatively inexpensive to get protection from the Caribbean nations that also grow sugar. So Senator Aldrich, who was not from Florida, kept putting in provisions that were tariffs from about 1890 on. The Republicans were the party of the tariffs in Congress. And so between 1900–1920, the sugar industry managed to get a large number of tariffs and quotas, that is protection from foreign sugar. Now you can make a national defense argument for this, I suppose, that we need to have a secure source for sugar. But that is hard to say that without laughing.
What’s interesting is when you play this out, the result is that a lot of the diabetes crisis in the United States is a consequence of Senator Aldrich getting protections for the sugar industry. Sugar in the United States is somewhere between 30 and 50% more expensive than the rest of the world. The result is that we use sugared beets and corn and high-fructose corn syrup far more than other countries do. High-fructose corn syrup has a very high glycemic index for the same sweetness. So if you use products that would otherwise have sugar if we had world prices, if the sugar market were open, then we wouldn’t be using so much high-fructose corn syrup. The result would be much healthier products and probably a substantial decline in the extent and severity of diabetes.
In this case, there’s literally health consequences. Once you protect one industry, then you have to end up spending more on healthcare for diabetes for poor people. So it metastasizes. The problem spreads out and you are constantly pursuing new regulatory remedies to a problem that wouldn’t have happened in the first place. None of this would’ve happened if we hadn’t had the crony business to begin with. So we’re always playing catch up. We’re always imposing new regulations. We’re always adding new subsidies, but it’s always because we started doing this in the first place. So the ripple is still spreading out from the fact that we had a relatively minor protection for the sugar industry in the 1920s. The consequences of that is something we’re still paying for.
Bob Zadek: And each of these incidents of successful cronyism begets other instances. And we have the government distorting the marketplace, which means lots of goods and services are sold at a price which is above their relative value.
Mike Munger: And it can be below. Some of them are above their correct price in terms of opportunity costs. Some of them are much below. So the electric cars are actually pretty expensive. Those batteries are pretty expensive. It’s not clear. They really save much. Some people call them “coal-powered cars” because the electricity system is often still from coal powered general electric generating facilities. So we have some prices that are too low and some prices that are too high. You can’t say one or the other of those is worse.
It is these distortions from the market price that reflect the opportunity cost of that resource. It means that people use too much or too little. And there are hundreds of examples like sugar or like the subsidy of electric cars, that if these things are going to compete in the marketplace, they have to do it on their own merits, not because we’ve decided to subsidize some or to put taxes on others. But the government is terrible at choosing winners and losers. That’s the position that we’ve put the government in. We tell them to decide what to subsidize and tax instead of letting the market system and prices find their own level.
Bob Zadek: We have innovation when capital is directed to where it can produce the greatest good to the greatest number of people and fulfill a need. Once capitalism does not know where to go because of market distortions, then bad capital investment decisions are made and innovation becomes impaired and economic growth for all of us is interfered with. So the real harm is when the government picks winners and loses. The entire world is impaired and that’s why this is such an important topic.
A Lesson From the Reagan Tax Cuts of 1986
Bob Zadek: Now, you explained the relevance of the Reagan 1986 tax cuts and how that was a giant step backwards against cronyism and what it took to achieve that. That’s what it’s going to take going forward to get us back on track. Let’s end with your discussion, if you will, of what the lesson is from the Reagan 1986 tax cuts.
Mike Munger: Full disclosure, I was a Reagan revolutionary myself. In 1984 I was working at the U.S. Federal Trade Commission. We were trying to figure out a new set of rules. We were going to have economic growth because we were going to unshackle the dynamism of the economy. And one of the things that Reagan had said from the beginning was that tax cuts would unleash a new era of productivity. But there’s a lot of opposition to taxes and I think the tax cuts, and for some reason because we were worried about deficits.
We no longer are since the deficits that we’ve had under the last three Presidents have increased so much. But at the time we were about deficits. So in 1986 a group of forces came together and I think there is some hope for us to look at this as a model. People said we can cut taxes but we need to do it in a way that will not increase the deficit very much. So is there a way we can increase the efficiency of the economy?
The distorting effects of the tax deductions would offset the tax increases. And so the members of Congress came together, led by the committee chairs in both the House in the Senate, and we said, all right, we’re going to cut the deductions, which are that, that’s going to hurt some people. We’re going to cut taxes. That’s going to offset the cuts and deduction. Everybody’s going to take a hit, but everybody’s also going to get a benefit.
