Orrin Hatch Puts Money on Supply-Side Ideas: By Amity Shlaes

March 13 (Bloomberg) — If "supply-side economics" were a stock, it couldn't be lower.

For one thing, the concept seems so 1980s. There are senior congressional staffers who have never even heard of Dan Rostenkowski or William Steiger, to name two great supply-siders in Congress, one Democrat, one Republican. For another, supply-siders can't seem to agree among themselves these days — Bruce Bartlett, who served in the Reagan administration, just published a book assailing the rest for working for Bush.

Besides, much of the country believes that supply-side economics is the single great cause of deficits in the modern era. That's wrong — spending increases, some on the Cold War, did the most to widen the deficit in the 1990s. Still, the formula of supply-side = deficits has taken hold.

So it's all the more interesting to discover a senior Republican Senator, Orrin Hatch of Utah, investing political capital in these damaged goods. Even as Washington tears itself apart over the Dubai Ports deal, Hatch has been quietly hosting free-market economists and writers to talk about leading another grand supply-side foray.

The senator may someday be in a position to do so. He turns 72 this month. But if he wins his reelection campaign this year, and if Republicans retain control of the Senate, he is likely to become chairman of the Senate Finance Committee in 2009.

The reason Hatch is making this move is simple. He thinks supply-side economics is a value stock, not a dog.

"Supply-side economics says that people respond to incentives. That incentive concept is something we need to pay more attention to," he said in a talk earlier this month in his office.

Tax Cuts

On the tax front, Hatch says, he wants to put through legislation that would increase American investment and savings on the same scale as Reagan's changes. That means a low-rate simple regime on the personal income side and lower corporate taxes on the business side. The goal is something close to the tax cut of 1986 — but with a lower capital-gains rate.

Flat tax? He's still ambivalent. But he doesn't like the "Fair Tax" movement, which advocates replacing the income tax with a national sales tax. To bring in the necessary revenue the rate on such a tax would have to be in the 20-percent range, he believes — high enough to give consumers an incentive to cheat, not work.

"Tax policy is also now all about health care — that's different from the 1980s," when the income tax was the focus.

Health Care

The current problem is that spending on health-care is rising faster than employers and employees can afford. Through Health Savings Accounts Congress recently created incentives for workers to save on health costs and employers to make health insurance cheaper. (Employees put money towards health in an account; if they don't spend it, they get to keep it.)

The HSA project seemed risible when it passed because it was included in the same legislation that created a giant new entitlement, senior drug benefits.

But as Washington is noting now, the popularity of HSAs suggests incentives at work. As of January 2006, almost 3.2 million Americans and their employers were enrolled in HSAs, triple the 1 million level of a year earlier, according to a study published last week by the America's Health Insurance Plans, the insurers' lobby.

Savings Incentive

The supply-side-ishness of the HSA is the fact that it really does create an incentive to save. It is the opposite of the old Flexible Spending Accounts, whose "use it or lose it" component tends to send employees on a health shopping spree in December. Hatch says he is thinking a lot about incentives these days — one of the books on his desk is free-market economist Benjamin Friedman's "The Moral Consequences of Economic Growth."

Hearing all these ideas from Hatch is a bit of shock to old tax hands. After all, Hatch is better known as a moralizer than an economic liberal. When people think of the "Hatch legacy" they think of the Senate Judiciary committee, or his staying power — he entered the Senate in 1977. Hatch was one of the senators who killed off the highly liberal Equal Rights Amendment.

In 2000, when he ran for the Republican nomination for president, Hatch's big tax idea was a credit for stay-at-home families.

Voting Right

But when the time came on tax votes "he voted right," says former vice-presidential candidate Jack Kemp, coauthor of the 1986 tax legislation.

Hatch also, crucially, supported 1981 tax legislation that brought the top tax rate down to 50 percent from 70 percent. Still, what stands out here is the fact that Hatch is taking up the supply-side concept at a time when it is so unpopular.

This move reflects insight. Lower tax rates and greater tax incentives in recent decades succeeded in promoting growth in economies from Estonia's to America's.

The move also suggests the sort of willingness to crusade for incentives that would be necessary to push them through the legislative process. It's awfully early to be thinking about 2009. And awfully early to assume that Republicans will rule the Senate through the decade. But it is not too early for supply-siders to give Orrin Hatch a second look.

(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2006 Bloomberg

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To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
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